Kelner v Baxter [1866] LR 2 CP 174 is a significant UK company law case that revolves around the concept of pre-incorporation contracts.
A group of promoters was working on establishing a new hotel business. Before the company was officially registered, the promoters, on behalf of the yet-to-be-formed company, entered into a contract to purchase wine. After the company's registration, it ratified the contract. However, the wine had already been consumed before the payment was made, and the company eventually went into liquidation.
The promoters, acting as agents, were sued on the contract. They argued that since the company had ratified the contract, the liability had transferred to the company, and they were not personally liable. The court, however, held that as the company did not exist at the time of the agreement, the contract would be wholly inoperative unless it was considered binding on the promoters personally. The court emphasised that a stranger (the company) cannot, through subsequent ratification, relieve the promoters from their personal responsibility.
The judgment clarified that a promoter can avoid personal liability if, after incorporation, the company and the third party agree to substitute the original pre-incorporation contract with a new one on similar terms. This process is known as novation and can also be inferred by the conduct of the parties, such as when the terms of the original agreement are changed.
Additionally, a promoter can escape personal liability if they sign the agreement merely to confirm the signature of the company. In such cases, where the company was not in existence at the time of signing, the signature and the contractual document are deemed null and void.
Erle CJ, in delivering the judgment, held that the promoters were personally liable. He emphasised that if the company had been in existence at the time of the agreement, the signatories would have acted as agents of the company. However, given that the company did not exist at that time, the agreement would only be valid if held to be binding on the promoters personally.
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