Royal Mail Estates Ltd v Maple Teesdale [2015] EWHC 1890 (Ch)

A property sale contract was purportedly made with a company that had not yet been incorporated. The claimant sought to hold the defendants personally liable under Section 36C of the Companies Act 1985. The defendants argued the contract contained an 'agreement to the contrary' excluding the statutory effect. The court dismissed the summary judgment application, holding no contrary agreement existed.

Facts

By a contract dated 19th December 2008, the claimant (Royal Mail Estates Limited) agreed to sell property at 257/259 Kensington High Street, London for £20 million to Kensington Gateway Holdings Ltd. The buyer’s part of the contract was signed by Maple Teesdale ‘for and on behalf of the Buyer’. At the time of the contract, the company had not been incorporated; it was incorporated on 19th February 2009. Neither the claimant nor the defendants knew at the time that the company had not been incorporated.

The contract contained clauses restricting assignment and transfer, including clause 24.1 stating ‘the benefit of this Contract is personal to the Buyer and is not capable of being assigned by the Buyer other than being novated to an Associated Party’.

The claimant brought proceedings claiming the defendants were party to the contract by virtue of Section 36C of the Companies Act 1985 and were in repudiatory breach. The claimant claimed the deposit and damages totalling £5.1 million.

Issues

The central issue was whether the contract contained an ‘agreement to the contrary’ for the purpose of Section 36C of the Companies Act 1985, which would exclude the statutory effect making the defendants personally liable on the contract.

The Defendants’ Argument

The defendants argued that clauses 24.1 and 24.2, particularly the words ‘the benefit of this Contract is personal to the Buyer’, constituted a contrary agreement excluding Section 36C. They contended that since Section 36C operates to give the agent both the benefit and burden of the contract, excluding the benefit should exclude the entire statutory effect.

Judgment

Mr Jonathan Klein, sitting as Deputy Judge, dismissed the defendants’ summary judgment application.

Construction of Section 36C

The court identified two possible constructions of what constitutes a ‘contrary agreement’:

One possibility is that there is a contrary agreement when there exists a contractual provision which, if given its widest interpretation, is inconsistent with a consequence which flows (or the consequences which flow) from the Section 36C Effect.

A second possibility is that there is only a contrary agreement if it is established that, by the relevant words properly construed, objectively the parties intended that the contract would not take effect as one made with the ‘agent’.

The court favoured the second construction for the following reasons:

A primary purpose of the sub-section is to give effect to Art.7 and so one of the sub-section’s primary purposes is to protect the other contracting party… That purpose is less likely to be achieved if, when parties do not have in mind Section 36C and/or believe that the company in question is incorporated, by a side-wind the Section 36C Effect is excluded because there is a contractual provision which, if given its widest interpretation, would be inconsistent with a consequence of the ‘agent’ being a contracting party.

Application to the Facts

The court held:

I cannot derive, from the words in question, an intention on the part of the Claimant and the Defendants to exclude the Section 36C Effect. Bearing in mind that neither the Claimant nor the Defendants apparently knew that the company had not been incorporated, I cannot accept, on the evidence before me, that they had in mind Section 36C when they agreed the words in question.

The words are more apt to and were, in fact, in my view, intended to prevent (or restrict) a third party, say the Defendants, becoming in effect third party purchasers by way of assignment or sub-sale in circumstances where the original contracting party was the company.

Implications

This case provides important guidance on the interpretation of Section 36C of the Companies Act 1985 (now Section 51 of the Companies Act 2006). The judgment confirms that a contrary agreement must demonstrate an objective intention to exclude the statutory effect of personal liability for pre-incorporation contracts, rather than merely containing provisions inconsistent with consequences of that effect. Standard contractual restrictions on assignment do not constitute contrary agreements unless they expressly negate the agent’s personal liability. This maintains the protective purpose of the legislation derived from Article 7 of the First Council Directive.

Verdict: The defendants’ summary judgment application was dismissed. The court held that the contractual provisions relied upon did not constitute an ‘agreement to the contrary’ for the purpose of Section 36C of the Companies Act 1985, meaning the claimant’s claim based on the defendants’ personal liability could proceed to trial.

Source: Royal Mail Estates Ltd v Maple Teesdale [2015] EWHC 1890 (Ch)