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Pre-Incorporation Contracts: The Reform of Section 35 of the Companies Act

Section 35 of the South African Companies Act of 1973 is laudable to the extent that it overcomes the common-law hurdle that a company cannot ratify a pre-incorporation contract purportedly made by an agent on behalf of the company prior to the formation of the company. But, although the South African legal principles relating to pre-incorporation contracts were historically progressive, since South Africa was one of the first jurisdictions to provide a ‘legislative solution’ to ‘the conundrum of the pre-incorporation contract’, the solution contained in section 35 has some thirty years later become outdated, inequitable and out of line with current global trends and business practices. Section 35 is in dire need of a thorough overhaul. Reform is essential not only of the fundamental underlying policy of section 35, but also to provide a complete, modern and comprehensive solution to the multitude of practical problems to which this section has given rise. This article proposes a statutory solution for balancing the conflicting rights and liabilities of the company, the agent and the third party. It also provides detailed suggestions for amendment of the Act, together with comprehensive statutory solutions to the array of practical problems. The comparative law discussion includes the law of Australia, New Zealand, Canada, the USA, the UK, Ireland, Ghana and Malaysia.