Kelner v Baxter [1866]

Kelner v Baxter (1866) LR 2 CP 174 is a foundational case in UK company law, particularly regarding the issue of pre-incorporation contracts. It deals with the legal implications when promoters, acting on behalf of a company that has not yet been formed, enter into contracts in anticipation of the company's incorporation. The key question in this case was whether the promoters, who signed a contract on behalf of a company that did not yet exist, could be held personally liable for the obligations under that contract.

In this case, a group of promoters for a hotel business entered into a contract to purchase wine before the company had been legally registered. After the company's incorporation, the contract was ratified by the newly formed entity. Unfortunately, the wine was consumed, and the company soon went into liquidation without paying for it. The promoters were subsequently sued by the wine supplier, as the company was insolvent. The promoters argued that once the company ratified the contract, any liability for payment had passed to the company, thereby relieving them of personal responsibility.

The court, however, disagreed. Chief Justice Erle ruled that since the company did not exist at the time the contract was made, the agreement could not be binding on the non-existent company. As a result, the promoters were personally liable for the contract. The reasoning was that a contract made before a company’s incorporation cannot be ratified retrospectively because the company had no legal existence at the time. Therefore, a third party cannot release the promoters from liability through ratification alone.

The case also clarifies that promoters can avoid personal liability in certain situations. For example, if after incorporation, the company and the third party substitute the original pre-incorporation contract with a new agreement on the same or similar terms, this process, known as novation, can transfer liability to the company. Additionally, if the promoter signs the contract merely to confirm the signature of the company, and not as a principal or agent, there may be no personal liability, as the contract would be deemed a nullity in the absence of the company.

Kelner v Baxter sets an important precedent in company law, confirming that promoters cannot escape liability for contracts made on behalf of non-existent companies unless a novation occurs or another mechanism is used to transfer responsibility. It highlights the risks faced by promoters and emphasises the need for caution when entering into agreements before a company's formal registration.