W3

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

NEWBORNE v SENSOLID LTD 1954

Promoter will not be personally liable on a contract where he signs
agreement merely to confirm signature of the company. Because in doing
so he has not held himself out as either agent or principle
The signature, and also the contractual document will be a COMPLETE
NULLITY because the company was not in existence
HOWEVER, promoter may be liable to other party for breach of warranty of
authority on the principle of COLLEN v WRIGHT 1857 in that he
misrepresented his authority by purporting to represent a director of nonexistent company which-lacking legal existence- had no validly appointed
officers
FACTS HERE
PHONOGRAM LTD v LANE 1982
Section 51 of Companies Act 2006 states promoters contracting on
behalf of a putative company will be held personally liable this was first
tested in PHONOGRAM LTD v LANE 1982
Lord Denning took the phrase subject to any agreement to the contrary
(from the CA)to mean that in order for promoter to avoid personal liability
the contract must expressly provide for his exclusion
Lane was to form FM ltd and entered into negotiations with Phonogram Ltd
who agreed to provide 6,000 to finance the pop group
Cheque sent to Lane on the terms that if FM ltd wasnt formed within a
month the money would have to be repaid
FM ltd never formed and 6,000 never paid- issue arose as to who was
liable to pay the sum
Contract was signed for and behalf of FM Ltd
Lane had made contract on behalf of FM Ltd when it had not been
formed hence he was held liable
Therefore, personal liability exists irrespective of whether:
Both parties know the company does not exist at the time of the
contract
The company is never incorporated
HOWEVER, subsequent case law has held that section 51 does NOT apply to a
contract involving a misnamed existing company- or company is in existence and
changes its name after signing the contract.
OSHKOSH BGOSH INC v DAN MARBEL INC LTD 1988
Company passed resolution to change its name to Oshkosh Bgosh
Contract was made before new name was registered
The director was held not personally liable under Section 51- because
of CA 2006 Section 81(2) provides that a change of name shall not affect
any rights or obligations of the company

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.