Signing a Contract On Behalf of a Client? Beware!

Professionals who sign contracts on behalf of their clients should beware following a High Court ruling which paved the way for trial of a £5.1 million claim by Royal Mail Estates Limited against a specialist firm of commercial property solicitors.

Royal Mail had contracted to sell a London property for £20 million to a development company. The contract was signed on the company’s behalf by the law firm. At the time, neither Royal Mail nor the firm were aware that the company had not yet been incorporated.

The deal went sour and Royal Mail launched proceedings against the firm, arguing that it was a party to the contract. It claimed from the firm the deposit due under the contract and damages for alleged repudiatory breach of the same. The total principal sum claimed came to £5.1 million.

Royal Mail cited Section 36C(1) of the Companies Act 1985, which provides that a contract which purports to be made by or on behalf of a company before it has been formed has effect, subject to any agreement to the contrary, as a contract made with the person purporting to act for the company or as agent for it.

The firm sought to strike out Royal Mail’s claim on the basis that it had no realistic prospect of success. However, the Court rejected the firm’s plea that it had been agreed that it would not stand in the shoes of its client when signing the contract and that section 36C(1) did not apply. The decision opened the way for a full hearing of Royal Mail’s claim.