Pre-Incorporation Contract Problem

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Pre-Incorporation Contract Problem
A creative use of the common law provides a number of ways of avoiding the common law pre-incorporation contract problem discussed above.

1. Promoter as Trustee of a Chose in Action:
The promoter could be treated as a trustee of a chose in action for the corporation. This would put the promoter under a fiduciary obligation to enforce the contract and would allow an order permitting the company to sue in the name of the promoter as trustee.

2. Company as Assignee:
The circumstances may allow the court to treat the contract as having been assigned to the company (as opposed to ratification by the company).

3. Restitutionary Principles:
The court might accept that although there was no valid contract with the corporation there was a “quasi contract” allowing for a restitutionary based remedy. This could allow a court to redress an enrichment of one party by the performance of another in the belief that there was a valid contract.

4. Infer a Second Contract from a Course of Dealings:
The court might look at par performance of the terms of the original attempted contract and infer another contract between the third party and the corporation.

5. Offer to Promoter as Agent for the Third Party to Make an Offer to the Company: The promoter might be viewed as an agent of the third party with authority to make an offer to the corporation on the same terms as those involved in the dealing between the promoter and the third party. A purported ratification or adoption by the company could then be considered an acceptance of an offer conveyed by the promoter as agent for the third party.

6. Provisional Contract to Become Binding on a Future Event (the Incorporation of the Company): Yet another alternative is to consider the contract a provisional contract that would take effect on the incorporation of the company and its adoption of the contract.

To resolve the dilemma of promoters’ pre-incorporation contracts...
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