Scottish Court of Session Decisions

By offer dated 26th November 1889 and acceptance dated 11th July 1890 the Mirrlees, Watson, & Yaryan Company, Limited, Glasgow, contracted with Messrs Darley & Butler, London, to supply the machinery and ironwork for a building at Tuticorin, Madras Presidency, India, for a non-char sugar refinery capable of turning out 10 tons per day of twelve hours. Delivery was to be given f.o.b. in Glasgow harbour.

The Tinnevelly Sugar Refining Company, Limited, was incorporated on 29th July 1890 for the purpose of refining sugar at Tuticorin, where the said machinery was fitted up. The machinery having failed to give satisfaction, the Tinnevelly Company in January 1894, with consent and concurrence of Messrs Darley & Butler, brought an action of damages for £23,000 against the Mirrlees, Watson, & Yaryan Company.

They averred, inter alia, that “Messrs Darley & Butler, who have all through the negotiations transacted for the Tinnevelly Sugar Refining Company with the defenders, are large shareholders in the pursuers' company. The contracts for the machinery were made by them for behoof and on behalf of the pursuers the Tinnevelly Sugar Refining Company. The defenders knew before the contract was given to them for the machinery that it was for the pursuers' company's use, and that Messrs Darley & Butler were acting, in making the said contract, for behoof of or as agents for the pursuers' company. Messrs Darley & Butler have from the beginning of negotiations with the defenders acted for behoof of the Tinnevelly Sugar Refining Company, and the defenders have treated and transacted with Messrs Darley & Butler on that footing. The machinery was paid for out of the capital of the Tinnevelly Sugar Refining Company, … The said machinery and ironwork was manufactured by the defenders, and early in 1891 was erected at works at Tuticorin, which had been specially constructed for its reception on plans approved by the defenders. The work of erection was effected under the superintendence of an engineer sent out by the defenders. … The manager was a well qualified sugar refiner, selected and approved by the defenders on behalf of the pursuers. … After the refinery was started the defenders were always fully informed of how it was working, and continually assured the pursuers that the machinery was quite adequate, and would, when everything was in full working order, produce what was stipulated for.”

The pursuers pleaded, inter alia—“(3) The defenders having negotiated and contracted on the footing that Messrs Darley & Butler were acting for behoof of or as agents for the Tinnevelly Sugar Refining Company, are barred from questioning the pursuers' title. (4) The defenders having admitted by their actions as condescended on their obligation to make the machinery perform the work required of it by the

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pursuers, are barred from pleading want of title in the pursuers, or failure of the pursuers to make timeous rejection.”

The defenders pleaded, inter alia— “(1) No title to sue. (2) The pursuers' statements are irrelevant, and insufficient to support the conclusions of the summons.” Upon 7th June 1894 the Lord Ordinary ( Low) allowed a proof.

“ Opinion.—The defenders maintain that their first plea-in-law of no title to sue should be sustained, and the action thrown out without any inquiry. They argued that the contract, for breach of which damages are sought, being made by Messrs Darley & Butler before the Tinnevelly Sugar Refining Company was incorporated, that company cannot sue upon the contract, even although it was made for behoof of the company when it should come into existence, and that the concurrence of Darley & Butler cannot aid the company, because that firm not having sustained the loss for which reparation is sought have no interest and could not themselves have sued the action.

It seems to be clear that a company incorporated under the Companies Acts is not bound by a contract made for it or on its behalf before incorporation, unless after incorporation it has so acted as to make the contract its own. Further, it appears to be settled in England that a company after incorporation cannot ratify a contract entered into on its behalf before incorporation, because ratification (in the strict sense) refers to an act previously done for the person ratifying, and cannot apply to an act done before that person came into existence.

The case chiefly relied upon by the defenders was the Northumberland Avenue Hotel Company, 33 Ch. Div. 16. In that case the plaintiff sued the liquidator of the hotel company for damages for breach of a contract entered into between him and one acting as trustee for the intended company before its incorporation. The plaintiff had a lease from the Board of Works of certain lands upon condition that he should erect certain buildings within a specified time. The contract with the trustee for the intended company was for a sub-lease of the lands at a higher rent than that which the plaintiff was under obligation to pay to the Board of Works, the company being bound to erect the buildings stipulated for in the plaintiff's lease. The articles of association of the company provided that the contract should be adopted and carried into effect. After being registered, the company entered into possession of the lands, spent large sums of money upon them, made payments to the plaintiff to account of rent, and passed certain resolutions, with the assent of the plaintiff, modifying the contract which had been made with him. The company went into liquidation, and the Board of Works cancelled the lease to the plaintiff, and resumed possession of the lands, apparently because the company had not erected the buildings stipulated for within the specified time.

The Court of Appeal held that the plaintiff had no claim for damages (1) because the contract being made before the company was in existence was not binding upon it, and was incapable of ratification by the company after incorporation; and (2) because the acts of the company were not evidence of a fresh agreement having been entered into between it and the plaintiff, having been done under the erroneous belief that the contract was binding on the company.

That judgment goes very far, because it was clear that the company had, as far as it possibly could, recognised and taken advantage of the contract. The ground of judgment was that to give the plaintiff a claim against the company it was necessary that the latter should have made a new contract with him upon the same terms as the original contract, and that the facts showed that they had not done so, but had proceeded upon the erroneous belief that the original contract was binding upon the company. The footing, therefore, on which the company took possession of the lands, and otherwise recognised the contract, was essential to the judgment. If it had been proved that the directors knew that the original agreement was not binding on the company, it may well be that the judgment would have been different, and that the Court would in that case have held that the actings of the company were evidence of an agreement between them and the plaintiff.

The decision, therefore, apart from the peculiar circumstances of the case, does not appear to me to go further than to affirm that an action will not lie against a company if it is only rested upon a contract with the company itself. But I know of no authority for saying that such a contract must be a formal contract. I apprehend that it is sufficient if the actings of parties necessarily lead to the inference that they intended to be, and held themselves out as being binding on each other. If a company by its acts adopts a contract made before its incorporation, takes benefit by the contract, and allows the other contracting party to act upon the footing that the company is bound to him, in terms of the original agreement, I can see no principle upon which the company should not be bound, just as an individual is bound who homologates an informal or defective contract. And there are many authorities in the English law pointing in that direction, among which I refer to Touch v. The Metropolitan Railway Warehouse Company, 1871, L.R., 6 Ch. 671; Spiller v. Paris Skating Rink Company, 1822, 7 Ch D 368; and Howard v. Patent Ivory Manufacturing Company, 1822, 38 Ch D 156.

In this case the averments are that the defenders were from the first told that the machinery which was ordered from them was for the company; that before the machinery was made the company was incorporated; that the machinery when finished was sent by the defenders to Tuticorin, where the company had constructed buildings for it on plans approved

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by the defenders; that the machinery was fitted up by an engineer sent out by the defenders; that the manager who was to work the machinery for the company was selected by the defenders, and that the price was paid out of the capital of the company. According to these averments the defenders were brought directly into contact with the company as the principals in the transaction. If this had been an action by the defender for payment of the price upon such averments of adoption of the contract by the company, I think that there would have been a relevant case to go to proof; and in like manner when the action is by the company for damages on the ground that the machinery is not fit for the purpose for which it was supplied, I am of opinion that there must be inquiry, so that the precise facts may be ascertained.

I shall therefore allow a proof before answer.”

The defenders reclaimed, and argued—(1) If all the averments summarised by the Lord Ordinary at the end of his note were proved they would fail to give the pursuers a title to sue. (2) The pursuers' own statements were fatal to their case. That was, as again and again stated, that Darley & Butler were agents for them. But Darley & Butler could not act as agents for an admittedly non-existent principal. (3) The pursuers had failed to set forth anything instructing privity of contract between them and the defenders. The case resembled The Edinburgh United Breweries, Limited v. Molleson ( Nicolson's Trustee), March 17, 1893, 20 R. 581, aff. March 9, 1894, L.R., 1894, App. Cas. 96. Here, as there, the concurrence of the original contracting party, not alleged to have suffered in any way, could not improve their position— cf. also Blumer & Company v. Scott & Sons, January 16, 1874, 1 R. 379; and Tully v. Ingram, November 10, 1891, 19 R. 65. (4) Relying on their mistaken position of being Darley & Butler's principal, they had taken no steps to enter into direct contractual relation with the defenders by adopting the contract which would have been necessary— Kelner v. Baxter, 1866, L.R., 2 C.P. 174; in re Express Engineering Company, 1880, L.R., 16 C.D. 125; in re Northumberland Avenue Hotel Company, 1886, L.R., 33, C.D. 16.

Argued for respondents—(1) The cases relied on by the defenders were not in point. The actings of the parties throughout showed that the pursuers had adopted the contract, and that the defenders had negotiated with them throughout as the real parties, on behalf of whom Darley & Butler had originally contracted. (2) Darley & Butler were to be regarded not as agents for a non-existent principal, but as trustees for the company before incorporation— cf. Davenport v. Bishopp, 1822, 2 Yonge & Collyer, 451; Gregory v. Williams, 1822, 3 Merivale, 582. (3) Darley & Butler could, without the defenders' consent, have assigned their contract, there being no delectus personæ— British Waggon Co. v. Lea & Co., 1880, L.R., 5 QBD 149. Here Darley & Butler were concurrent pursuers.

At advising—