Pre-incorporated Companies and Privity of Contract
Privty of contract is the notion that only parties to a contract may receive the benefits of or may be called upon to perform the obligations of a contract. This legal principle governs all contractual disputes and determines if a party is properly named in any lawsuit concerning any contractual rights or obligations.
There are limited instances where the law allows for parties other than those named in a contract to be held liable for or to be able to sue in relation to a contract. One such instance is in the case of pre-incoprorated entities. Such was the case in the recent decision of The Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corporation, 2019 BCCA 145 (CanLII) (“Crystal Square”).
In Crystal Square the question before the court was whether a strata corporation, once incorporated, was bound by a contract entered into by its predecessors, in particular, one that concerns shared expenses for a parking garage. The issue stemmed from the agreement in question having been entered between the developer, a corporation, prior to the strata corporation coming into existence.
The court cited Phelps Holdings Ltd. v. Owners Strata Plan VIS 3430, 2010 BCCA 196 (CanLII) for the test as to whether a party may be bound to the terms of a pre-incorporation contract as follows:
…[W]here a party shows an intention to be bound by a new, and identical, post-incorporation contract, that party cannot take the benefit of the agreement without accepting the burden. When the benefit … and burden … are contemplated pre‑incorporation, and are then acted upon exactly as contemplated post-incorporation, there will be found to be a new post-incorporation contract on the same terms.
In applying this test to the facts, the Court of Appeal noted that:
- the future existence of the strata corporation and its assumption of the contractual obligations in question were contemplated in the words of the contract;
- formal adoption of the contract in question by the strata was not necessary and there is no stringent requirement of formal adoption in the matter of adoption of a pre-incorporation contract (noting s. 20 of the Business Corporations Act, S.B.C. 2002, c. 57);
- outward expression of intention to be bound by a contract can be in any form;
- the contract in question offered benefits to the strata once it was incorporated which the strata took advantage of and utilized once incorporated; and
- the strata acted as though it were bound by and sought performance of the contract in question as though it were bound by the contract.
Crystal Square contains a useful review of the law applicable to pre-incorporation contracts and that it is quite possible for a corporation to be bound by a contract that arise before the corporation came into existence so long there are objectively clear terms to the contract, there has been consideration for the contract and there is outward expression of the parties to be bound by the contract which expression can be found in any number of ways. While formal adoption of a pre-incorporation contract would be the most prudent course of action, that is not required in order to establish the enforceability of a contract.