Kelner v Baxter [1866]

Court: Court of Common Pleas

Facts: A group of promoters entered into a contract to purchase wine on behalf of a company that had not yet been incorporated. The company later ratified the contract after its registration, but the wine had already been consumed before payment, and the company went into liquidation. The promoters were sued for payment. They argued that the company’s ratification transferred liability to the company, and they should not be personally liable.

Issue: Can promoters of a company be personally liable for a contract entered into on behalf of a company that did not exist at the time of the contract?

Held: The court held that the promoters were personally liable. Since the company did not exist at the time of the agreement, it could not have entered into the contract, and subsequent ratification by the company could not relieve the promoters from their liability. The only way for promoters to avoid personal liability would be through novation, where the contract is substituted by a new agreement between the third party and the company after incorporation.

Key Judicial Statement: "A contract made on behalf of a company that does not yet exist is inoperative unless it is considered binding on the promoters personally. A subsequent ratification by the company cannot relieve the promoters of personal responsibility."

💡Leveluplaw: This case highlights the risks promoters face when entering contracts on behalf of a company that has not yet been formed. It also underscores the importance of novation to transfer liability to the company once it is incorporated, offering valuable insights into pre-incorporation contracts and personal liability.