Court: Court of Common Pleas
Judgment Date: 14 November 1866
Where Reported: (1866-67) L.R. 2 C.P. 174; [1866] 11 WLUK 81
Legal Issue in Kelner v Baxter
Kelner v Baxter addresses the binding nature of contracts made by persons purporting to act as agents for a yet-to-be-formed company.
The legal issue central to Kelner v Baxter was whether individuals who sign a contract on behalf of a non-existent company can be held personally liable for the obligations under that contract.
This issue challenges the conventional understanding of agency law and corporate formation, probing the extent to which individuals can commit to contracts on behalf of a prospective entity.
Material Facts in Kelner v Baxter
The case arose when the plaintiff, Kelner, entered into a contract with Baxter and others, who signed as agents of the Gravesend Royal Alexandra Hotel Company, which was yet to be incorporated.
Kelner sold wine and other goods under this agreement, believing he was contracting with the company.
However, when the company was later formed and subsequently failed, Kelner sought to enforce the contract against the individuals who had signed the agreement, claiming they were personally liable as the company did not exist at the time of contract formation.
Judgment in Kelner v Baxter
The court held that the individuals who signed the contract were personally liable. It reasoned that since the company did not exist at the time of the contract’s formation, it could not be a party to the contract.
Therefore, the signatories, who acted as if they were agents of a non-existent principal, were personally bound by the agreement they entered into.
The Reason for the Decision in Kelner v Baxter
The decision was rooted in the principles of agency law and the legal status of a corporation. The court emphasised that an agent must have a principal to act on behalf of, and in the absence of a principal, the agent becomes personally liable.
This doctrine prevents individuals from avoiding personal liability by purporting to act for a non-existent entity.
The decision also reflected the necessity to protect the contractual expectations of parties who engage in good faith with individuals purporting to represent a company.
By holding the signatories personally liable, the court upheld the sanctity of contractual agreements and deterred individuals from prematurely entering into contracts on behalf of companies yet to be formed.
Legal Principles in Kelner v Baxter
Kelner v Baxter is a seminal case in company law and agency law, establishing that individuals who contract on behalf of a non-existent company are personally liable.
Kelner v Baxter underscores the legal principle that a company must be in existence at the time of contract formation to be bound by it.
This ruling has significant implications for the formation of contracts during the incorporation process of a company, highlighting the risks associated with premature contractual commitments made in the name of a company yet to be legally formed.
