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KELNER V. BAXTER

Kelner v. Baxter, (1866) LR 2 CP 174

ISSUE:

  • 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?

RULE:

  • This case is concerned with the 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.

FACTS:

  • 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, 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 incomplete. This implied that the liability had indeed shifted on to the company.

HELD:

  • The Court held that the situation is where a promoter had entered into a contract on behalf of a party that 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.