The normal treatment where a promoter purports to enter into a contract on behalf of a corporation that has not yet been formed is that the promoter is personally liable. Here is a summary of the normal treatment:
- The promoter is personally liable for pre-incorporation contracts.
- The corporation becomes liable not merely upon formation but upon adoption. This is sometimes referenced as “ratification”. A somewhat tedious observation is that one formally cannot ratify a contract where the person purporting to ratify the contract was not in existence as of the time of the contract. Hence, avoiding tedious distraction is facilitated by referencing this as an “adoption”.
- Acceptance of benefits constitutes adoption.
- The promoter is not discharged upon corporation becoming bound, unless creditor assents to substitution (novation).
- A novation exists where the newly-formed entity accept benefits “if performance is made with the understanding that a complete novation is proposed”.
More after the break …