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This case is concerned with enforcement of a pre-incorporation contract. The position is that a pre-incorporation contract does not bind the company, although certain exceptions exist in this regard. However, this case reaffirmed the standing position that a company is not bound by any contract that it may have entered into before the company was incorporated.
A new hotel company was going to be established by the name of “Gravesend Royal Alexandra Hotel Company”. The promoters of this company entered into a contract for the purchase of wine for the hotel. Although the contract was for the purchase of wine for Gravesend after the hotel started functioning, but the contract was signed before the registration of Gravesend Company. For this reason the contract was a pre-incorporation contract.
Later on the company Gravesend was registered. By the time the company was registered the wine had been consumed, and before the payment could be realized in total, the company went into liquidation. Eventually, for the recovery of money for the wine, the promoters of the company who had entered into the contract for the company were sued, for acting as the agents of the company when the contract was entered into on the part of the company.
However, the promoters contended that they were not liable for the repayment of the same since they stated that the contract had been ratified when the company was incorporated in complete. This implied that the liability had indeed shifted on to the company.
Whether the agents i.e. the promoters of the company were liable for the pre-incorporation contract when the contract had been ratified by Gravesend after the incorporation?
The Court held that the situation is where a promoter had entered into a contract on behalf of a party which did not exist at the time when such contract was being formed. The company had failed to repay Mr. Kelner, the seller of the wine. The judges observed that the principal-agent relationship between the promoters and the company cannot be in existence before the incorporation, since the company in itself i.e. the principal was not in existence, leading to the conclusion that the promoters could not be agents of the company in the first place. The judges also noted that the company could not take liability for the contract which was entered into before incorporation, neither by way of adoption nor by way of ratification. The court held that the promoters were personally liable for the contract so entered into since it was the promoters who were the parties that consented to enter into the contract.
The Court held that since the company did not exist at the time when the contract was entered into by the promoters. The promoters could not act on behalf of someone since there was no one on whose behalf the promoters could have entered into the contract. The court also reasoned that since a stranger could not ratify a contract, nor can a stranger adopt a contract, which leaves no manner in which the company could have adopted the contract subsequent to the promoters having entered into it. There are still ways where a promoter could have avoided the personal liability or could have done the same when he/she signs the agreement with the intention to confirm the signature of the company. If this way is adopted by the promoter, then the promoter has not acted as agents for the company, which in turn helps the agents to avoid the personal liability towards the company.
This case reaffirmed the legal position that when a company enters into a pre-incorporation contract, the same is not binding on the company. However, this case clarified that the promoters can be held personally liable in the case where they are the one who have entered into the contract on behalf of the company, since the company could not have adopted or subsequently ratified the contract. In itself, the document would never be binding, since the company never existed in the first place.