A pre-incorporation contract is a contract purported to made by or on behalf of a company which has not been formed.

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INTRODUCTION

A pre-incorporation contract is a contract purported to made by or on behalf of a company which has not been formed. It is the intention of this essay to examine how the courts have decided on promoter's liability in relation to pre-incorporation contract.

As stated above, a pre-incorporation contract is one which is attempted to be made on behalf of a company which is not yet formed. The problem with these contracts is who exactly is liable under them. The question to be asked is, is the company liable or is it the promoter who incurs liability.

At common law, a number of rules were established. The first one is that until the company is formed it has no legal existence. A company comes into being from the date on its certificate of incorporation (s13 Companies' Act 1985 and Re Jubilee Cotton Mills1). Prior to this a pre-incorporation contract cannot be enforce by or against the company, for it is not possible to contract with a non-existent person.

This is illustrated by the leading case of Kelner v Baxter2. In this case Baxter and two other promoters agreed to buy some wines and spirits from Kelner and signed the order on behalf of a hotel company which they had not yet formed. When the company was formed, the wines and spirits were consumed but the company failed before Kelner was paid. It was held that the company was not liable for the wines and spirits. Earle LJ said: "When the company came afterwards into existence it was a totally new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before."3

In an attempt to ratify the contract by the company after it has been formed will not save the contract. This is because notification has retrospective effect and attempts to give authority to a person at the time the contract was made. Since a company will not have been formed at this time, it cannot be given the necessary authority Natal Land Co Ltd v Pauline Colley Syndicate Ltd4. It was also held in Kelner v Baxter that if the company is not liable on the contract, the promoters may be personally liable. If the promoter does not sign the contract as agent, but merely to authenticate the company's signature, then no contract exist at all. This point was made in Newborne v Sensolid (Great Britain) Ltd5.
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In this case, Leopold Newbourne Ltd. entered into a contract to sell a quantity of tinned ham to Sensolid. The contract was signed 'Leopold Newbourne (London) Ltd.' and underneath the signature of Leopold Newbourne, the promoter and director. The question which emerged after Sensolid refused to take delivery of the goods was whether the promoter can enforce the contract. It was held that Leopold Newbourne did not enter the contract to sell the ham as principal or agent. Instead the contract was purported to be made by a company which was not yet in existence by one of ...

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