- Parties Involved:
- Plaintiff: Mr. Riche, promoting railway construction in Belgium.
- Defendant: Ashbury Railway Carriage and Iron Co, not yet incorporated.
- Contract Formation:
- Negotiations occurred between Mr. Riche and Mr. Baxendale, the managing director of the not-yet-incorporated company.
- Agreement made for the supply of railway carriages according to Riche’s specifications after the company’s incorporation.
- Company Incorporation:
- At the time of negotiations, Ashbury Railway Carriage and Iron Co was in the process of being formed but not yet incorporated.
- Issue:
- Whether a contract entered into before the incorporation of a company could be enforced against the company after its incorporation.
- Legal Principle Emphasized:
- The court highlighted the separate legal personality of a corporation from its promoters or members.
- Until incorporation, a company does not exist as a legal entity and cannot enter into contracts.
- Enforceability of Pre-incorporation Contracts:
- The House of Lords held that the contract made before incorporation was not enforceable against the company.
- The pre-incorporation agreement was considered a preliminary negotiation and not a binding contract.
- Role of Corporate Veil:
- Emphasis on the importance of the corporate veil, emphasizing the distinction between individuals and the future corporate entity.
- Legal Status of the Agreement:
- The agreement made before incorporation was deemed a “parol” or oral contract, and without the company’s existence, there could be no binding contract.
- Foundational Principle in Company Law:
- The decision contributed to foundational principles in company law, establishing the significance of formal incorporation in creating a legal entity capable of entering into contracts.
- Subsequent Legal Developments:
- The case influenced subsequent legal developments, and legislation (e.g., Companies Act) has provided mechanisms to address issues related to pre-incorporation contracts.
In summary, Ashbury Railway Carriage and Iron Co v Riche established the legal understanding that contracts made on behalf of a company before its formal incorporation are generally not enforceable against the company, highlighting the importance of the corporate veil and the separate legal personality of a corporation.