IDE ASSIGNMENT COVERSHEET
SECTION A
Name:SIPHESIHLE KHUMALO Student ID: 202102055
Address: MAZINI, ZAKHELE, PLOT 89 DLAMINI STREET
Tutor: Course Lecturer: P.J NDZABANDZABA-DLAMINI
Module Code &Title: LAW 311 Programme: LLB
Study Centre: KWALUSENI Date sent to IDE: 12 OCTOBER 2024
Assignment Number: 1 Signature:
Assignment Title:
SECTION B
Tutor/Course Lecturer’s overall comments and advice to Student: Mark:
Tutor’s signature: Date sent to Course Lecturer:
Course Lecturer’s Signature Date sent to IDE:
The Companies Act of 2009 introduces the subject of pre incorporation contracts in
Eswatini. A pre incorporation contract is defined as a contract that is entered into by a
person who is acting on behalf of a company that does not exist yet1. This is done in the
best interests of the company. Thus, upon incorporation of the company it is expected of
that company to be bound by the terms of the pre incorporation contract. Section 34 of
the Companies Act, allows for pre-incorporation contracts stating that a person can act
as an agent or trustee for a company yet to be formed save as they ensure that the
ratification of the contract is included in the objects of the memorandum and the
contract is submitted simultaneously with the memorandum and articles of association.2
Legal Challenges
Common law places the rule that a pre-incorporation contract does not bind the
company3. This is because in order for a contract to be viable, according to common
law, the person’s contracting should be legally recognizable. In the event that the
company upon incorporation, does not ratify the contract, the liability therefore rests on
the promoter. This means that the failure to fulfill obligations would result in the
promoter paying for damages to third parties. Although this may be the consequence
according to common law, statutory law in Eswatini, brings the exception therefore that
if the contract is ratify or adopted upon incorporation then the contract is legally
recognizable by the company itself.
Secondly if the company does not exist at the moment, there will be contractual
uncertainty. In order for a contract to be a contract, there needs to be two legally
recognized persons. In the case of a pre incorporated contract, one can easily state
that there is a non existent legal entity as the company is legally not in existence.
Therefore it would raise uncertainties within the third parties if the contract would be
enforced. In a contract there also should be terms of offer and acceptance. In simpler
words there should be a party who provides the offer and one party that accepts the
1
D Davis, W, Geach, T Mangalo, D Bulter, A Loubser, Companies and Other Business
Structures in South Africa (2013), 3rd edition.
2
Companies Act, 2009
3
LawTeacher, Pre-Incoporation Contracts, (2021)
offer. Pre-incorporation contracts omit this and the terms of offer and acceptance are
made vague. The contract is therefore made a voidable one in that sense.
Consequently, Failure to ratify the contract brings about promoter’s liability. The
promoter may be faced with the consequences of the contract in the event that
contractual obligations have not been met. There may be no remedies for the third
parties against the company. The consequences may fall back to the promoter also.
While the law gives an allowance to promoters to act on behalf of an unformed
company the fact that the company is still non-existent poses a threat to the promoter
as all incomplete obligations maybe fulfilled by him.
Thirdly, third parties in a pre-incorporation contract are not protected. The promoter may
act as an agent for the company but the laws of agency do not apply in the concept of
pre incorporation contracts because the purported juristic person is not recognised
legally yet. Thus it raises the question of who is liable in the event where the contract is
not ratified this therefore complicates matters when seeking legal redress. There are
limited to no remedies for the third parties if the contract is not ratified. It is true that the
promoter can be sued in order to be vindicated of their interests, but the third parties
intended to deal with the company not a person. Thus, these cotracts prove to be an
economic threat to third parties.
Lastly contractual terms may be altered. The contract terms may be changed or
renegotiated. This may be stated by the company that it did not exist at the time the
contract was finalised, thus giving rise to disputes pertaining as to whether the
contractual terms should be honoured as they were. The now existing company may
probably argue that some terms in the contract are noREFERE favourable due to the
acts of God or market conditions. Therefore there may be guaranteed tension between
the company’s interests in conjunction with the interests of the promoter and the third
parties.
In Conclusion, although, Section 34 is of a great advantage to the starting company.
The legal challenges that the section poses upon promoters and the third parties are
truly not worth it if there are no remedies or ways in which the parties can be protected
in the event the company is never incorporated.
