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Published online by Cambridge University Press: 16 January 2009
The law of agency has been affected indirectly by the European Communities Act 1972. This is largely due to section 9 of the Act which has undermined important principles of English company law. Since many of the propositions of the law of agency depend upon, or are supported by, company law cases it follows that the law of agency has, itself, been affected by the changes in company law. The real question, therefore, is not whether changes have occurred; but to what extent they have occurred. Unfortunately, the infelicitous wording of the Act, already criticised by academics, makes the answer to the above question that much more difficult. Assistance in elucidating the point, however, may be forthcoming from elsewhere. Section 9 of the Act purports to give effect in the United Kingdom to the provisions of the First Directive of the Council of the European Economic Communities on Harmonisation of Company Law and one is, therefore, entitled to seek clarification of the section's verbal ambiguities in the provisions of the said First Directive.
1 Chap. 68, hereinafter referred to as the Act.
2 See Collier, J. G. and Sealy, L. S., “European Communities Act—Company Law” [1973]Google Scholar C.L.J. 1 et seq.; Farrar, J. H. and Powles, D. G., “The Effect of section 9 of the European Communities Act 1972 on English Company Law” (1973) 36 M.L.R. 270Google Scholaret seq.; Prentice, D. D., “Section 9 of the European Communities Act” (1973) 89 L.Q.R. 518Google Scholaret seq.
3 Of 9 March 1968 (68/151) C.E.E.; published in (1968) J.O.L. 65, pp. 8–9. This Directive was made pursuant to Art. 54 (2) of the Treaty of Rome, in order to carry out the obligations of the Council and Commission set out in Art. 54 (3) of the Treaty.
4 It is assumed in the text that as a result of Art. 189 (3) of the Treaty of Rome the Directive itself is not part of the municipal law of the United Kingdom; but it is binding as regards its objectives which are twofold: (a) to afford protection to third parties dealing under certain circumstances with companies and their directors and, (b) to provide for additional publicity of important information concerning the company. For s. 189 (3) see Lipstein, K., The law of the European Economic Community (1974), p. 11.Google Scholar
5 See references in note 2 above to which add Clive M. Schmitthoff's brief commentary on the Act published in (1972) J.B.L. 85 et seq.
6 Farrar and Powles, op. cit., p. 276 and note 47 for further references to academic literature. See also, Collier and Sealy, op. cit., p. 5.
7 [1964] 2 Q.B. 480.
8 The complicated position of the law prior to the Act was lucidly set out by Professor Gower, L. C. B., The Principles of Modern Company Law (3rd ed., 1969) in the form of six rules (see pp. 153–168).Google Scholar It is believed that with the exception of rules 1 and 3c the remaining rules still represent the law accurately. See Farrar and Powles, op. cit., p. 276, note 47. See, also, Baxter, Colin, “Ultra Vires and Agency Untwined” [1970]Google Scholar C.L.J. 280 et seq.
9 I think it is safe to assume that the plural includes the singular. See Interpretation Act 1889, s. 1 (1) (b) and Prentice, op. cit., p. 528. Unfortunately, this is not the only ambiguity. See Farrar and Powles, op. cit., pp. 273 et seq. Prentice, op. cit., p. 526. Referring to these ambiguities Collier and Sealy have remarked (op. cit., p. 4) “It seems likely … that pernickety liquidators, clever counsel and pedantic judges will get plenty of mileage out of these words.” The learned authors modestly omitted “ingenious academics” from the above list.
10 Diplock, Lord dictum, therefore, in Freeman and Lackyer v. Buckhurst Park Properties Ltd. [1964] 2 Q.B. 480, 504Google Scholar that “… no representation can operate to estop the corporation from denying the authority of the agent to do on behalf of the corporation an act which the corporation is not permitted by its constitution to do itself” henceforth must be read as referring to agents other than directors. On the other hand, however, it should be noted that the third party is not prevented from invoking the doctrine against the company, a result which, though not usual, is by no means desirable.
11 Questions of “capacity” figure prominently in cases of agency involving infants. It is perhaps illuminating to note that in those cases the law enables the agent to bind his principal (the infant) only in those cases in which the infant could have bound himself (e.g., contracts for necessaries). The agent, therefore, does not have power to conclude contracts (or, generally speaking, enter into transactions) which the principal cannot do himself. See Webb, P. R. H., “The Capacity of an Infant to Appoint an Agent” (1955) 18 M.L.R. 461Google Scholaret seq. See also R. E. Megarry, in (1953) 69 L.Q.R. 446–447, criticising the judgment of Denning L.J. (as he then was) in Shephard v. Cartwright [1953] 1 Ch. 728, 755.Google Scholar
12 “The distinctive feature of the agency power-liability relation is that the power of the one party to alter the legal relations of the other party is a reproduction of the power possessed by the latter to alter his own legal position. In other words, the power conferred by law on the agent is a facsimile of the principal's own power.” Dowrick, F. E., “The Relationship of Principal and Agent” (1954) 17 M.L.R. 24, 37Google Scholar (italics supplied).
13 Because it is difficult to argue that the agent of a company has apparent authority to make a contract which is ultra vires the company. Prior to 1973 at any rate this was indisputable. See Bowstead on Agency (13th ed., 1968), p. 254.Google Scholar
14 Most of the defects of company law (and, indirectly, of the law of agency) were stressed by the Jenkins' Report on Companies (Cmnd. 1749/1962) and were accompanied by constructive proposals for amendment which, had they been followed, would have made most of the major changes called for by the EEC Directive unnecessary. See, for example, paras. 44 et seq. of the Jenkins' Report and Art. 7 of the 1968 EEC Directive.
15 The brief discussion in the text was included for the sake of completeness. For further details see: Getz, L., “Pre-incorporation Contracts: Some Proposals” (1967)Google Scholar U.B.C.L.Rev. 382; Kessler, R. A., “Promoters' Contract: A Statutory Solution,” 15 Rutgers L.R. 566 (1961)Google Scholar; Gross, J. H., “Pre-Incorporation Contracts” (1971) 87 L.Q.R. 367.Google Scholar All three articles have references to further bibliography.
16 Companies Act 1948, s. 13.
17 (1866) L.R. 2 C.P. 174.
18 Ibid. at p. 183. Italics supplied. Willes J. (at p. 184) and Byles J. (at p. 185) delivered similar judgments. See also, Natal Land and Colonisation Co. Ltd. v. Pauline Colliery and Development Syndicate Ltd. [1904] A.C. 120, 126.Google ScholarCf. Dairy Supplies Ltd. v. Fuchs (1959) 18 D.L.R. (2nd) 408Google Scholar (where an agent contracted on behalf of a company which he was intending to form and where it was held that the company, when incorporated, should be held liable).
19 Thus, in Re Empress Engineering Co. (1880) 16 Ch.D. 125 James L.J. refused to accept the views expressed by Malins V.-C. in Spiller v. Paris Skating Rink Co. (1878) 7 Ch.D. 368 and said (at p. 130) “ … it appears to me that it is settled, both in the Courts of Law and by us in the Court of Appeal … that a company cannot ratify a contract made on its behalf before it came into existence—cannot ratify a nullity.” See also, Re Northumberland Avenue Hotel Co. (1886) 33 Ch.D. 16; Star Corn Millers' Society v. Moore & Co. (1886) 2 T.L.R. 751; North Sydney Investment and Tramway Co. Ltd. v. Higgins [1899] A.C. 263; Re Dale and Plant Ltd. (1889) 61 L.T. 206. In this last case, a contract of employment concluded prior to incorporation and subsequently confirmed by the company after its incorporation, was held to be not binding on it on the grounds that the company had ineffectively attempted to ratify an agreement which it was incapable of ratifying. But the court avoided the inequitable consequence which normally follows such a judgment by declaring that the plaintiff (employee) was entitled to remuneration by way of quantum meruit. It should be noted, however, that the plaintiff was allowed remuneration on a quantum meruit basis for services rendered to the company after its incorporation. Services rendered to the company before incorporation, however, receive a different and, it is submitted, unfair treatment despite dicta to the contrary (see, for example, Hereford & South Wales Waggon and Engineering Co. (1876) 2 Ch.D. 621). Thus, in Re English & Colonial Produce Co. Ltd. [1906] 2 Ch. 435, 442, Vaughan Williams L.J. said: “I think we were all prepared to hold that there is no binding authority for the proposition that a company, because it has taken the benefit of work done under a contract entered into before the formation of the company, can be made liable in equity under that contract. On the contrary, it seems to me that the authorities are the other way.” See also Re National Motor Mail-Coach Co., Clinton's Claim [1908] 2 Ch. 515.Google Scholar In this context it is noteworthy that s. 6 (1) of the Conservative Government's Companies Bill 1973 provided that: “Where a contract purports to have been made in the name or on behalf of a company at a time when the company has not been incorporated, the company may, after incorporation, ratify the contract to the same extent as if it had already been incorporated at that time and as if the contract had been entered into on its behalf by our agent acting without its authority.”
20 Howard v. Patent Ivory Co. (1888) 38 Ch.D. 156. Provided, of course, the contract is not ultra vires. Shrewsbury V.N.S.Ry (1866) L.R. 1 Ex. 593. It has been observed, however, that, “Once a promoter has become personally liable on a contract executed before the organisation of a corporation, he is not discharged from liability merely because the corporation is later set up and receives the benefit of the contract, … Nor is he discharged from liability merely because the corporation has adopted the contract after incorporation …,” Gross, op. cit., p. 393. Apparently, therefore, the agent can only be discharged through the mechanism of novation which requires the consent of all the parties concerned. But this may produce difficulties and, in order to overcome them, Williston, Contracts (3rd ed., 1959), para. 306, p. 431 has suggested that the third party who is dealing with the company should be taken to have given his consent in advance with the result that the promoter (or company agent) is automatically discharged the moment the company unilaterally adopts his acts. This, as we shall see below, is the position adopted by German law even though para. 415 of the B.G.B. lays down the general rule that the creditor's consent is essential for a valid novation. Williston's view, however, has not been accepted either in his country or in this one though isolated exceptions can be found. Thus, see, Bradshaw v. Jones, 152, SW, 695 (Tex.Civ. 1913)Google Scholar and Williston, ibid., note 17. See also s. 6 (2) of the Companies Bill 1973.
21 As we shall see further on, s. 9 (2) of the Act provides that a person contracting for or as agent of an unincorporated company will be personally liable to the third party “subject to any agreement to the contrary.” According to Professor C. M. Schmitthoff “This … is already English law under the rule of Kelner v. Baxter.” He continues: “The object of this provision appears to be to prevent the courts from restricting the ambit of that rule or from overruling it, by admitting that a pre-incorporation contract can be ratified by the company after its incorporation” (see [1972] J.B.L. 86). With respect one has to disagree with the above statement. The position at common law was far from clear as the learned author seems to suggest and depended on the intention of the parties which often had to be determined by reference to subtle differences in the terminology employed. (See the Jenkins' Report, p. 14; Gross, op. cit., pp. 386, 388; Prentice, op. cit., p. 530 and contrast Kelner v. Baxter (1866) L.R. 2 C.P. 174, Newborne v. Sensolid (G.B.) Ltd. [1954] 1 Q.B. 45Google Scholar and Black v. Smallwood (1966) 39 A.L.J.R. 405Google Scholar). Nor can it be the subject of s. 9 (2) to prevent the courts from holding that pre-incorporation contracts can be ratified. True enough, ratification of pre-incorporation contracts is not possible in English law. But it would be surprising if s. 9 (2) was interpreted as aiming to preserve this position, given the fact that Art. 7 of the EEC Directive expressly provides for the possibility of ratification. It seems to me that Professor Schmitthoff has elsewhere (Current Law Statutes Annotated, s. 9 of the European Communities Act 1972) mentioned the real object of s. 9 (2) which, as is explained later on in the text, is to protect the third parties dealing with “agents” of unincorporated companies.
22 (1866) L.R. 2 C.P. 174, 185. In Nicolene Ltd. v. Simmonds [1953] 1 Q.B. 543Google Scholar Lord Justice Denning (as he then was) was quite categorical about this. He said (on p. 551): “… if a man signs a contract expressly as agent for a named company, and it turns out that there is no such company in existence, because it has not yet been formed, the courts do not say there is no contract; they reject the meaningless words ‘as agent for the company’ and hold that the man himself was a party to the contract. So, also, if he signs ‘as agent’ and has no principal, the words ‘as agent’ are rejected and the contract held to be a good contract between the parties …” This, however, was an obiter dictum. American courts also seem to take this view. See, for example, Wells v. Fay & C. Co., 143 Ga. 732, 85 S.E. 873 (1915)Google Scholar though sometimes they tend to make the “agent” or promoter liable on breach of an implied warranty of authority. Thus, see Farmers' Co-operative Trust Co. v. Floyd, 47 Ohio St. 525, 26 N.E. 110 (1890); Weiss v. Baum, 218 App.Div. 83, 217 N.Y.S. 820 (1926).Google Scholar English law does not appear to accept the view that a promoter warrants his authority. See Parker, J.'s remarks in Newborne v. Sensolid (G.B.) Ltd. [1954] 1 Q.B. 45, 47Google Scholar (C.A.).
23 [1966] Argus L.R. 744.
24 “Personal Liability of Agent” (1966) 116 N.L.J. 1605.
25 [1953] 1 Q.B. 45.
26 (1866) L.R. 2 C.P. 174, 183 per Erle C. J. The courts' well-known desire to uphold, if possible, the validity of agreements was obviously reinforced in this case by the fact that Kelner had supplied the goods and Baxter and the other directors had consumed them.
27 (1880) 3 T.L.R. 247n.
28 p. 14.
29 The Newborne v. Sensolid formula.
30 As in Kelner v. Baxter (1866) L.R. 2 C.P. 174.
31 We are, of course, talking here of public companies. See, generally, Palmer's Company Law (21st ed., 1968), pp. 136 et seq.
32 i.e. the day when the Registrar delivers the “trading certificate” in accordance with s. 109 (3) of the Companies Act 1948.
33 Palmer, op. cit., p. 136. Italics supplied.
34 [1906] 2 Ch. 390. The case involved the construction of s. 6 of the Companies Act 1900 which was identical to s. 109 (4) of the Companies Act 1948.
35 Ibid. at p. 392.
36 (1908) 24 T.L.R. 583.
37 Cmnd. 1749/1962, pp. 22–23.
38 Italics supplied. Compare the more precise formulation in French law.
39 [1906] 2 Ch. 390, 392.
40 Professor Pennington, R. R., Company Law (3rd ed., 1973), p. 91Google Scholar has argued that “ … presumably when it (the trading certificate) is issued the contract is treated as though it had been binding on the company all along, so that the company may be sued for breaches of contract committed before the certificate was issued.” (Italics supplied) The view is attractive but Professor Pennington unfortunately gives no reasons why this is so. Further he does not say whether this applies to the other party which has contracted with the company. Presumably, it too, can be sued for breaches of contract committed before the certificate was issued.
41 This view is taken by Professor Pennington, ibid., and is based on a literal interpretation of s. 109 (4).
42 Also, “one of the most ill-used expressions in the legal dictionary” per Lord, Greene M. R. in Finnegan v. Allen [1943] 1 K.B. 425, 430.Google Scholar
43 See Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. [1952] 2 Q.B. 297, 304Google Scholarper Denning L.J. See, also, Carnegie, A. R., “An Implied Condition in Motor-Car-Hire-Purchase” (1968) 31 M.L.R. 78, 80Google Scholar, and contrast Stoljar in (1953) 69 L.Q.R. at p. 490.
44 (1856) 6 E. & B. 370. See also, Aberfoyle Plantations Ltd. v. Cheng [1960]Google Scholar A.C. 115. In W. M. Cory & Son Ltd. v. Inland Revenue Commissioners [1965]Google Scholar A.C. 1088 it was held that an option agreement was not a binding agreement and should be distinguished from an agreement to sell subject to a condition precedent.
45 This, at least, is the logical interpretation of Erle J.'s judgment (1856) 6 E. & B. 370 (“there never was any agreement at all”). This view is accepted by Cheshire and Fifoot, The Law of Contract (8th ed.), p. 116; Benjamin's Sale of Goods (1974), ss. 187, note 3 and 753, note 25; and Reynolds, F. M. B., “Warranty, Condition and Fundamental Term” (1963) L.Q.R. 534, 537.Google Scholar But see Stoljar, S.'s contrary views in “The Contractual Concept of Condition” (1953) L.Q.R. 485, 492Google Scholar and references in note 40.
46 Carnegie, A. R., “An Implied Condition in Motor-Car-Hire-Purchase” (1968) 31 M.L.R. 78.Google Scholar The term “condition precedent” is mostly used but the term “suspensive condition” is not unusual to describe the same thing. See, for example, W. M. Cory & Son Ltd. v. Inland Revenue Commissioners [1965]Google Scholar A.C. 1088, 1098. See also, Carnegie, ibid. at p. 80.
47 (1881) 6 App.Cas. 251.
48 [1971] 3 W.L.R. 588.
49 Ibid. at p. 593.
50 See Brauer & Co. (G.B.) Ltd. v. James Clark (Brush Materials) Ltd. [1952] 2 T.L.R. 349Google Scholar: A. V. Pound & Co. Ltd. v. M. V. Hardy & Co. Inc. [1956]Google Scholar A.C. 588.
51 S. 109 (4) could be subjected to yet a third interpretation. Thus, it could be argued that before the condition is fulfilled the main agreement is not binding but during the period of suspense one of the parties (in this case the third party) is bound to await the outcome of the condition. This was the view taken by the court in Smith v. Butler [1900] 1 Q.B. 694Google Scholar in which A bought land from B on condition that a loan to B, secured by a mortgage on the land, was transferred to him. Held: that A could not withdraw before completion since he was bound to wait and see whether B could arrange the transfer. But it is difficult to accept that while A was bound to wait, B was under no obligation to act at all. Hence, it has been argued, that B “may by implication have been bound to make some efforts” towards arranging the transfer. See Treitel, The Law of Contract (4th ed., 1975), p. 44. If Treitel's view is accepted, then the practical differences between this kind of condition and the one envisaged by Denning, Lord in Smallman v. SmallmanGoogle Scholar reaches a vanishing point.
52 For a discussion of the grammatical ambiguities of s. 9 (2) of the Act see the remarks of Professor Schmitthoff on s. 9 of the Act in the Sweet and Maxwell annotated edition of the European Communities Act 1972 and Prentice, op. cit., pp. 531–562.
53 Watson v. Swann (1862) 11 C.B.(n.s) 756, 771 per Willes J.
54 See Bowstead on Agency (13th ed., 1968), Art. 17, p. 43.Google Scholar
55 See Prentice, op. cit., p. 533.
56 See authors mentioned in notes 2 and 5 and Halsbury, I (“Agency,” paras. 760, 855 note 8 and “Companies,” para. 727 note 1).
57 The two basic enactments are: Loi No. 66–537 du 24 Juillet 1966 sur les soci´t´s commerciales and D´cret No. 67–236 du 23 Mars 1967 sur les soci´t´s commerciales. English translations of both these texts can be found in French Law on Commercial Companies as of January 1, 1967, published by the Commerce Clearing House Inc. (1971). The translations in the text are from this edition. For a commentary on the law see: Ripert, G., Trait´ El´mentaire de Droit Commercial (7th ed. by R., Roblot, 1972), pp. 600Google Scholaret seq.; H´mard, J., Terr´, F., Mabilat, P., Soci´t´s Commerciales, I (1972), pp. 575Google Scholaret seq.; Rodi´re, R. and Houin, R., Droit Commercial (pr´cis Dalloz, 1970), pp. 435Google Scholaret seq. For an illuminating summary in English see Gall, J. Le, French Company Law (1974), pp. 9, 10, 12, 44–54.Google Scholar Further bibliography can be found in the above-mentioned French text-books.
58 There are, however, certain differences. For example, many Soci´t´s Anonymes do not raise funds from the public.
59 Art. 74 of Law No. 66–537.
60 Art. 74.2 provides for a notice to be published pursuant to Decree 1967, Art. 59 in an annex of the Journal Officiel. Special notice must also be given to the Stock Exchange. See Ripert (Roblot), op. cit., para. 1057. For comparative observations on this stage see para. 1059.
61 The undertaking to subscribe is evidenced by the “souscripteur” signing the “bulletin de souscription.” The entire capital must be subscribed but only 25% need be paid at the time of the issuing of the shares. The remainder must be paid within five years from incorporation. See Art. 75.2 of Law No. 66–537.
62 The 1966 law was, inter alia, meant to bring French law into harmony with Art. 8 (1) of the draft EEC Directive of 21 February 1964 which eventually became Art. 7 of the EEC Directive 68/151 of 1968. It is noteworthy, however, that the French courts, in their desire to protect the third parties dealing with the “directors” of an unincorporated company, had achieved similar results even before the adoption of the new text. For details and bibliography see Ripert, para. 1043.
63 The basic law is the Aktiengesetz 1965 and the most recent detailed commentary on it can be found in the Aktiengesetz Gross Kommentar (3rd ed., 1973)Google Scholar, paras. 1–14 (Mayer-Landrut), paras. 15–22 (Würdinger) and paras. 23–75 (Barz). For shorter works see: Baumbach-Hueck, Kurzkommentar zum Aktiengesetz (13th ed.);, Godin-Wilhelmi, Kommentar zum Aktiengesetz (3rd ed., 1967); Möhring-Schwarz, Rowedder-Haberlandt,. Die Aktiengesellschaft und ihre Satzung (2nd ed., 1966). For the older law see: Brodman, Kommentar zum Aktienrecht (1928); Ritter, Kommentar zum Aktiengesetz (2nd ed., 1939); Tecichmann-Koehler, Kommentar zum Aktiengesetz (3rd ed., 1950); Wieland, Handelsrecht, I (1921), II (1931). For a short account in English see, Würdinger, H., German Company Law (1975).Google Scholar
64 The agreement must be concluded between five persons and must be duly notarised (para. 23 AktG); it must also contain a minimum of specified provisions (para. 23.3) similar, in many respects, to those found in Table A of the Companies Act 1948.
65 Para. 23 AktG. See, Möhring-Schwarz, Rowedder-Haberlandt, op. cit., pp. 2 et seq.
66 See paras. 36–38 AktG.
67 Brodman, op. cit., para. 200 Anm. la. Wieland, op. cit., II, p. 73; Schlegelberger-Quassowski, Kommentar zum Aktiengesellschaft (3rd ed., 1939), para. 22 Anm. 4; Scholz, JW (1938), 3149 et seq. etc.
68 For bibliography see Gross Kommentar I/31, p. 233.
69 Gross Kommentar (Barz) I/1, para. 29 Anm. 4.
70 OLG Dresden, Sächs, OLGE 38, p. 111.
71 See Gross Kommentar I/1, p. 298. A logical exception one may add since the third party was aware from the outset that he was ultimately contracting with the company and not its agents. There is a certain similarity here with a slightly different rule of the English law of agency which does not allow a third party to object to ratification by the principal provided it was clear from the outset that the agent was professing to act on behalf of that principal.
72 The explanation of the company's ability to adopt the acts of its agents has given rise to a number of interesting but difficult theories which happily need not concern us here. For details and references see the Gross Kommentar in the paragraphs mentioned above.
73 The research for this section was done by Professor Lipstein who kindly allowed me to incorporate his notes in the text.
74 Belgium: Laws of 30 May 1924, 9 May 1929, 3 July 1956 and 16 August 1963; Luxemburg: Law of 23 December 1909.
75 Belgium, Code de Commerce in the wording of the Royal Decree of 30 November 1955, book I, title IX, Arts. 4, 10–11, 29–31, 32–33; Luxemburg, Law of 10 August 1915, Arts. 4, 8–9.
76 Belgium, Arts. 4 (2), 29, 31; for the contents of the founders' agreement see Art. 30; Luxemburg, Arts. 4 (2), 26 (2), 28.
77 Belgium, Art. 29, last para.; Luxemburg, Art. 26 (2).
78 Belgium, Art. 29 bis. No such requirement exists in Luxemburg.
79 Belgium, Art. 32; Luxemburg, Art. 29.
80 Belgium, Art. 33; Luxemburg, Art. 30.
81 Belgium, Art. 33, last para.; Luxemburg, Art. 30, last para. This procedure of deferred subscription is seldom used.
82 Belgium, Arts. 9, 10, 11; Luxemburg, Arts. 8, 9, 10.
83 Belgium, Art. 35; Luxemburg, Art. 32.
84 Wetboek van Korphandel, Art. 36 (e).
85 Ibid. Art. 36 (2).
86 Ibid. Art. 36 (e) (i).
87 Ibid. Art. 36 (f).