учебный год 2023 / England-USA

professes to be signing as 'agent,' but who has no principal existing at the time, and the contract would be altogether inoperativeunless bindingupon the personwho signedit, he is

bound thereby ..."

This holding reveals a very commendablephilosophythat bargains shouldbe kept andthateverysignatureshouldbe honoured.Perhaps the readerfeels a regret when he learns that "It was once, indeed, thought that an inchoate liabilitymight be incurredon behalf of a proposed company, which would become bindingon it when sub- sequentlyformed."Assumingthe ChiefJusticemeantto say: "which would become bindingon it if ratifiedwhen the companyis subsequentlyformed,"thisis the doctrinesuggestedin the JenkinsReport6 and widely accepted in continentalEurope7as well as in Canada, Ghana,Michiganor Kansas.8To have rejectedit was, in the view of a Frenchman, a step backward. But one should not expect a century-olddecision to be in accordancewith the spiritof our time.

The real difficultystartswithNewbornev. Sensolid(GreatBritain) Ltd.9A contracthad been signed on a printedform of a company whichwas not yet incorporated,for the deliveryby that companyof cases of tinned ham. Leopold Newborne had signed for Leopold Newborne (London) Ltd. The market fell. The buyer refused to take delivery. It sounds like bad faith. However, the Court of Appeal agreed with the buyer that "as the company was not in existence when the contractwas signed there never was a contract, and Mr. Newborne cannot come forwardand say: 'Well, it is my contract.'"

The result is surprisingfor the Frenchstudentwho has just read Kelnerv. Baxter.The reasoningalso is surprising.Mr. Diplock had argued for the plaintiff, first on the basis of that case, but Lord GoddardL.J. states: "Thatdecisionseems to me to stop far shortof

holding that every time an alleged companypurportsto contractwhen there is no companyin existence-everybody who is signing for the company is making himself personally liable." That was precisely what the French student had understoodto be the ratio decidendi of Kelner v. Baxter. It had even seemed to be the

philosophy of the decision that no one, in particularin business, shouldbe allowedto repudiatehis signature.However,in Newborne, that was preciselywhat the buyerdid becausethe markethad fallen

if the trend had been upward)and what he was authorisedto do. Thus, a rule made for the protectionof a companyat the stage of its

6Reportof the Company Law Committee,Cmnd. 1749, paras. 44 and 54(b) (1962).

7For a survey of European law, see B. S. Markesinis,"The Law of Agency and Section

9(2) of the European CommunitiesAct 1972"[1976] C.L.J. 112, 125 et seq.

8See A. Afterman and R. Baxt, Cases and Materialson Corporationsand Associations (3rd ed., 1980), pp.261-263.

9[1954] 1 Q.B. 45.

a mannerthat it was workingagainstthe interestsof the company.

How imperativemust be the authorityof precedentto compel the Court of Appeal to make such a decision-rather shocking!And how sharpmust be the mind of an Englishjudge to be able to feel

The student is invited to try to guess how the distinctionwas possible. Was it because the signaturewas not expresslygiven "On behalf' of the future company, as in Kelner v. Baxter? Was it because, in Kelnerv. Baxter,the non-existenceof the companymay

of the patched-upsituationmust be borne by the partyresponsible for it: the defendantin the firstcase, the plaintiffin the secondone? A more fundamentaldifference exists between the two decisions:

the firstone placesthe problemin a frameworkof contractlawwhile the second one approachesit from an institutionalpoint of view

(even though it does not carry it to its logical consequence of

regarding the company as an infans conceptus).1 But this difference only relates to the second partof Lord Goddard'sreasoning,not to

the of Kelnerv. Baxter. distinguishing

The Frenchstudentmay at that point feel somewhatdiscouraged. His mind must be awkward,coarse. Will he ever be able to follow

the steps of an Englishjudge and to understandthe workingof the common law? Fortunately, the teacher offers him some comfort: most judges and commentatorshave found it extremelydifficultto reconcile the Kelner and the Newborne decisions12;the Jenkins

Committee itself considered the result of Newborne v. Sensolid

(GreatBritain)Ltd. as "obviouslyundesirable"andbasedon "subtle differencesin the terminologyemployed."'3Thus, the studentis in good company. His first possible explanationof the case was even the right one accordingto the JenkinsCommittee.He may recover

at the second seminar.But he mustfirstturnto the Americancases

on contracts. pre-incorporation

The first one is a decision of 1903 of the Supreme Court of

Pennsylvania: O'Rorke v. Geary.14 A contract had been signed

proposed ...

L.J.C.P. 94.

n The development appears to be even strangerif one considersthat English courts .iad ignored dicta in 19th century cases which might have allowed the company to be seen as the "unborn" beneficiary of a trust (the trust property being a contractual chose in action)-from which base most of the problems could have been solved (as in the case of unbornchildren). See, e.g. Re EmpressEngineeringCo. (1880) 18 Ch.D. 125.

12 See for instance the High Court of Australia in Black v. Smallwood [1966] A.L.R. 744. As to the commentators, Jennings and Buxbaum write: "This agent-amanuensis distinction is rather formal and the point of difference almost invisible" (Corporations, Cases and Materials(5th ed., 1979), p.105) while another regardsthe distinctionmade on the basis of the formula precedingor following the signatureas "absurd"(L. C. B. Gower et al., Gower's Principlesof Modern CompanyLaw (4th ed., 1979), p.336).

13Report, (supra, note 6), para. 44.

14207 Pa. 240, 56 A. 541.

Mar. 1984] THE NOT SO COMMONLAW 153

between a builder and "D. J. Geary for a bridge company to be organized and incorporated." The builder was suing for payment not

the company itself, apparently insolvent, but D. J. Geary personally. The Supreme Court decided for the plaintiff: "Geary became liable

framework which deserves to be reproduced, at least in part:

"We have examined a great number of authorities which touch

more or less closely upon the point involved. We do not propose to review them nor even to cite them, but will simply suggest a few principles which we think are in accord with all of these cases, and which fully warrant the interpretation which we put upon the contract, with respect to who is the responsible party of the second part."

This approach to the authorities surprises the French student who has tried to adjust himself to the techniques of the common law. In Newborne v. Sensolid (Great Britain) Ltd., the Court of Appeal had heard Mr. Diplock, "who has argued the case for the plaintiff, bringing to our attention every point which could possibly be taken"; Mr. Diplock had based his demonstration on "the well-known series of cases of which Kelner v. Baxter is one of the earliest and perhaps the best known." And Lord Goddard C.J. took the time to restate

at some length the circumstances of this leading case and the ruling of the court. In O'Rorke v. Geary, the court seems fed up with the authorities. The court, at least, seems to look at them from a distance and to trust that the bulk of them should accord with a few

principles which the court will enunciate.15

From these principles, the court derives a preliminary conclusion: "We have then simply the question as to whether or not Geary bound himself or the company to be incorporated for the building of this bridge" (the matter has not yet much advanced) and continues:

"When a party is acting for a proposed corporation, he cannot, of course, bind it by anythinghe does, at the time, but he may

(1) take on its behalf an offer from the other, which, being accepted after the formation of the company, becomes a contract; (2) make a contract at the time binding himself, with the

stipulation or understanding, that if a company is formed it will

take his place and that then he shall be relieved of responsibility, or (3) bind himself personally without more and look to the

proposed company, when formed, for indemnity. It seems to us that Geary in this case comes within No. 3."

15The House of Lords has also recently shown some impatiencetowardprolix pleaders tryingto discussin detail any relevantauthority.See YorkeMotorsv. Edwards[1982] 1 All E.R. 1024, 1025, [1982] 1 W.L.R. 444, criticisedas a source of bad law in the context of tort law (1983) 46 M.L.R. 224, 227 and in the field of labour law, MerkurIsland Shipping v. Laughton [1983] 2 W.L.R. 778, criticised (1983) 46 M.L.R. 632, 635. This is a very

strikingdevelopment. As far as one can see, however, this new style of adjudication(by the House of Lords only?) is very differentfrom the American one.

154 THE MODERN LAW REVIEW [Vol. 47

Findingsof fact purportto justify this conclusion. None of them appear decisive. One does not see why the facts would not have equally justified a classificationunder No. 1 or No. 2. Practically deprived of any argumentation,this decision seems based on the "hunch"of a courtwhichhas felt thatthe equityof the case required a judgmentagainstthe defendant.l6Suchan airymanneron the part of the SupremeCourtof an importantstate givesthe Frenchstudent the impressionthat Americancommon law is quite differentfrom the Englishversion-and of muchlower quality.

The second Americancase discussed,QuakerHill, Inc. v. Parr,

was decided in 1961 by the Supreme Court of Colorado.'7The plaintiff had sold a large quantityof nurserystock to a "Denver MemorialNursery,Inc.," whichwas to be the "sister"of an existing "DenverMemorialGardens,Inc."but was not yet formed-the fact

being noted in the contract-and, in fact, in orderto avoid a name confusion, was formed under anothername: "MountainView Nur-

series, Inc." E. D. Parr,who had signedthe contractas presidentof the corporation, had recently formed together with some friends "Denver Memorial Gardens, Inc." and was to sign consecutive

contractsand ordersfor "MountainView Nurseries,Inc."The latter

havingfallen in to a "defunctfinancialcondition"before payment, Quaker Hill sought the personal liability of E. D. Parr and his friends"basedupon the fact that the corporationwas not formedat the time the contractwas made and on the furthergroundthat the

were comparableto those of O'Rorkev. Geary. The trial court, however, ruled for the defendants, finding that they "were not promoters of a corporation called 'Denver Memorial Nurseries, Inc."'and that "theplaintiffintendedto contractwitha non-existent corporation."The SupremeCourtaffirmedthe judgment.Again, it may be necessaryto reproducethe legal frameworkin which the

courtplaces the problem:

"The general principlewhichplaintiffurges as applicablehere is thatpromotersarepersonallyliableon theircontracts,though made on behalf of a corporationto be formed.See 13 Am.Jur. 252, Sec. 113, Corporations.See also the section notes in the 1961cumulativesupplement.This doctrinehas been recognized and appliedin Colorado.See Herseyv. Tully,8 Colo.App. 110,

44 P. 854; Colorado Land & Water Company v. Adams, 5

Colo.App. 190,37 P. 39 (concurringopinion).A well recognized exceptionto this generalrule, however,is thatif the contractis made on behalf of the corporationand the other party agrees to look to the andnot to the promotersforpayment,

corporation

the promotersincurno personalliability."

At this point, the teacher has to presenttwo observations.First, it is remarkablethat the SupremeCourtof Coloradodoes not seek

16See J. C. Hutcheson, "The JudgmentIntuitive.The Functionof the Hunch in Judicial Decisions" (1929) 14 Corn.L.Quart. 274.

17148 Col. 45, 364 P. 2d 1056.

the principle of law directly from the law of the state, but first considersAmerican law in general before findingthat the general doctrinehas been recognisedin Colorado.The law of the state thus appearsto be submittedto a permanentcomparisonwhich, at least to some extent, blursthe distinctionbetweenbindingandpersuasive

encyclopediaof a type very useful to the practitioner:the latter is nearly certain of findinga statementof law which is favourableto his thesis, with a great wealth of referencesin a footnote. Unfortu-

nately,in manyinstances,the following-or the preceding-sentence containsa statementto the contrary,with perhapsa similarwealth of referencesin a footnote. If one had time to engagein a thorough study of the cases referred to, one might perhaps be able to harmonise their rationes and show that they refer to different

circumstancesor even differentproblems.But the cases are usually so numerous that the task is discouraging;perhaps it will be undertaken one day by an academic or a post-graduatestudent preparing a thesis. Unfortunately, the drafters of the American Jurisprudence,being paid by the line or by the hour to write an

encyclopedia and not to engage in research, had to stay on the

deciding it, at what distance are they respectivelyfrom the penholder and the academic?

Before drawingconclusionsfromthis style of decision,the student is invited to read the recital of the circumstancesof fact which led

the court to place the case under the exception ratherthan under

the general rule. He can hardlyfind it compelling.Assumingthat the question is "one of intention of the parties,"he does not see why the intentionsof the partieshave been held differentin the two cases. The teacher confesses that he has tried to see whether the

mattercould be clarifiedby carefulreadingof other cases, but that

intentions of parties who, completely overlooking potential legal

was read by one Justice, the Chief Justice abstaining,two Justices concurringin the majority'sresulteven thoughthey "cannotjoin in most of its analysis" and the last Justice dissenting because the majority'sholding is "inconceivable"to him. This is not a good

omen for future clarificationof the law by the courts. Practically speaking, there is no law on the subject. A vacuumin the law is

added to a vacuumin the parties'will. It seems clear that a small amount of legislationwould save a significantamountof litigation

19RKO-StanleyWarnerTheatres,Inc. v. Graziano, 467 Pa. 220, 355 A. 2d 830 (1975).

20As an example of a provisionwhich should prove satisfactory,see the JenkinsReport, para. 54(b).

been passed in the United Kingdom, where section 9(2) of the European Communities Act 1972, has clearly settled the question of the promoter's liability,21 but it is still nearly non-existent in the United States.

However, this is not the matter which is presently of concern. Comparison of the two English cases and the two American cases discussed, points to striking differences between the common law as it works in England and as it works in the United States. While English law is a very delicate machine working under the strict authority of precedent,22 American law seems a rather loose collection of decisions made under the pressure of innumerable precedents coming from the state and from the sister states. The French student

cannot avoid the feeling that American law is a second-rate form of the common law. This, however, is a provisional conclusion. Will it be confirmed by other comparisons?

II. THEPROPERPURPOSEDOCTRINE

There are two tasks for the teacher before he can engage in a discussion, fruitful for French students, of the "Proper Purpose Doctrine"-a subject, it is true, that has lost part but only part of its interest by reason of section 14 of the Companies Act 1980. First, it must be explained that this is an aspect of the idea that directors are in a fiduciary position and that this position entails for them a number of duties. Strange as it may seem, French law does not recognise this idea, even though it fills up the lacuna by a number of statutory rules.23 Secondly, it may be useful to clarify the termi- nology. It may be convenient in company law as well as in administrative law,24 to say that a power was used for an "improper purpose" when it was used for a purpose which was not the one for which the power was granted. However, in company law, it would be useful to distinguish between a "dishonest improper purpose," i.e. a purpose intended to serve the interests of the person exercising the power or other private interests, and an "honest improper purpose," i.e. a purpose intended to serve the interests of the

are, not surprisingly, Punt v. Symons and Co. Ltd.26 and Piercy v. S. Mills and Co. Ltd.27 The facts of the cases are comparable.

without any need of additional capital, in order, in the first case, to

21 See Phonogram Ltd. v. Lane [1981] 3 All E.R. 182, noted [1982] C.L.J. 47, [1982] J.B.L. 41, (1982) 3 Co.Law 28. Many commentatorsregret that the Act did not make it

possible for the companyafter it is formed to "adopt"or "ratify"the contractand discharge the promoter.

22See however supra, note 15.

23Compare A. Tunc, op. cit. note 2, p.13.

24E.g. MunicipalCouncil of Sydneyv. Campbell[1925] A.C. 338.

25See L. C. B. Gower et al., op. cit. note 12, p.580. Compare K. W. Wedderburn,

"CompanyLaw-Powers of Directors-Scheme to Defeat Take-over Bid" [1955] C.L.J. 37.

26[1903] 2 Ch. 506.

27[1920] 1 Ch. 77.

158 THE MODERN LAW REVIEW [Vol. 47

subsequentjudge feels bound by this decision in a case when the directors"actedas they did in an honest belief that they were doing

the first case, had taken pains to repeat that the power to issue shares "mustbe exercised for the benefit of the company:primar-

ily . . . to raise capital," but occasionally "for other reasons." Would

have been in perfect accordancewith the firstcase?3 A Frenchman can hardly avoid the feeling that Byrne J.'s decision has been hardened,stiffened and, finally,taken on its surfaceratherthan in its ratio. It is without surprise, therefore, that the student reads Harlowe's Nominees Pty. Ltd. v. Woodside(Lakes Entrance)Oil Co. N.L.31and Teck CorporationLtd. v. Millar.32The High Court of Australiain the firstcase, the SupremeCourtof BritishColumbia in the second, revolt against this understandingof the Punt and Percy decisions.

The Australiandecisiondwells at some lengthon the point:

"At the thresholdof the argumentfor Harloweon the appeal was a submissionof law whichwas put in the formof a corollary upon the undoubtedgeneralpropositionthat a powervested in directors to issue new shares is a fiduciarypower which the directorsare not entitled to exercise otherwisethan bona fide

for the benefit of the company as a whole. The suggested corollaryis that an exerciseof the powercannotbe maintained as havingbeen bona fide in the interestsof the companyunless the companyhas at the time of the exercisean immediateneed of the capitalto be paid up on the new shares. In manya case this may be true as a general propositionof fact; but in our opinion it is not true as a general propositionof law. To lay down narrow lines within which the concept of a company's interests must necessarily fall would be a serious mistake." Again-and this may appear a mere restatementof what had been said by the courtin Punt-: "Theprincipleis thatalthough primarilythe poweris given to enablecapitalto be raisedwhen required for the purposes of the

occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a

purposeof benefitingthe companyas a whole, as distinguished from a purpose, for example, of

company in the hands of the directors themselves or their friends."

The SupremeCourtof BritishColumbiatakes the same position on the basis of Lord Greene M.R.'s famousexpositionin Re Smith