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

Ben, a promoter, signs a contract to buy equipment 'on behalf of Orchid Ltd', a company not yet incorporated. Ben signs as 'agent for Orchid Ltd'. Under the general rule applied in many common law jurisdictions, who is personally liable on the contract?

Ben is personally liable. A person who contracts on behalf of a company that has not yet been incorporated is treated as the party to the contract, unless the agreement says otherwise, because the company did not exist and cannot be the principal.

  1. ABen, because he acts for a non-existent principalCorrect
  2. BNo one, because the company did not exist
  3. COrchid Ltd, once it is incorporated

Explanation

A person who purports to contract for a company not yet formed is personally liable on the contract, subject to any contrary agreement. The company cannot be liable because it did not exist. Saying no one is liable is wrong, since the promoter takes on the liability.

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