Story Case

Certain persons, three in number, decided to promote a corporation, which, when organized, should engage in buying timber, making it into lumber, and selling the lumber. Before the organization was complete, but while arrangements for incorporation were in progress, one of the promoters, with the consent and authority of the other two, went out to buy timber land. Mr. Howell, who owned a large tract of timber land, agreed to sell it to this promoter for $150 per acre. A written contract was drawn up for the sale of the tract, between the promoter and Mr. Howell. In due course of time, the organization was completed and the corporation entered upon its business. Timber was cut from the tract in question, carried to the plant of the corporation, sawed, and much of it sold by the corporation. Mr. Howell then demanded payment of the corporation; when it refused to pay, suit was brought against it. By the corporation, it was contended that it had made no contract with Howell, and that his sole remedy was against the promoter. By Howell, it was insisted that the corporation had adopted the contract made by the promoter, and was liable on it to the same extent as if it had made it originally. "What should be the decision of the Court under the foregoing circumstances?

Ruling Court Case. Mcarthur Vs. Times Printing Co., Volume 48 Minnesota Reports, Page 319

McArthur was employed under a contract for one year, as advertising solicitor for a paper to be published by a corporation, which was being formed by-one C. A. Nimocks and others. The contract was made by Nimocks, as promoter, on behalf of the company, on September 12; the paper was published from October 16. In April, of the next year, McArthur was discharged, and this, he claims, was a breach of contract on the part of the company. The corporation, or its directors, had never voted to adopt or ratify the contract with McArthur, but they all had known of its terms and had never repudiated it, but had continued the employment with no new contract. Now, however, the company claims that the contract was with Nimocks, only, and that its obligation to the plaintiff, McArthur, was only to pay him for the time that he had worked.

Mr. Justice Mitchell delivered the opinion of the Court: The general rule is clearly established, that contracts made by promoters, in the name of, or on behalf of a corporation to be formed, do not bind the corporation. They are not its contracts, because, when made, the corporation is not in existence and could not be a party to them. Neither can they be ratified, because ratification requires that the person on whose behalf the contract is made, should have been able to have made it himself, in the first instance. But, it is equally well settled, that the corporation can make the promoters' contracts its own contracts, by what is called adoption. Mr. Justice Mitchell said: "This it may do precisely as it might make similar original contracts. It may do so by formal action by its directors, but this formal action is necessary only where it would be necessary in the case of a similar original contract. It is not requisite that this adoption or acceptance be express, but it may be inferred from acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown." Here, the course of dealing with McArthur amounted to an acceptance and adoption of the contract which Nimocks had made with him in behalf of the company. Therefore, the company was bound by its terms. Judgment was given for the plaintiff.

Ruling Law. Story Case Answer

A contract made by a promoter before the corporation comes into existence, even though made for a corporation, is not binding upon it, because the corporation was not then in existence. Nor can the corporation ratify it, because there is a rule of agency which says that a contract cannot be ratified by a person or corporation unless the person or corporation was in existence when the contract was made. But the corporation may, after its creation, adopt such contracts, and thus, be bound by the contract. Adoption may be made by some express declaration by the corporation, or it may be made by the corporation's accepting and enjoying the benefit of such a contract. In the Story Case, the corporation, though not expressly adopting the contract made by the promoter, accepted and was enjoying the benefits of the contract. This amounted to adoption of a contract by the consequences of which, it was bound to pay Mr. Howell for the land. Judgment should be given for him.