Company Law

Kelner v. Baxter

(1866) LR 2 CP 174

Facts

A group of promoters intended to form the Gravesend Royal Alexandra Hotel Company Ltd.
Before the company had been incorporated, they negotiated with Kelner for the purchase of wine.
Baxter and the other promoters signed a written contract stating that the wine was purchased on behalf of the proposed company.
At that time, the company did not legally exist.
The wine was supplied and was later consumed in the hotel business.
After incorporation, the company purported to ratify or adopt the agreement.
The company subsequently became insolvent before paying the purchase price.
Kelner sued Baxter and the other promoters personally.
The promoters argued that:
they had acted only as agents for the intended company;
the company had adopted the contract after incorporation; and
liability therefore belonged exclusively to the company.
Kelner responded that no agency could exist when the alleged principal did not exist at the time of contracting.
The case required the court to determine who bears liability for a pre-incorporation contract under common law.

Whether a company can ratify a contract made before it came into existence.
Whether promoters signing on behalf of a proposed company become personally liable.
Whether subsequent incorporation and adoption release the promoters from the original agreement.

An agent can bind a principal only where the principal:
exists at the time of contracting; and
possesses legal capacity to authorise the transaction.
Ratification relates back to the date of the original contract.
A non-existent company cannot subsequently ratify because it could not have been a principal on the original date.
Where persons sign a contract for a proposed company, the court must interpret the agreement to determine whether they intended personal liability.
If the contract was intended to take immediate effect, someone must be bound.
Promoters remain personally liable unless:
the contract expressly provides otherwise; or
after incorporation, the company and the other contracting party enter a fresh contract or novation.

When Baxter and the others signed the wine agreement, the Gravesend company had no legal existence.
It therefore possessed:
no legal personality;
no contractual capacity;
no board;
no agents; and
no ability to authorise or ratify.
The words “on behalf of” the proposed company could not create a genuine agency relationship.
The later resolution purporting to ratify the agreement was legally ineffective.
Ratification would have related back to a time when the company did not exist, which the law could not permit.
The court then examined whether the promoters themselves were bound.
The agreement was not expressed as a mere offer that would become effective only after incorporation.
It operated as an immediate commercial purchase:
the wine had to be delivered;
Kelner supplied it;
the hotel business used it; and
payment was expected.
If the promoters were not liable, the agreement would have imposed no obligation on anyone when made.
The court inferred that the parties intended Baxter and the other signatories to assume liability.
The company’s later use of the wine did not automatically substitute it as debtor.
A novation would have required Kelner’s agreement to release the promoters and accept the company in their place.
No such novation was proved.
The company’s insolvency therefore did not shift the unpaid obligation away from the original signatories.

The court held Baxter and the other promoters personally liable for the price of the wine.
The company could not ratify the pre-incorporation contract because it did not exist when the agreement was made.
A later company may become liable only through a new contract or valid statutory mechanism, not common-law ratification.
Use this case for: promoters who enter an immediately binding contract for a non-existent company are ordinarily personally liable.