On October 23, 2020 the Supreme Court of Canada in Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp. 2020 SCC 29 clarified the law on whether or not a corporation is bound by a contract made for it before it was incorporated.
Generally, a corporation isn’t bound by a pre-incorporation contract. However, once incorporated the corporation may enter into a new contract on the same terms as the pre-incorporation contract. The Court summarized the caselaw as follows (citations omitted):
“An agreement entered into prior to incorporation, even one that was purportedly entered into on behalf of the corporation, is not binding on the corporation once it comes into existence… At common law, a corporation is incapable of ratifying or adopting a pre-incorporation contract, because a person cannot ratify or adopt a contract if they were not in a condition to be bound by it at the time it was made… A corporation can, however, enter into a post-incorporation contract on the same terms as the pre-incorporation contract.” [Strata, ¶ 25-26].
“[T]he applicable test for finding that a post-incorporation contract exists is the same as the one for finding that any other agreement exists at common law. The test is objective, and the offer, acceptance, consideration and terms may be inferred from the parties’ conduct and from the surrounding circumstances.” [Strata, ¶ 37].
As noted in a previous post, it is very common for parties to enter into pre-incorporation contracts with people who purport to contract for the corporation to be incorporated. The Supreme Court of Canada has just confirmed that it is not wise to do so. There are options to address this, including tight contractual requirements on the principals of the proposed corporation, but those add complexity and uncertainty. Parties should at least consider declining to proceed until the corporation itself exists and can be bound by the contract.
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