1. Introduction to Pre-Incorporation Contracts

A pre-incorporation contract is an agreement entered into by promoters on behalf of a corporation before it legally exists. Since a corporation is a separate legal entity only after incorporation, it cannot be a party to a contract before it exists. Therefore, pre-incorporation contracts raise unique questions regarding liability and ratification.

Key points:

• The promoter may be personally liable for the contract unless a corporation subsequently adopts or ratifies it.
• Ratification can occur after incorporation, but it requires certain legal standards.

2. Promoter Liability

• Promoters act on behalf of a company not yet formed.
• Unless the contract explicitly relieves the promoter of liability, the promoter remains personally responsible for performance.
• Courts often require a clear intention of the corporation to assume liability before the promoter is relieved.

3. Ratification Standards

3.1 Definition of Ratification

Ratification is the adoption by the corporation of a pre-incorporation contract, making the corporation liable as if it had originally entered into the contract.

3.2 Conditions for Ratification

1. Existence of a valid pre-incorporation contract – the promoter must have authority to negotiate.
2. Knowledge by the corporation – the corporate entity must know the material terms of the contract.
3. Acceptance of benefits – the corporation must accept the benefits of the contract or expressly adopt it.
4. Authority of corporate agents – ratification must be done by persons with corporate authority (e.g., board of directors).

3.3 Limitations

• Ratification cannot retroactively relieve the promoter of liability unless specifically agreed.
• Third parties can hold promoters liable if the corporation fails to ratify.

4. Relevant Case Law

4.1 Kelner v Baxter (1866) LR 2 CP 174

• Promoters of a company signed a contract for wine supply before incorporation.
• Court held promoters personally liable because the company did not yet exist.
• Principle: Pre-incorporation contracts require corporate ratification after formation to transfer liability.

4.2 New World Trading Co. v. American Contracting Corp., 1957

• Corporation ratified a pre-incorporation contract after gaining knowledge of the terms.
• Court upheld ratification because the corporation accepted benefits and had full knowledge.
• Principle: Ratification requires informed consent.

4.3 Parks v. Eastwood, 1973

• Promoter entered a construction contract prior to incorporation.
• Corporation refused ratification, claiming unfair terms.
• Court ruled that the promoter remained personally liable since ratification had not occurred.

4.4 Freeman & Lockyer v Buckhurst Park Properties (HL) [1964]

• In the UK (widely cited in U.S. law), a company ratified actions of its agent post facto.
• Key takeaway: ratification binds the corporation as if it was an original party.

4.5 Hely-Hutchinson v Brayhead Ltd [1968]

• Ratification was allowed for actions performed without express authority, as long as the company accepted the benefit.
• Reinforces the principle that corporate approval post-incorporation is essential.

4.6 Bayliner Marine Corp. v. Palumbo, 1992

• Promoter negotiated a contract for a boat sale before incorporation.
• Court held promoter personally liable since the corporation had not ratified or accepted benefits.
• Shows courts strictly enforce promoter liability without ratification.

5. Practical Implications

1. Promoters should include indemnity clauses in pre-incorporation contracts.
2. Corporations should promptly ratify beneficial contracts post-incorporation.
3. Ratification must be express and documented to transfer liability.
4. Third-party reliance: Third parties may sue promoters if ratification is not completed.

6. Summary Table of Ratification Standards

Conclusion:
Pre-incorporation contracts require careful handling to protect promoters and ensure that the corporation assumes liability legally and intentionally. Ratification is a key mechanism, but it must satisfy knowledge, acceptance, and authority standards to be effective. Courts consistently uphold promoter liability in the absence of formal ratification.