Facts

• A group of promoters for a new hotel company, the “Gravesend Royal Alexandra Hotel Company” (Gravesend) entered into a contract for wine.
• This contract was purportedly on behalf of Gravesend, but Gravesend had not at that point been registered.  It was a “pre-incorporation contract”.
• Gravesend was eventually registered, but by that stage the wine had been consumed before the money had been paid.  Gravesend soon went into liquidation.
• The promoters, as Gravesend’s agents, were sued.
• The promoters argued that, as Gravesend had been incorporated, the contract had subsequently been ratified and the liability had passed to the company.

Issues

• Were the agents liable for the pre-incorporation contract post ratification by Gravesend?

Held

• The Court of Common Pleas held that because the company did not exist at the time of the signing of the agreement it would be wholly inoperative unless it was binding on the promoters.
• A stranger cannot, by subsequent ratification, relieve the promoters from that responsibility of liability.
• A promoter can avoid liability if a substitute agreement novices the original pre-incorporation contract.

Quotes

“…if the Gravesend Royal Alexandra Hotel Company had been an existing company at this time, the persons who signed the agreement would have signed as agents of the company. But, as there was no company in existence at the time, the agreement would be wholly inoperative unless it were held to be binding on the defendants personally. The cases referred to …[explain that] where a contract is signed by one who professes to be signing “as agent,” but who has no principal existing at the time, and the contract would be altogether inoperative unless binding upon the person who signed it, he is bound …a stranger cannot by a subsequent ratification relieve him from that responsibility.  When the company came afterwards into existence it was a totally new creature, having rights and obligations from that time, but no rights or obligations by reason of anything which might have been done before. …There must be two parties to a contract; and the rights and obligations which it creates cannot be transferred by one of them to a third person who was not in a condition to be bound by it at the time it was made. The history of this company makes this construction to my mind perfectly clear. …It cannot be supposed that [the agent] for a moment contemplated that the payment was to be contingent on the formation of the company…”

(Erle CJ)

-- Download Kelner v Baxter (1866) LR 2 CP 174 as PDF --

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