new-york-state breach-of-contract incorporation
Can a company be held to an agreement it signed before it was incorporated?
<p>Company X, Inc. or an entity purporting to be Company X, Inc. signed an agreement, A, with Company Y on the tenth of the month.</p>
<p>On the fifteenth of the month, Company X filed for, and received incorporation in New York. It became X Inc. at this time, but not before.</p>
<p>On the 20th of the month, Company X, Inc. signs a second agreement B, with Company Y.</p>
<p>Company X, Inc. is willing to honor agreement B.</p>
<p>Company X, Inc. claims that it is not bound by Agreement A because it was signed five days before Company X was a properly constituted (corporate) entity.</p>
<p>Company Y wants to enforce agreement A as well. Can Company Y do this? If not, what recourse does it have? (Y did not know about the lack of &quot;incorporation&quot; on the tenth, and found out about it on the fifteenth.)</p>

<h2>Only if the company consents</h2>
<p>While some jurisdictions have by statute allowed corporations to be bound by pre-incorporation contracts, New York is not one of them and holds to the <a href="https://fhnylaw.com/lesson-personal-liability-owners-soon-formed-llc/" rel="nofollow noreferrer">common law principle</a> that a person cannot enter a contract before that person exists.</p>
<p>In your circumstances the company is only bound by the second contract. So, who is bound by the first?</p>
<p>Well, corporations can only act through agents and agency law tells us that an agent who purportedly acts for a non-existent principal is actually acting on their own behalf. So, the person(s) who signed for Company X on the first contract are personally bound to the contract.</p>
<p>Unless they explicitly told Company Y that they wouldn’t be. It seems that they didn’t so Company Y can require performance of the first contract by them and of the second by Company X.</p>
<p>Company Y must, of course, fulfil its obligations under both contracts - it needs to bear this in mind if it is actually impossible to do both, for example, transferring the same property to the signers of the first contract <em>and</em> Company X or becoming a full time employee of both. If so, it might be in Company Y’s best interests to let the first contract “die”.</p>

<p><strong>Contract law may give X and <em>the promoter</em> (the person who signed the contract) a way out.</strong></p>
<p>The contract you describe is called, not surprisingly, a &quot;pre-incorporation&quot; contract. Since these are fairly common, you can find lots of discussions of their legal status online (for example, <a href="https://hazelwoodlaw.com/f/pre-incorporation-contracts-of-promoters" rel="nofollow noreferrer">here</a> and <a href="https://www.carsonkyung.com/your-liability-for-pre-incorporation-contracts/" rel="nofollow noreferrer">here</a>).</p>
<p>The basics are what you'd expect: First, since X Inc. didn't exist when the contract was signed, it couldn't sign the contract. To get around this, pre-incorporation contracts usually contain terms saying explicitly what will happen after incorporation. (Even if the terms are not explicit, the behavior of the parties may be enough to transfer the contract.)</p>
<p>(Of course, in this case, the promoter's lies mean the contract said nothing about what would happen to the contract <em>after</em> incorporation. They may have other consequences as well.)</p>
<p>Second, and most importantly: <em>Somebody</em> signed the original contract, and that somebody -- the promoter -- is still bound by that contract. So if nothing else, Y can sue the promoter.</p>
<p>NY follows these principles, as can be seen in the article Dale cites, or in the <a href="https://casetext.com/case/clinton-investors-company-v-watkins/how-cited?PHONE_NUMBER_GROUP=P&amp;citingPage=1&amp;sort=relevance&amp;citingJxs=ny&amp;sortCiting=date-descending" rel="nofollow noreferrer">string of cases</a> citing <em>Clinton Investors Company v. Watkins.</em></p>
<p>The only way to be sure the contract is adopted by X Inc, and the promoter is released from liability, is called <em>novation.</em> Unfortunately, since novation <a href="https://www.rocketlawyer.com/gb/en/quick-guides/novating-a-contract#:%7E:text=Novation%20is%20the%20process%20by,and%20burdens%20under%20the%20contract." rel="nofollow noreferrer">requires</a> the consent of all of the parties, it probably won't work in this case.</p>
<p>Thus, it appears the law of pre-incorporation agreements puts X Inc and its promoter on the horns of a dilemma: If X Inc adopts the original contract, it becomes liable for that contract; if X Inc refuses to adopt the contract, then the promoter (its founder?) is liable.</p>
<p>There may, however, be a way for X Inc and the promoter to avoid the dilemma, and free themselves from liability for the contract. That way is for X to accept the original contract, and then argue that the second contract was a <em>substitute contract</em> which replaced the original. If the second contract is a <em>substitute</em> then it voids the original contract.</p>
<p><a href="https://caselaw.findlaw.com/ky-court-of-appeals/1733315.html" rel="nofollow noreferrer">Here’s</a> a nice explanation of how to tell whether a contract is a substitute for the earlier contract:</p>
<blockquote>
<p>If the new contract in express terms rescinds the old one, no question can be asked;  yet the same result follows, as a necessary implication, and takes place by operation of law, <em>without any express agreement</em> to that effect, whenever the new contract is <em>manifestly in place of</em> or inconsistent with a former one, or which renders a former contract impossible of performance.</p>
</blockquote>
<p>Because the circumstances (the promoter lied, Y thought it was signing a contract with a corporation, and so on) are so odd, I would want to talk to a lawyer with a lot of experience in commercial contract in NY before I ventured a guess as to whether this strategy would work.</p>
