Question

Liz, a promoter, hired an office support staff for a corporation that had not yet been incorporated. If there is a novation clause in a subsequent contract with the corporation and the staff, which of these is correct?

1) The corporation will not be bound by any of Liz's contracts.
2) The office support staff will work without pay until the corporation becomes incorporated.
3) Liz will escape potential liability under the novation contract entered into.
4) Liz and the corporation will be held equally liable under all contracts entered into.

Answer 1

A novation clause in a contract frees the promoter from liability when a corporation assumes responsibility for contracts entered into before it was formed.

Step-by-step explanation:

When a promoter like Liz enters into contracts on behalf of a not-yet-formed corporation, she initially holds liability for those contracts. The introduction of a novation clause in a subsequent contract shifts that liability from the promoter to the corporation upon its formation. The correct response is that Liz will escape potential liability under the novation contract entered into.

This implies that the newly formed corporation will assume the obligations and liabilities under said contract, releasing Liz from her prior commitments. However, until the novation agreement is executed, Liz will remain liable. The novation clause must be expressly agreed upon by all parties involved, including the corporation upon its incorporation.