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Court of AppealDismissedNot stated in the judgment

Consolidated Chemicals Ltd v KEL Chemicals Ltd [1981] KECA 3 (KLR)

Court of Appeal of Kenya
23 July 1981
3,254 words in judgment
View original judgmentRead on Kenya Law Watch case
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·~13 min to read original · ~4 min brief

The bottom line

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A Kenyan company cannot simply 'adopt' a deal signed before it existed—it must sign a fresh contract after incorporation.

What this practically means

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Executive summary

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This Court of Appeal appeal arose from execution proceedings. KEL Chemicals Ltd obtained default judgment against Consolidated Chemicals Ltd for Kshs 178,346 and attached goods at the vendor's former Nanyuki Road premises. The appellant, Consolidated Chemicals (1979) Ltd, incorporated after the goods were sold, objected to the attachment, relying on a pre-incorporation sale agreement made by Mr Sultanali Hasham Lalji on its behalf, which it claimed to have adopted after incorporation by paying the purchase price, taking delivery and insuring the goods. Harris J dismissed the objection, holding that no new contract with the company had been entered into after incorporation. The Court of Appeal, in a single principal judgment by Simpson Ag JA concurred in by Law JA and Miller JA, dismissed the appeal. The court reaffirmed that a company cannot bind itself to a pre-incorporation agreement by mere ratification or unilateral acts of adoption; there must be a new contract after incorporation, which may be inferred from the company's acts unless those acts were done in the mistaken belief that the original agreement was already binding. On the evidence, Mr Lalji's payments, correspondence and affidavits showed he regarded himself as the purchaser, and the company's acts were done under that erroneous belief. In re Northumberland Avenue Hotel Co was applied; Howard v Patent Ivory Manufacturing Co was distinguished. The High Court decision was affirmed and the appeal dismissed with costs to the respondent.

Questions the Court framed

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The issues the Court set itself to decide, in its own words.

  1. 1.Whether a company may be bound by an agreement entered into before its incorporation by adopting it after incorporation, where such adoption is said to be inferred from the company's acts
  2. 2.Whether the acts of the appellant company after incorporation (payment of purchase price, taking delivery, insurance, payment of vehicle charges) evidenced a new contract between the company and the judgment-debtor
  3. 3.Whether the goods attached in execution of the decree belonged to the appellant company at the time of attachment

Key legal issues

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01

Whether a pre-incorporation contract can bind a company by adoption after incorporation

Holding

Only if a new contract between the company and the counterparty is entered into after incorporation; such new contract may be inferred from the company's acts, but not where the acts are done under the erroneous belief that the pre-incorporation agreement is already binding

Reasoning

The court relied on Kenler v Baxter, In re Northumberland Avenue Hotel Co and Howard v Patent Ivory Manufacturing Co as summarised in Halsbury's Laws. In re Northumberland Avenue Hotel is directly analogous: acts done under an erroneous belief that the agreement was binding were held not to be evidence of a fresh agreement. Howard v Patent Ivory was distinguished because there the articles empowered adoption and a directors' resolution adopting the agreement was passed in the presence of the counterparty, evidencing a fresh contract.

p. 2
02

Whether the appellant company's acts (payments, taking delivery, insuring goods, paying vehicle charges) evidenced a new contract

Holding

They did not; the only reasonable inference was that the acts were done under the erroneous belief that the company was bound by the pre-incorporation contract, as Mr Lalji's own letters and affidavit showed he regarded himself as the purchaser

Reasoning

Payments were made by Mr Lalji personally through Greenfield Investments Ltd before the company opened a bank account; his letters referred throughout to his agreement with Mr Lalji and still held Mr Lalji liable; his affidavit said the company had 'duly honoured' the agreement rather than made a new one. The correspondence showed no suggestion of a contract between the vendor and the appellant company.

p. 4
03

Whether departure from the grounds of appeal without leave barred Mr Kassam's submission

Holding

The appellant departed from his grounds of appeal but leave was impliedly granted since no objection was taken until after submissions concluded

Reasoning

Mr Da Gama Rose objected that Mr Kassam had departed from the grounds without leave, contrary to rule 101 of the Court of Appeal Rules, because the grounds implied unilateral adoption while the submission was of a new contract. The court held that the late objection meant leave could be taken to have been impliedly granted, and the appeal proceeded on the new-contract argument.

p. 2

Legal principles established

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  • A company is not bound by a pre-incorporation agreement unless a new contract to the effect of the previous agreement is made after incorporation, although such new contract may be inferred from the company's acts except where those acts are done in the mistaken belief that the agreement is binding
  • A company cannot by mere unilateral ratification or adoption bind itself to a pre-incorporation contract; a company cannot ratify a contract made before it existed

Court orders

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  1. 1.This appeal be dismissed with costs

The bench

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One judgment of the whole court — no separate or dissenting opinions.

majority

Wrote the judgment

Simpson Ag JA prepared the principal judgment analysing the pre-incorporation contract and concluding that no new contract could be inferred from the company's acts.

A new agreement between the judgmentdebtor and the appellant company on which the judgment-debtor could sue the appellant for the balance remaining due cannot in my opinion be inferred from the acts of the appellant company on which Mr Kassam relies.p. 4
majority
majority
On appeal from
High Court of Kenya
Not stated
Jurisdiction invoked
Appeal to the Court of Appeal under the Court of Appeal Rules (rule 101 referred to); the judgment does not state the specific constitutional provision

Relief refused

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Setting aside the High Court order dismissing the objector's claim and declaration that the attached goods belonged to the appellant

No new contract after incorporation could be inferred from the company's acts; the acts were done under the erroneous belief that the company was bound by the pre-incorporation contract, so the attached goods did not belong to the appellant

p. 5

Costs

The appeal was dismissed with costs to the respondent

Quotable passages

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Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.

In order that the company may be bound by agreements entered into before its incorporation, there must be a new contract to the effect of the previous agreement, although this new contract may be inferred from the company's acts when incorporated, except when such acts are done in the mistaken belief that the agreement is binding.
p. 3Principle on adoption of pre-incorporation contracts (Halsbury's Laws, adopted)
Could the company become liable by a mere ratification? Clearly not. Ratification can only be by a person ascertained at the time of the act done - by a person in existence either actually or in contemplation of law; as in the case of assignees of bankrupts and administrators, whose title, for the protection of the estate, vests by relation.
p. 2No ratification of pre-incorporation contract (Kenler v Baxter, Willis J)
I respectfully agree with the learned judge that the facts is disclosed in the proceedings before him do not support any suggestion of a new contract having been entered into by the appellant's company after incorporation. It follows that the goods attached by the court broker do not belong to the appellant/objector. I would dismiss the appeal with costs to the respondent.
p. 5Conclusion and disposition
As Miller JA agrees, it is ordered that this appeal be dismissed with costs.
p. 5Final orders of the court
The appellant company qua company was not and could not have been a legally recognized and consensual party to the contract of sale.
p. 5Legal incapacity of a company not yet incorporated (Miller JA)

Issues in the judgment

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minor

The case name of Kenler v Baxter appears possibly misprinted ('Kenler' rather than the conventional spelling) in the judgment text

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Consolidated Chemicals Ltd v KEL Chemicals Ltd [1981] KECA 3 (KLR)", Case Analysis (1981). Not stated in the judgment. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1981/3/eng@1981-07-23

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.