ARE PRE-INCORPORATION CONTRACTS BINDING ON THE COMPANY REGISTRATION PROCESS IN CAMEROON?
Who is a Promoter in Cameroon?
A promoter is the person who is undertakes to set up a company in Cameroon by ensuring that the company registration process is duly respected in accordance with the laws of Cameroon. The process of forming a company in Cameroon may see a promoter engage into some form of contract arrangements when the company is not yet registered. In this light, we see the coming into existence of pre-incorporation contracts.
For a contract to be considered a pre-incorporation contract, the company in question must be a prospective company.
Nature of a Pre-Incorporation Contract
A pre-incorporation contract is not same as an ordinary contract as it has the elements of being a bilateral contract on the one hand and a tripartite contract on the other hand. Hence, they are regarded as contracts before company registration in Cameroon but which have a future effect on the registered company.
A pre-incorporation contract is bilateral when the promoter engages in such a contract with an interested individual.
What makes a pre-incorporation contract tripartite is that it is engaged by the promoter and an interested person for the benefit of the company which was not a party to the contract.
Pre-Incorporation Contract and the Principle of Novation of Contract
A pre-incorporation contract as earlier said in the contract engaged by the company promoter and an interested person though for the benefit of the prospective company. However, the principle of novation of contract is to the effect that a registered company engages into a new contract with the same person, on same contract terms in replacement of the promoter. This has raised the argument as to whether a novation of contract should be treated as a pre-incorporation contract or a post-incorporation contract.
When does a Pre-Incorporation Contract Become Binding on a Company Registered in Cameroon?
A pre-incorporation contract becomes binding on a company registered in Cameroon from the time it is ratified by the registered company Articles of Association or after the company has started operations by the general assembly.
Liability of the Promoter Concerning Pre-Incorporation Contracts in Cameroon
The promoter is personally liable for the pre-incorporation contract if the company does not ratify or adopt the pre-incorporation contract.
In the case of Phonogram Limited v Lane, Lord Denning settled the position, he found that if an unformed company enters into the contact, then it cannot bind the company and the promoter or representor shall be personally liable for the pre-incorporation contract.
How can a Promoter Shift Liability and Right to the Company?
A promoter can shift his liability by engaging the novation of contract principle under contract law on the one hand, or by the company ratifying the pre-incorporation contract in the company Articles during the registration of the company in Cameroon or by virtue of a company general assembly validation during the post incorporation company process in Cameroon.
ADVANTAGES OF PRE-INCORPORATION CONTRACTS IN CAMEROON
Key advantages during the company registration process include:
Immediate Operational Readiness: Prior to the entity's legal formation, promoters are empowered to secure office premises, engage key personnel, and acquire essential assets, enabling the company to commence operations immediately upon incorporation in Cameroon.
Facilitates Contractual Continuity: These contracts enable the newly formed entity to formally adopt pre-existing agreements, such as supplier contracts or property leases, taking on their associated rights and obligations without the need to renegotiate their terms.
Establishes Legal Certainty for Third Parties: Through a formal, often statute-backed ratification process, these contracts guarantee that the corporation will assume and honor all obligations to third parties upon its incorporation.
Protects Promotional Interests: By setting out management structures and control mechanisms before the company's first official meeting, it creates a clear legal framework for how the business will be governed, minimizing the potential for post-incorporation conflicts.
Avoids Startup Delays: By entering into pre-incorporation agreements, companies can advance their business operations without having to wait until the registration process is fully completed.
HOW DISPUTES ARE SOLVED FOR BREACH OF PRE-INCORPORATION CONTRACTS IN CAMEROON
When disputes arise from the breach of pre-incorporation contracts — instruments executed on behalf of a company prior to its legal formation — resolution typically hinges on whether the company, upon incorporation, formally ratified the contract, or whether personal liability rests with the promoters who executed it.
Disputes are typically resolved through the following mechanisms and legal principles:
1. Personal Liability of Promoters (Common Law)
Under traditional common law principles, a company that has not yet been legally constituted lacks the capacity to be a party to a contract and is equally precluded from subsequently ratifying any such agreement.
Result: Personal liability for any breach of contract rests with the promoter — the individual who executed the agreement on behalf of the yet-to-be-formed company.
Action: The third party is entitled to institute legal proceedings directly against the promoter, whether on grounds of breach of contract or breach of warranty of authority.
2. Novation (Substitution of Contract)
Novation constitutes the post-incorporation process by which a new contract is established, whereby the company is substituted as a party in place of the promoter under the original agreement.
Resolution: The execution of a new contract between the third party and the newly incorporated company operates to discharge the promoter from all further contractual liability.
Requirement: Such circumstances require demonstrable evidence that the third party expressly intended to release the promoter from liability and to accept the newly formed company as the sole contracting party in its stead.
3. Statutory Adoption/Ratification
Inline with the OHADA Uniform Act on Commercial Companies & Economic Interest Groups, a company can adopt a pre-incorporation contract.
Resolution: Where the company's board of directors formally ratifies the contract the company becomes legally bound by its terms and assumes all attendant liabilities.
The contract can equally be expressly mentioned in the Articles of the Company as ratified during the company registration process in Cameroon.
Effect: The promoter is released from personal liability upon ratification either in the company Articles of Association or Company meeting.
4. Equitable Remedies (Estoppel and Restitution)
Where a company avails itself of the benefits conferred by a contract whilst simultaneously repudiating its obligations thereunder, courts may invoke equitable principles to prevent such unconscionable conduct.
Estoppel: A court may estop a company from repudiating its contractual obligations where its conduct has been such as to reasonably indicate its acceptance and adoption of the contract.
Restitution: Where a company is not contractually bound yet has nonetheless derived benefits — such as goods or services — from the agreement, a court may order restitution on the grounds of unjust enrichment.
Summary of Remedies
Against the Company Promoter: the remedies available are specific performance, monetary damages, or personal liability for breach.
Against the Registered Company: If adopted, specific performance or damages for breach.
Key Dispute Mitigation Steps
Clear Drafting of Contracts: It is common for contracts to expressly stipulate the extent of the promoter's continuing liability, specifying either a defined date or the point at which the company formally assumes responsibility under the agreement.
Incorporation Clause: Contractual clauses may be incorporated to make the agreement conditional upon the successful incorporation of the company and its formal adoption by the board of directors.
Legal Action: In the event of a dispute, the parties will commonly issue formal demand letters or commence mediation proceedings to ascertain whether the company intended to assume liability under the agreement.