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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.

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.

On the 20th of the month, Company X, Inc. signs a second agreement B, with Company Y.

Company X, Inc. is willing to honor agreement B.

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.

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 "incorporation" on the tenth, and found out about it on the fifteenth.)

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    I assume that Inaki is right, and B is a replacement for A. Did X lie about being incorporated? Why did X & Y sign the new contract? Did they discuss it as a replacement contract? Who asked for the new contract? Were their lawyers involved in either contract? – Just a guy Jul 26 at 23:20
  • @Justaguy: Two answers. 1) Contract B was an "expansion," not a replacement of Contract A for five times the original money. 2) X lied about being incorporated. – Libra Jul 26 at 23:41
  • Thanks! That's very helpful. This is truly a mess. I take it they didn't discuss how this contract would affect the original contract, and the new contract doesn't have any language about "superseding" the original contract? – Just a guy Jul 26 at 23:55
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Only if the company consents

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 common law principle that a person cannot enter a contract before that person exists.

In your circumstances the company is only bound by the second contract. So, who is bound by the first?

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.

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.

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 and 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”.

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Contract law may give X and the promoter (the person who signed the contract) a way out.

The contract you describe is called, not surprisingly, a "pre-incorporation" contract. Since these are fairly common, you can find lots of discussions of their legal status online (for example, here and here).

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.)

(Of course, in this case, the promoter's lies mean the contract said nothing about what would happen to the contract after incorporation. They may have other consequences as well.)

Second, and most importantly: Somebody signed the original contract, and that somebody -- the promoter -- is still bound by that contract. So if nothing else, Y can sue the promoter.

NY follows these principles, as can be seen in the article Dale cites, or in the string of cases citing Clinton Investors Company v. Watkins.

The only way to be sure the contract is adopted by X Inc, and the promoter is released from liability, is called novation. Unfortunately, since novation requires the consent of all of the parties, it probably won't work in this case.

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.

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 substitute contract which replaced the original. If the second contract is a substitute then it voids the original contract.

Here’s a nice explanation of how to tell whether a contract is a substitute for the earlier contract:

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, without any express agreement to that effect, whenever the new contract is manifestly in place of or inconsistent with a former one, or which renders a former contract impossible of performance.

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.

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