A promoter's contract is a pre-incorporation undertaking made by a person who organizes, finances, procures property for, or otherwise brings into being a corporation that is still only contemplated. The usual subjects are leases, purchases of assets, construction or supply agreements, loans, underwriting arrangements, professional services, employment commitments, and organizational expenses intended to launch the corporate enterprise.
The controlling point is juridical personality. A corporation under the Revised Corporation Code becomes a separate juridical person only upon incorporation; before that moment, it has no corporate will, board, officers, property, or capacity to authorize an agent. A promoter who signs for a proposed corporation therefore does not bind the future corporation merely by naming it, describing it as soon to be organized, or stating that the obligation is for its benefit.
General Rule
A corporation is not automatically liable for contracts entered into by its promoters before incorporation. The promoter is not an agent of the non-existent corporation, and the future corporation is not a principal that can be bound by an act made when it had no legal existence.
The third person who deals with a promoter assumes, unless the contract provides otherwise, that the promoter is the person presently undertaking the obligation. The later birth of the corporation does not, by itself, substitute the corporation as debtor, convert the promoter into an agent retroactively, or impose contractual burdens on the corporation.
The rule protects both sides of corporate personality. It prevents promoters from creating debts for an entity that cannot yet consent, and it prevents a later corporation from taking the benefits of a promoter's bargain while repudiating the corresponding burdens once it has knowingly accepted the transaction.
Adoption After Incorporation
The corporation may become liable after incorporation when it adopts, assumes, or accepts the promoter's contract. The word ratification is sometimes used loosely, but strict ratification presupposes an existing principal at the time of the act. The more accurate analysis is that the corporation, after coming into existence, enters into its own undertaking by adoption, assumption, novation, or conduct amounting to acceptance.
Adoption creates corporate liability because the corporation itself acts after incorporation. It does not erase the fact that the corporation was not originally a party, and it does not automatically discharge the promoter unless the third person agrees to a substitution or release.
Express Adoption
Express adoption occurs when the corporation, through its board or another duly authorized corporate organ, clearly assumes the promoter's contract. A board resolution, a written assumption agreement, a new contract with the same terms, a formal acknowledgment of the obligation, or an authorized corporate payment arrangement may constitute express adoption.
Because corporate powers are exercised by the board of directors or trustees, the safest indication of adoption is board action. A statement by an incorporator, promoter, officer, or controlling shareholder does not bind the corporation unless that person has authority under the corporation's governance rules or the board later accepts the act.
Implied Adoption
Implied adoption arises from corporate conduct showing that the corporation knowingly accepted the contract as its own. The inference is strongest when the corporation takes possession of property obtained by the promoter, uses services procured by the promoter, makes payments under the contract, records the obligation in its books, demands performance from the other party, or sues to enforce the agreement.
Knowledge is essential. The corporation must know, through its authorized decision-makers or circumstances chargeable to it, that the benefit it receives came from a promoter's contract carrying obligations. Acceptance without knowledge may justify restitution in a proper case, but it is weaker as proof that the corporation intended to assume the entire contract.
Benefit and burden must ordinarily go together. A corporation that adopts a pre-incorporation purchase cannot claim title or possession while denying the price. A corporation that enforces a promoter's supply agreement cannot treat the supplier's obligations as binding while rejecting its own payment or performance obligations.
Acts Insufficient By Themselves
Not every connection between the later corporation and the promoter's transaction amounts to adoption. The following circumstances, standing alone, do not necessarily make the corporation liable:
- The articles of incorporation are later filed and approved after the promoter signs the contract.
- The corporate name used in the contract is the same or similar to the name later approved.
- The promoter later becomes a director, officer, shareholder, or controlling person of the corporation.
- The third person expected the future corporation to pay once organized.
- The contract states that it is for a proposed corporation, without later corporate assumption.
- Individual incorporators know of the contract but no authorized corporate action or acceptance of benefits is shown.
- The promoter unilaterally enters the obligation in corporate records without authority.
These facts may help prove adoption when combined with corporate acceptance, but none of them alone supplies the missing corporate consent.
Effect On The Promoter And The Third Person
The corporation's later liability must be separated from the promoter's original liability. The promoter may be personally liable because, at the time of contracting, the promoter was the only existing person capable of promising performance. Corporate adoption adds a corporate obligor only to the extent intended by the parties and supported by corporate action.
| Situation | Corporation's Liability | Effect On Promoter Or Third Person |
|---|---|---|
| Promoter signs before incorporation and the corporation never adopts | No contractual liability of the corporation arises from the promoter's signature alone. | The promoter remains the usual defendant if the contract shows personal undertaking or implied personal liability. |
| Corporation expressly assumes the contract after incorporation | The corporation is liable according to the assumed terms and any valid limitations in the assumption. | The promoter remains liable unless there is novation, release, or a contract provision shifting liability exclusively to the corporation after assumption. |
| Corporation knowingly accepts benefits and performs under the contract | Liability may be implied because acceptance of benefits with knowledge is conduct consistent with adoption. | The third person may enforce the burdens corresponding to the benefits accepted. |
| Third person agrees to substitute the corporation for the promoter | The corporation becomes the principal obligor under the substituted obligation. | The promoter is discharged only if the requisites of novation or release are present. |
| Contract is illegal, prohibited, or beyond corporate capacity | No adoption can validate a void or unlawful undertaking. | Personal, restitutionary, or statutory consequences may still arise against persons who acted without authority. |
Limits On Corporate Assumption
A corporation may adopt only a contract that it could lawfully make after incorporation. If the undertaking is prohibited by law, contrary to public policy, outside the corporation's authorized purposes in a way that affects capacity, or dependent on a license or regulatory qualification the corporation does not possess, corporate acceptance cannot cure the defect.
The corporation also takes the contract subject to its terms and defenses. If the promoter's contract was conditional on incorporation, financing, board approval, delivery, permits, or another event, the corporation's liability follows the condition. If the third person materially breached before adoption, the corporation may assert the same defenses available under the contract once it assumes the transaction.
When the underlying contract requires a particular form, the corporate assumption should satisfy that form or fall within a recognized basis for enforcement. A pre-incorporation sale of immovable property, long-term lease, suretyship, or other transaction subject to formal requirements should not be treated as binding on the corporation merely from informal statements unless the law recognizes sufficient written assumption, part performance, estoppel, or another enforceable basis.
Adoption may be entire or limited only if the other contracting party agrees. The corporation cannot unilaterally accept profitable provisions and reject inseparable burdens, but the parties may execute a new contract that modifies price, duration, warranties, liabilities, or parties bound.
Closely Related Applications
Organization Expenses And Professional Fees
Fees for drafting documents, securing subscriptions, arranging meetings, preparing filings, or advising promoters are not automatically corporate debts. The corporation becomes liable when it assumes them, accepts the services as corporate services after incorporation, or otherwise manifests that the expenses are corporate obligations.
A professional who contracted only with the promoter should ordinarily proceed against the promoter unless corporate adoption is shown. A professional who continues services after incorporation with corporate authorization may have a separate claim for post-incorporation services even if earlier services remain the promoter's obligation.
Property Acquired For The Future Corporation
When a promoter contracts to buy or lease property for the intended corporation, the corporation is not bound to pay merely because the property is useful to its business. Liability arises when the corporation takes title, possession, use, or other benefits with knowledge of the contract and treats the transaction as its own.
If the promoter resells property to the corporation at a profit, the promoter must disclose material interests and profits to persons capable of protecting the corporation. A promoter's fiduciary position does not by itself defeat the third person's contract, but it may give the corporation remedies against the promoter for secret profit, unfair terms, or breach of fiduciary duty.
Loans And Financing Arrangements
Money borrowed before incorporation for organizational or start-up purposes is not automatically the corporation's debt. The lender must show corporate assumption, corporate use of proceeds with knowledge, or a post-incorporation financing agreement binding the corporation.
If the corporation receives the loan proceeds after incorporation and applies them to corporate purposes under authorized management, the facts may support implied adoption or restitution. If the promoter merely borrowed in anticipation of incorporation and spent the money before corporate existence without later corporate acceptance, the ordinary debtor remains the promoter.
Employment And Service Contracts
A promoter's promise of employment by the future corporation does not bind the corporation before it exists. The corporation becomes liable for wages, compensation, or benefits when it hires the person after incorporation, accepts services after incorporation, or assumes the pre-incorporation employment commitment through authorized action.
Services rendered before incorporation are generally chargeable to the person who requested them, unless the corporation later assumes the obligation or knowingly retains the benefit under circumstances making nonpayment inequitable.
Pre-Incorporation Subscriptions
Pre-incorporation subscriptions are treated differently from ordinary promoter contracts because the law specifically recognizes subscriptions for shares in a corporation still to be formed. Once the corporation is incorporated, it may enforce valid subscriptions according to the governing rules on subscription contracts.
This special treatment does not mean that every promoter's commercial contract is likewise automatically enforceable against the corporation. Share subscriptions create capital commitments to the contemplated corporation; ordinary promoter contracts create obligations only when the later corporation adopts them or the law otherwise supplies liability.
Corporation By Estoppel
When persons act as or on behalf of a corporation without authority to do so, rules on corporation by estoppel may impose liability on those who assumed corporate powers or may prevent a person who dealt with an apparent corporation from denying its existence to escape obligations. This doctrine addresses the consequences of acting under an ostensible corporate existence; it does not automatically make a later valid corporation liable for every pre-incorporation contract.
If a later corporation adopts the transaction, corporate liability may arise from that adoption. If it does not adopt, the estoppel consequences usually fall on the persons who acted and on the parties who dealt with them under the apparent corporate arrangement.
Consequences Of Adoption Or Rejection
Once the corporation adopts the promoter's contract, it may enforce the contract and may be sued on the corresponding obligations. The corporation's liability may include obligations that accrued before formal adoption if the assumption clearly covers the whole contract or if its conduct shows acceptance of the transaction as a continuing whole.
If adoption covers only future performance and the third person agrees, prior obligations may remain with the promoter. If the corporation's conduct is ambiguous, courts examine the nature of the benefit received, the knowledge of the board or authorized officers, the entries in corporate records, payments made, demands for performance, and whether the corporation's position would unjustly retain benefits without their burdens.
If the corporation rejects the contract before accepting benefits, the third person generally cannot compel performance from the corporation solely because the bargain was intended for it. The third person must rely on the promoter's liability, any express contractual allocation of risk, applicable estoppel principles, or restitution for benefits actually retained by the corporation.
The practical rule is compact: before incorporation, the corporation cannot be bound; after incorporation, it may bind itself by authorized adoption; after adoption, it must accept both the rights and the burdens of the transaction it has made its own.