FACT PATTERN 1: ORGANIZATION OF A CORPORATION - PRE-INCORPORATION CONTRACTS

Question 1

What is a promoter?

Answer 1

A promoter is a person acting on behalf of a corporation not yet formed.

Question 2

What is the liability of the corporation for any contracts made by promoters before the corporation is formed?

Answer 2

The corporation is not liable on pre-incorporation contracts until it adopts the contract.

Question 3

On January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease “Oscar de la Rental Cars, Inc.” On February 20, Oscar de la Rental Cars, Inc. is formed.
Is the corporation liable on the contract?

Answer 3

Only if it adopted the contract.

Question 4

How can a corporation adopt a pre-incorporation contract?

Answer 4

1. Express – board takes an action adopting the contract (e.g., board resolution).
2. Implied –If the corporation accepts the benefits of the contract.

Question 5

What is the liability of the promoter for pre-incorporation contracts that are adopted by the corporation

Answer 5

Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts until there is a novation.

Question 6

What is a novation?

Answer 6

A novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract.

Question 7

Will a promoter be liable on the lease if Oscar de la Rental Cars, Inc. is never formed? Why or why not?

Answer 7

Yes, the promoter is liable until there is a novation. No novation here.