Law

PreIncorporation Contracts and Resolution of Problems

1. A corporation will not be in a position to ratify such pre-incorporation contracts which a promoter alleged to enter into in lieu of the corporation prior to the existence of the corporation (Kelner v. Baxter).
2. A promoter can be held liable for a pre-incorporation contract only if it can be proved that the situation was such and it had the aim to make the promoter a representative to the contract. (Kelner v. Baxter as understood by Newborn v. Sensolid Ltd.,1 Black v. Smallwood,2 and Wickberg v. Shatsky3).
3. If a promoter purports to act as a representative of a corporation before its formation, the promoter can be held liable for a breach of assurance of office (Black v. Smallwood. Wickberg v. Shatsky). On the other hand, the compensation may be insignificant if the corporation, or the business intended to carry on by the corporation, is now bankrupt (Wickberg v. Shatsky).

The major problems under the common law in the case of Kelner v Baxter, for both the promoter and the third party, were that the contract was not enforceable. As the proposed contract was not reliable this proved to be risky. The faith of reliance in this contract was thwarted as there was an option of either the promoter becoming unjustly richer at the expense of the third party or vice versa. For example, if the courts had not found the liability of the promoters in Kelner v. Baxter then the entire loss on wines supplied to the hotel company would have to be borne by Kelner. Again under common law, unnecessary costs are involved. In order to know the position of the company both the parties will have to find out whether the company is a legal entity or not which would involve unnecessary expenditures.

The problems which are linked to the pre-incorporation contracts are mainly due to the artificial personality of the company. In reality, the existence of a company is not like that of a natural person. Its existence cannot be determined immediately and is a&nbsp.concern of legal formality.&nbsp.

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