If a contract is entered into before a corporation is formed and novation has not occurred, who is liable?

If a contract is entered into before a corporation is formed and novation has not occurred, who is liable?

• A. The third party
• B. The state
• C. The corporation
• D. The promoter

Answer: (D)

When a contract is made to further the formation of a company, the person who negotiated and signed it—the promoter—is personally responsible because the corporate entity does not yet exist to assume obligations. Since novation has not occurred, there is no substitution of the corporation as the contracting party, so the promoter remains liable to perform under the contract or answer for any breach. The corporation would become liable only if it adopts the contract or a proper novation takes place, substituting the corporation for the promoter. Therefore, the promoter bears the liability.

When a contract is made to further the formation of a company, the person who negotiated and signed it—the promoter—is personally responsible because the corporate entity does not yet exist to assume obligations. Since novation has not occurred, there is no substitution of the corporation as the contracting party, so the promoter remains liable to perform under the contract or answer for any breach. The corporation would become liable only if it adopts the contract or a proper novation takes place, substituting the corporation for the promoter. Therefore, the promoter bears the liability.