Enforceability of Preincorporation Contracts and Partnership Contracts

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Title of the paper:
Student’s name:
Institution:

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Question 1
Issue: the question that needs to be decided in this part days with the enforceability of pre-
incorporation contract. Before the incorporation of WA Gold Exploration Ltd., the promoter of
the company, Steve Jones had entered into a contract with Thor Mining Machinery Ltd. The
purpose of the contract was to purchase a drill, which can be used as a test shaft. Another issue
is, if Volvo Trucks (Australia) Ltd. can enforce the contract against Steve Jones as the company
is not in a position to pay the price of trucks purchased by the company.
Law: The Corporations' Act does not elaborate the meaning of the term 'promoter'. However in
this context, a promoter is the person who is dealing with the incorporation of a company
directly or indirectly (Ehrich and Bunzl, 1929). At this point, it is worth mentioning that the
dumper mode does not mean the persons who are involved in this activity only in managerial or
professional capability. Regarding the activities of a promoter, it is provided by the law that a
fiduciary relation is present between the company that is going to be incorporated and the
promoter (Baxt, 1975). The result is that it becomes the responsibility of the promoter to act in
the best interests of the newly formed company. In the same way, it is also the zones within the
promoters to avoid putting themselves in any situation where there is a possibility of the
presence of a conflict between the duty of the person as the promoter of the company and the
personal interests of such a person. According to the law, the promoters are bound to disclose to
the board of the company in case there is any worse arrangers present in any transaction
involving the company. The disclosure made by the promoter in this regard should be complete
and frank. It is possible for the company to rescind the contract with the promoter after the

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promoter had disclosed the fact that he or she had a personal interest in the transaction. Similarly,
the company may sue the promoter in order to recover any undisclosed profit (Gross, 1971). The
provisions of common law as well as the relevant provisions of the Corporations Act, 2001,
along with the ASX listing rules can be used in case of the promoters.
According to the law, before its incorporation it is not possible for a company to form a contract
with a third-party. Hence, a contract created before the registration on the incorporation of the
company is a contract that has been found by a person on behalf of our purportedly for the
company before the company has registered with the ASIC. It has been provided by the
Corporations Act that after its incorporation, it is possible for the company to ratify a contract
created by the promoter. Hence, when the company has ratified the pre-incorporation contract
after it has been registered, the contract is considered by the law as being binding for the
company (Lucke, 1967). In this regard, the Corporations Act imposes liability on the persons to
provide compensation to the third party itself, but he has to suffer the loss due to the fact that
after it's registration, the company failed to ratify the contract created by the promoter with the
third-party on behalf of the company or art or its incorporation, the company failed to fulfill its
obligations prescribed by the ratified contract.
According to the law, for undertaking the benefits that are available to corporate personality, it is
required that the association of persons need to be incorporated. After the incorporation, a
separate legal entity comes into existence. Therefore, the law allows the company to start
business operations only after it has been incorporated (McKenzie, 1973). The reason is that
before the incorporation of the company, it does not have any legal existence. Therefore if the
association of persons forms an agreement under the name of the company before it has been
registered, the agreement is not enforceable. But such position may result in significant