Before the Company Is Born: Legal Realities of Pre-incorporation Contracts Under CAMA 2020

INTRODUCTION

In the dynamic landscape of Nigerian business law, the formation of a company marks a critical milestone, yet the journey often begins well before incorporation.

Preincorporation contracts, entered into on behalf of a yet-to-be-formed company, play a pivotal role in laying the groundwork for future operations.

However, these agreements come with unique legal complexities, as they straddle the line between entrepreneurial ambition and statutory compliance. The Companies and Allied Matters Act (CAMA) 2020, Nigeria’s principal corporate legislation, introduces significant provisions that govern the enforceability, liabilities, and implications of such contracts.

This write-up explores the legal realities of pre-incorporation contracts under CAMA 2020, examining the statutory framework, the responsibilities of promoters, and the practical challenges faced in navigating these agreements before a company legally comes into existence.

Meaning of Pre-incorporation Contracts

Pre-incorporation contracts are agreements entered into by promoters or individuals acting on behalf of an unincorporated company. These contracts may encompass a wide range of activities, including negotiations, commitments sand transactions relating to the intended business of the company.¹

The Common Law Position on Pre-incorporation Contracts

Before a company comes into legal existence, certain foundational activities must be undertaken such as; renting premises, negotiating deals, purchasing goods, or securing licenses. These arrangements are often made by promoters in anticipation of the company’s registration. The legal question that arises, however, is whether a company, once incorporated, can be bound by or enforce a contract entered into before it existed.

Historically, the common law answered this question with a firm “NO”. The classic rule, most notably espoused in KELNER v. BAXTER,² held that a company cannot ratify a contract made on its behalf before incorporation, as it did not exist at the time and thus had no legal capacity to contract. Over time, this position was reinforced in both English and Nigerian case law, often to the detriment of promoters and third parties alike.

At common law, the doctrine was clear: a company that does not yet exist lacks legal personality and, therefore, cannot enter into binding contracts. As a result, any preincorporation agreement purportedly made on behalf of the company was considered void, unenforceable by the company, and incapable of ratification.

In KELNER v. BAXTER,³ the court held that because the company had not been incorporated at the time of the contract, it could not become a party to the agreement post-incorporation. The promoters, who signed the contract, were personally liable. This case laid the foundation for a legal rule that a company cannot be bound by, nor enforce a contract made before its incorporation. While the rule maintained strict legal logic, it failed to accommodate the commercial reality that businesses often must make commitments in anticipation of formal registration.

This position was reaffirmed in NEWBORNE v. SENSOLID CO. LTD,⁴ where Newborne was forming a company but before it was formed, a contract was signed which purported to be made by the company for sale of goods to the defendants. It was singed “Leopold (London) Ltd” and underneath it was the signature of Leopold Newborne: when market fell the buyers refused delivery and writ was issued by the company, but when it was found out that as at the time of the contract the company had not been registered, the name of Leopold was substituted as plaintiff. It was held, that the company cannot enforce the contact as he had not purported to sell as principal or agent. As the company was not in existence as at the time of the contract, and it was not signed by the promoter, the signatory was not in existence and unknown, therefore the contract was a nullity.

Similarly, in CALIGARA v. GIOVANNI SATORI & CO. LTD,⁵ S obtained a cheque of ₦800 from plaintiff as loan in the name of and before the defendant
company was formed and incorporated. The plaintiff sued the company for recovery of the loan and interest arguing that the company had ratified the loan agreement. In a regrettably short judgment, SHOWEMIMO J. (as he then was) held that:

“A company is not bound by contracts purporting to be entered into on its behalf by its promoters or other persons before its incorporation. The company cannot, after incorporation, ratify or adopt any such contract because there is in such cases no agency and the contract is that of the parties making it. Neither the person who purports to make a contract on behalf of a proposed company, nor the company after its formation, have any contact rights under a pre-incorporation contract. A company cannot ratify or adopt an agreement entered into before its incorporation.”

In the Nigerian case of EMMANUEL URHOBO v. CHIEF J.S. TARKA,⁶ a Lagos High Court held that if a pre-incorporation contract be entered into by the company which did not exist at the time, the contract is a nullity and neither the company when formed nor the promoter whose signature was appended could sue or be sued on the contract and the company could not take any benefit under it. This effectively left third parties exposed and promoters personally liable, even when acting in the company’s best interest.

These cases reflect the central flaw of the common law rule; its failure to protect parties who, in good faith, engage in contracts with promoters expecting the company to adopt them once formed. It also undermines the efforts of promoters who take initial business steps to ensure the company’s smooth launch.

Statutory Intervention: CAMA 2020 to The Rescue

Recognizing the inadequacies of the common law approach, the Nigerian legislature introduced a significant reform through Section 96 of the Companies and Allied Matters Act (CAMA) 2020.⁷ This provision offers a clear and practical departure from the restrictive rule of non-ratification.

Section 96(1) of CAMA 2020 states that:
“Any contract or other transaction purporting to be entered into by the company or by any person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it has been in existence at the date of such contract or other transaction and had been a party thereto.”

Furthermore, Section 96(2) provides that unless and until the contract is adopted by the company, the promoter remains personally liable.⁸ This balances the interests of all parties, ensuring that third parties are not left without recourse, while also offering a mechanism for companies to affirm useful pre-incorporation arrangements.

This reform is commercially sensible and legally progressive. It acknowledges the reality that promoters often act in anticipation of incorporation and seeks to avoid unjust outcomes for either side. The statutory shift under CAMA 2020 effectively resolves the injustice and impracticality embedded in the old common law rule.

Conclusion

The development of the law on pre-incorporation contracts in Nigeria reflects the tension between strict legal rules and the practical needs of business. The old common law rule, shown in cases like KELNER v. BAXTER, NEWBORNE v. SENSOLID, AND EMMANUEL URHOBO v. TARKA, provided legal certainty but often led to unfair results. It ignored the fact that promoters frequently need to make business arrangements before a company is officially registered.

With the introduction of Section 96 of CAMA 2020,⁹ Nigerian company law has taken a more practical and balanced approach. The new rule allows a company to adopt contracts made before it was formed, protecting both promoters and third parties. Promoters now understand when they may be personally liable, while third parties have a better chance of enforcing valid agreements.

This change goes beyond technical law in the sense that it brings the law in line with the way business actually works today, ensuring fairness, clarity, and commercial sense in a modern economy.

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1. Yewande Aluko, The Binding Effect of Pre-Incorporation Contracts in Nigeria Under CAMA 2020 (Berkeley Legal, 4 April 2024) https://berkeleylp.com/insights/effect-of-pre-incorporation-contracts-in-nigeria/. [↩]
2. (1866) 2 QB 174 [↩]
3. Kelner v Baxter (n 4). [↩]
4. (1954) 1 QB 45 [↩]
5. (1961) 1 All N.L.R 534 [↩]
6. (1976)11 CC HCJ 262 [↩]
7. Section 96 (1), Companies and Allied Matters Act, 2020 [↩]
8. Section 96 (2), Companies and Allied Matters Act, 2020. [↩]
9. CAMA 2020, s 96 (n 9). [↩]