The Binding Effect of Pre-Incorporation Contracts in Nigeria Under CAMA 2020
The process of incorporating a company involves various legal formalities and procedures in Nigeria, just as it is in many other jurisdictions around the world. However, before a company is officially registered in Nigeria, individuals or the company’s promoters may engage in activities and transactions on behalf of the company.
These agreements or transactions, known as pre-incorporation contracts oftentimes raise important legal questions especially regarding their effect and their capacity to be binding on the company, bearing in mind that the company was yet to be incorporated at the time of execution of the contracts.
This article will discuss the intricacies of pre-incorporation contracts in Nigeria, it will also examine their legal status, enforceability, and implications for the parties involved.
Meaning of Pre-Incorporation Contracts
Pre-incorporation contracts are agreements entered into by promoters or individuals acting on behalf of an unincorporated company. These contracts may encompass a wide range of activities, including negotiations, commitments sand transactions relating to the intended business of the company.
Despite the absence of legal personality, pre-incorporation contracts have legal effect and are mostly ratified upon incorporation.
Legal Framework Regulating Pre-Incorporation Contracts in Nigeria
The Companies and Allied Matters Act (‘CAMA’) of 2020 is the principal legislation regulating company formation and operations in Nigeria as well as the validity and enforceability of pre incorporation contracts.
Effect of Pre-Incorporation Contracts Under Nigerian Law
One of the key factors determining the effect of pre-incorporation contracts in Nigeria is the subsequent incorporation of the company. CAMA stipulates that once a company is duly incorporated, it may adopt or ratify any contract entered into on its behalf before incorporation.
What ratification does is that it serves to retroactively validate the pre-incorporation contract, making it binding on the company as if it had been entered into after incorporation. However, it is important to note that ratification of a pre-incorporation contract does not happen automatically. It must be initiated by the company’s board of directors or shareholders.
Binding Effect of Pre-Incorporation Contracts
The binding effect of pre-incorporation contracts in Nigeria relies on several factors, including the authority of the promoters, compliance with statutory requirements, legality of the contract, and the intentions of the concerned parties.
Promoters, acting as agents of an unincorporated company, must possess the actual authority to act on behalf of the company to bind the company to contractual obligations created by them.
The scope of such authority may be expressly conferred in the intended memorandum or it can as well be implied from the actions and representations of the promoters.
It is worthy of note that, the validity and ratification of pre-incorporation contracts are subject to the provisions of the memorandum and articles of the unincorporated company.
Where no provision is made for the ratification of pre-incorporation contracts in a company’s articles, such contracts may not be ratified.
Also, prior to such ratification by the company, the person who purported to act in the name or on behalf of the company will, in the absence of express agreement to the contrary, be personally bound by the contract or other transaction and entitled to the benefit thereof.
In addition, CAMA mandates that pre-incorporation contracts must be consistent with the objects specified in the company’s memorandum of association.
Any contract that falls outside the scope of the company’s objects will be deemed ultra vires (beyond the powers of the company) and thus void or unenforceable against the company. Therefore, pre incorporation contracts must be related to the set business of the company.
What Happens When a Pre-Incorporation Contract is Not Ratified?
Liability and Remedies
In cases where a pre-incorporation contract in Nigeria is not ratified by the company or deemed ultra vires, promoters will become personally liable for the contractual obligations they undertook.
This liability arises from the principle of agency law, which holds agents accountable for their actions on behalf of undisclosed or unincorporated principals.
Consequently, promoters risk exposing themselves to legal liabilities, including claims for damages or specific performance, if the unincorporated company fails to honor the pre-incorporation contract.
Remedies Where a Pre-Incorporation Contract is Not Ratified
However, it is essential to note that the liability of promoters is not absolute and may be mitigated under certain circumstances. For instance, if the contracting parties were aware of the company’s pre-incorporation status and knowingly entered into the contract with the promoters, they may be estopped from holding the promoters personally liable.
Similarly, if the promoters acted in good faith and in the best interests of the unincorporated company, courts may exercise discretion in apportioning liability.
Conclusion
Pre-incorporation contracts play a significant role in the establishment and development of companies in Nigeria. While they enable promoters to initiate business activities and secure transactions on behalf of the unincorporated company, they also raise complex legal issues regarding their binding effect on the companies.
Understanding the legal framework governing pre-incorporation contracts is essential for promoters, contracting parties, and legal practitioners alike. By adhering to statutory requirements, exercising caution, and seeking legal advice, when necessary, parties can navigate the complexities of pre-incorporation contracts and safeguard their interests in the Nigerian business landscape.
Berkeley Legal is a leading business law firm in, Nigeria. We provide a comprehensive and sophisticated range of specialized and personalized legal services that are designed to meet the various needs of highly diversified local and international businesses.
If you would like to know more about pre-incorporation contracts and ratification, please contact info@berkeleylp.com
The information provided in this article is for general informational purposes only and does not constitute legal advice.
