Before answering the following questions, you should be familiar with these issues:
- The means provided by the Companies Act 1993 by which pre-incorporation contracts may be enforced against both the company and its agents;
- The law relating to the reservation of company names, particularly s 22(2) of the Companies Act 1993 and the prohibition of “identical or almost identical” names; and
- The requirement in s 25, that persons acting on behalf of a company clearly state the company’s correct name on written communications and legal documents, and the defences available to a person who does not do so.
The legislative provisions in ss 182–185 of the Companies Act 1993, rather than the common law, should be applied to problems dealing with pre-incorporation contracts wherever possible. These provisions were, after all, enacted to reform the unsatisfactory common law position.
Ratification of a pre-incorporation contract requires some action done for the purpose of confirming an imperfect contract. Merely acting as if the contract is binding does not constitute ratification.
The “almost identical” test in s 22(2)(b) of the Companies Act 1993 does not extend to names that are merely similar, even misleadingly so. The standards under the Companies and Fair Trading Acts are different; a name that is “misleading or deceptive” is actionable under s 9 of the Fair Trading Act, but in order to be prohibited under the Companies Act a name must be “virtually indistinguishable” with respect to its key words and the order in which they appear — a much more difficult test to satisfy.
On 4 September 2015 D&H Ltd entered a contract with Herbert Construction Ltd for a building to be constructed on the company’s property situated on Main Street, Palmerston North. The document showed the contractor as “Herbert Construction Ltd”, and was signed by M Herbert as agent for the company. However, unbeknown to either party at the time of contracting, Herbert Construction Ltd was not incorporated until 7 September. Upon discovering this, Herbert wrote to D&H Ltd on 8 September expressing the company’s intention to confirm the imperfect contract. Herbert Construction Ltd now refuses to complete the construction of the building, on the grounds that since the company was not incorporated at the time the contract was entered, it cannot be held liable to perform the contract. It cites Kelner v Baxter (1866) LR 2 CP 174 in its favour.
Is Herbert Construction Ltd’s defence valid? Can D&H Ltd enforce this contract against the company? Does D&H Ltd have any claim against Herbert personally?
You need to consider the following in your answer:
- The relevance (or otherwise) of Kelner v Baxter to these facts. Has the Companies Act 1993 superseded this case?;
- The two ways in which a company may be held liable for a pre-incorporation contract entered on its behalf — ratification by the company and validation by the court; and
- The ways in which D&H Ltd may claim against Herbert personally — breach of the implied warranty in s 183(1)(b) (if the contract has not been ratified), by way of a court order on just and equitable grounds under s 185 (if the company has ratified the contract), and possibly under the common law principles concerning personal liability.
Sine Labore Ltd was incorporated on 26 December 2000. Its registered office is in Palmerston North. The company operates a well-known and very successful theatre troupe in Palmerston North. Sine Labore (2015) Ltd was incorporated in 2015. Its registered office and centre of business is in Auckland. It operates a similar business to that of Sine Labore Ltd.
Sine Labore Ltd’s director, creative genius and lead actor, Aidan, recently became aware of confusion in the marketplace about these two unrelated competitor companies. This confusion arises from a mistaken belief by some customers and suppliers that the two companies are related. There is some evidence that the Auckland company is taking advantage of this confusion. Accordingly, Aidan asked the Registrar of Companies to invoke s 24(1) of the Companies Act 1993 and order Sine Labore (2015) Ltd to change its name.
The Registrar declined to exercise the powers conferred by s 24 to require Sine Labore (2015) Ltd to change its name. Aidan has now exercised his right of appeal under s 370(1) of the Companies Act 1993.
Consider the arguments for and against the appeal and, in light of those arguments, the likely outcome of the appeal.
If Aidan’s appeal is dismissed (and assuming that there is no further right of appeal to the Court of Appeal), is there anything else he can do to protect Sine Labore Ltd’s interest in its name?
You need to consider the following in your answer:
- Section 22 of the Companies Act 1993, which provides for the reservation of company names; and
- The other remedies which may be available when a company proposes to use a name that is similar to that of another company, such as the prohibition on conduct that is likely to “mislead or deceive” in s 9 of the Fair Trading Act 1986 and the tort of passing off.
For the full sample answers and more see Berkahn Questions and Answers: Company Law (3rd ed, LexisNexis, Wellington, 2014).