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Pre-incorporation contracts
The promoter is obligated to bring the company into legal existence and to
ensure its successful running; and in order to accomplish this obligation he may
enter into some contract on behalf of prospective company. These types of
contract are called Pre-incorporation Contracts'.
The problem:
A company only comes into existence when certificate of incorporation is
issued by Registrar of Companies.
Until incorporation a company CANNOT be bound by contracts entered
into in its name or on its behalf- it simply does not exist
However, as part of process of creating company, promoters will contract
with 3rd parties for such things as lease of premises/equipment- so once
company is incorporated it can start running without delay
ISSUE which arises in relation to such pre-incorporation contracts is
whether the promoter can avoid being held personally liable in spite of the
company not existing at the time that such contracts were being
concluded on its behalf
Common Law position on incorporation contracts:
It is a fundamental requirement of the principles of offer and acceptance
that a party must be in existence in order for an agreement to crystallise
The company does not in legal existence at time of pre-incorporation
contract. If someone is not in legal existence, then he cannot be a party to
contract- upon subsequent creation it is a stranger to it and it cannot ratify
or adopt the benefit of the contract
Privity to Contract' doctrine excludes company from the liability being
imposed on the company
KELNER v BAXTER 1866
As far as the law of agency is concerned a person cannot be an agent of a
non-existent principal and so company cannot acquire rights or obligations
under a pre-incorporation contract
These principles came together to form the underlying premise of the
decision in KELNER v BAXTER 1866
Promoters ordered wine on behalf of company. Signed written agreement
to this effect. Company incorporated. Company went into liquidation
before bill settled.
HELD: promoters were personally liable for the sum
AGREEMENT TO CONTRARY
In order to avoid personal liability there must be an agreement that the
company, once incorporated, will create new contract on the same terms
The doctrine of past consideration means the company cannot simply
take over the existing contract
This is referred to as Novation- CANCELLING the 1st contract between
promoter and 3rd party & replace it with identical contract between
company and 3rd party
This must be done in the clearest terms- BAGOT PNEUMATIC TRYE CO. v
CLIPPER PNEUMATIC TYRE CO. 1902
In order to cancel the first contract and replace with a new one you need
CONSENT of other party. This is difficult because they will be less
likely to agree to it.