For various reasons, many legal agreements are entered into by a juristic entity, as opposed to a contracting party in their personal capacity (e.g. for the benefit of perpetual succession, separate legal personality, etc.).
Many agreements are therefore entered into with at least one, or more juristic entities as party/ies to an agreement, either with an existing entity, or with an entity registered specifically for the purpose of entering into the agreement in question.
Before expending money, time and effort by registering a company specifically for the purpose of entering into an agreement, however, an individual may want to make sure that the asset/opportunity presented in the agreement in question is formally secured. This would, for example, also secure the confidence of an investor involved in the proposed transaction. In these circumstances, contracting parties may choose to enter into a stipulatio alteri contract, being a contract entered into by a party (the stipulans) for the benefit of a third party (i.e. the company to be formed).
Common Law Position
The problem with the above scenario is that in accordance with South African Common Law, a person cannot act for a principal that is not yet in existence. The result of this situation is that the contract would be null and void, or (depending on how the agreement is drafted) the signatory could be held responsible for the obligations flowing from the agreement in their personal capacity. This would be a completely unintended consequence for the parties (for the stipulans at least).
The Companies Act, 1973
The Companies Act has therefore come to the assistance of parties needing to contract under these circumstances. The Companies Act of 1973 provided a solution to the above problem by way of Section 35, which stipulated that if the requirements of Section 35 were met, the applicable pre-incorporation contract would be binding on the company (once the company ratifies/agrees to be bound by the provisions of the agreement) as if the company was in existence at the time that the agreement was entered into. The solution however, was not ideal, as the provisions of Section 35 were overly formulistic and if any of its requirements were not met, the pre-incorporation contract was void and the company was unable to “revive” it. It often occurred that the prescriptive requirements of Section 35 were not met, the result of which had a negative consequence for the parties involved.
The Companies Act, 2008
The Companies Act of 2008 has provided some relief to the above situation, with the requirements of entering into a pre-incorporation contract being much simpler and easier to follow. Section 21 stipulates that a person may enter into a written agreement “in the name of, or purported to act in the name of, or on behalf of, an entity that is contemplated to be incorporated in terms of this Act, but does not yet exist at the time”, with sub-section 2 thereof stipulating that a person is “jointly and severally liable with any other such person for liabilities as provided for in the pre-incorporation contract while so acting, if:
(a) the contemplating entity is not subsequently incorporated, or
(b) after being incorporated, the company rejects any part of such an agreement or action”.
Although Section 21 brings about much simpler formalities for the entering into of pre-incorporation contracts, it is not without its problems and nuances. It is also not clear on a number of issues which may prove to be important, for example, no mention is made for the role of the third party as to their position if the contract is rejected or only partially accepted. Furthermore, Section 21 appears to give favour to the contracting company, the actions of which could be to the detriment of the other parties.
It is therefore imperative that all advantages and disadvantages are considered in full when entering into a pre-incorporation contract, and that the pre-incorporation contract adequately covers the risks of each contracting party.
Contact us to find out more information in this regard, and to ensure that all of your bases are covered when entering into or considering entering into an agreement of this nature.