Corporate and Business Law (Global) · The formation and constitution of a company

Pre-incorporation Contracts: Liability and Ratification

Updated 11 October 2026 · Fact-checked

A pre-incorporation contract is made for a company that does not yet exist. Under the common law rule the company is not a party and cannot ratify it later. The person who signs is usually personally liable. The company becomes bound by a novation (or by a statutory adoption rule where one applies).

Understand Pre-incorporation Contracts

A company only exists once it is incorporated. Before that moment it has no legal personality. It cannot own property, sue, be sued or make contracts.

So what if someone signs a contract "on behalf of" a company that is not yet formed? Usually this is a promoter or a future director who wants to secure premises, stock or services in advance. The law treats the company as a non-existent principal. An agent cannot act for a principal that does not exist.

Under the common law rule, the result has two parts. First, the company is not bound by the contract when it is formed. It cannot ratify the contract, because ratification needs the principal to have existed when the contract was made. Second, a person who signed as agent for the future company is personally liable on it. In Kelner v Baxter, the promoters signed a contract to buy wine for a proposed hotel company that had not yet been formed. They were held personally liable, because the company did not exist and could not ratify the contract. The court treated the contract as binding on the promoters personally.

The position depends on the wording. If the signatory signs as agent for a future company, the courts usually read this as an intention to be personally bound. If the contract clearly states that the signatory is not to be liable, the outcome can differ. If the person signs in the company's name alone, with no agent wording, the contract can be treated as a nullity (Newborne v Sensolid). In that case the contract was signed in the company's name alone, so it was a nullity. The company did not exist, so it could not enforce it, and the individual who signed could not enforce it as a party either. Do not state that the signatory can never be sued. Liability depends on the facts and intention.

The company can become bound only by a novation: a fresh contract made after incorporation, with the other party's agreement. Some jurisdictions have statutory rules. For example, a statute may make the promoter personally liable, or allow a company to adopt a pre-incorporation contract. Always follow any statutory rule the question tells you to apply.

Key formulas to remember

Core rule: Contract made before incorporation → company not bound and, under the common law rule, cannot ratify; The company did not exist, so it could not be a principal when the contract was made. Follow any statutory rule the question gives.
Liability of the signatory: Person who signs as agent for a non-existent company → personally liable; Kelner v Baxter. Look at the wording and intention of the parties.
Signing the company name alone: Company name signed with no agent wording → contract can be a nullity; Newborne v Sensolid. The contract was void and the signatory, who signed only in the company's name, could not enforce it. Do not say the signatory can never be sued. It depends on the facts and intention.
How the company becomes bound: Novation = new contract after incorporation, agreed by all parties; Old contract is discharged and replaced. Adoption or ratification alone is not enough under the common law rule.
Exclusion of personal liability: Clear wording that signatory is not liable → no personal liability; Look for clear wording. Signing for a future company does not by itself exclude liability.

How to solve Pre-incorporation Contracts questions

Use this order for any scenario question on contracts made before a company is formed.

1Identify the date of incorporation and the date the contract was signed. Check the contract came first.
2Confirm the company did not exist at signing. If it did exist, this is not a pre-incorporation problem.
3State that, under the common law rule, the company is not bound and cannot ratify, because it was not in existence. Check whether the question gives a statutory rule and follow it if so.
4Look at how the person signed and any wording on liability. Decide if personal liability applies or has been excluded.
5If the person signed as agent for the future company, apply Kelner v Baxter: they are personally liable. If the company name was signed alone with no agent wording, apply Newborne v Sensolid: the contract can be a nullity and the signatory could not enforce it. Liability depends on the facts and intention.
6Check whether a novation happened after incorporation. If it did, the company is bound by the new contract.
7Conclude clearly: who is liable, who can enforce, and who cannot.

Quickest way: Three-question check

When to use it: Section A and Section B objective questions where time is short.

Was the company incorporated when the contract was signed? If no, go on.
Did anyone sign as agent for it? That person is personally liable, unless the contract clearly excludes it. If only the company name was signed, the contract can be a nullity and the signatory could not enforce it (Newborne v Sensolid).
Is there a new contract after incorporation? Only then is the company bound. Under the common law rule, ratification is not possible; follow any statutory rule the question gives.

Common mistakes in Pre-incorporation Contracts

Saying the company can ratify the contract after incorporation.
Students confuse this with ordinary agency, where an existing principal can ratify an unauthorised act.
Fix: Remember ratification needs a principal in existence when the contract was made. A company not yet formed has none.
Saying nobody is liable because the company does not exist.
Students stop at the company's lack of capacity and forget the signatory.
Fix: Always move on to the person who signed. They are usually personally liable.
Thinking a director's signature alone makes the company liable.
Students treat the signer as an authorised director, but no company or directors existed yet.
Fix: Check the dates. Before incorporation there are no directors with authority.
Ignoring the wording of the contract.
Students memorise the rule as absolute.
Fix: Read for any clause excluding personal liability or making the contract conditional on later adoption.
Saying the company is bound once it starts to perform the contract.
Students assume conduct amounts to adoption.
Fix: Performance alone does not bind the company. A novation, a new agreement, is needed.
Applying the rule when the company was already incorporated but had the wrong name.
Students see "company" and "contract" and apply the pre-incorporation rule automatically.
Fix: Always confirm the company had not yet been formed on the date of signing.

Worked examples

Example 1

Amir signed a lease for office premises on 1 March, stating he was signing "for and on behalf of Zenith Ltd, a company to be formed". Zenith Ltd was incorporated on 20 March. The landlord now claims unpaid rent. Advise who is liable.

Show the solution

Check dates: the lease was signed on 1 March, before incorporation on 20 March. This is a pre-incorporation contract.
Zenith Ltd did not exist on 1 March, so it was not a party to the lease and is not bound by it.
Zenith Ltd cannot ratify the lease after incorporation, because it did not exist when the contract was made.
Amir signed as agent for a non-existent company and there is no clause excluding his liability. Following Kelner v Baxter, he is personally liable.
Zenith Ltd would be bound only if a new contract (novation) were agreed with the landlord after 20 March.

Answer: Amir is personally liable for the rent. Zenith Ltd is not liable unless it later enters a novation with the landlord.

Example 2

Which ONE of the following statements about a contract made by a promoter before the company was incorporated is correct? A. The company is bound once it is incorporated. B. The company can ratify the contract after incorporation. C. The promoter is usually personally liable on the contract. D. The promoter has no liability because the company did not exist.

Show the solution

Test A: the company is not automatically bound on incorporation. This is wrong.
Test B: ratification is not possible, as the company did not exist when the contract was made. This is wrong.
Test D: the lack of a company does not remove liability from the signatory. This is wrong.
Test C: the person who contracts for a non-existent company is usually personally liable (Kelner v Baxter). This is correct.

Answer: C

Exam tips

Section A questions often offer "the company can ratify" as a tempting wrong option. Reject it every time.
In scenario questions, find the incorporation date first. It decides the whole answer.
In a written answer, give three parts: company not bound, no ratification, signatory personally liable. Then mention novation as the route to bind the company.
Name Kelner v Baxter, but do not just name it. State what it decided.
Look for wording that excludes personal liability. It is a common twist in Section B cases.

Practice questions from The formation and constitution of a company

Pre-incorporation Contracts: frequently asked questions

Can a company ratify a pre-incorporation contract?

Under the common law rule, no. Ratification requires the principal to exist when the contract was made. A company not yet formed cannot be a principal, so it cannot ratify later. Some jurisdictions have statutory rules, so follow any rule the question gives.

What happened in Kelner v Baxter?

Promoters signed a contract to buy wine for a proposed hotel company that had not yet been formed. They were held personally liable, because the company did not exist and could not ratify the contract. The court treated the contract as binding on the promoters personally.

How can a company become bound by a pre-incorporation contract?

It must make a new contract after incorporation, called a novation, with the other party's agreement. The new contract replaces the old one. Simple adoption or acting on the contract is not enough under the common law rule, unless a statutory adoption rule applies in the jurisdiction the question uses.

Can the signatory avoid personal liability?

It depends on how they signed. If they signed as agent for the future company (Kelner v Baxter), they are usually personally liable unless the contract clearly excludes it. If they signed the company name alone with no agent wording (Newborne v Sensolid), the contract was held a nullity. The company did not exist, so it could not enforce it, and the individual who signed could not enforce it as a party either. Whether the signatory can be sued depends on the facts and intention.