## Facts

- Michael Langham invented a highway construction device and marketed it through his unincorporated business, Langham Engineering.
- Clark Balderson and Business International, Inc. (BI) negotiated a pre-incorporation agreement (PIA) with Langham and Langham Engineering to form a new corporation (later Illinois Controls, Inc.).
- Under the PIA, Langham was to contribute exclusive patent rights, manufacturing capabilities, technical expertise, and title to specified vehicles.
- In exchange, the new corporation was to assume specified business debts of Langham Engineering and certain personal debts of Langham.
- The PIA also described Balderson/BI’s marketing responsibilities in an operative portion of the agreement introduced by “NOW, THEREFORE, pursuant to the mutual covenants herein contained, the parties hereto agree as follows.”
- After incorporation, Illinois Controls accepted and used the contributed patent rights and manufacturing resources but did not assume or pay the promised debts and did not formally adopt the PIA by board resolution.
- Disputes arose over whether the PIA created enforceable marketing obligations, whether Illinois Controls became bound to the PIA, and whether the promoters remained personally liable.

## Issues

1. Whether the PIA’s references to Balderson/BI’s marketing responsibilities created binding contractual duties or were merely prefatory.
2. When a corporation formed after a promoter contract becomes bound to a pre-incorporation agreement, including whether acceptance of benefits with knowledge constitutes implied adoption.
3. Whether promoters remain personally liable on a pre-incorporation agreement after the corporation forms and adopts the agreement, absent a clear release or novation.

## Decision

- The Supreme Court of Ohio held that the PIA’s marketing language was not merely prefatory and imposed enforceable obligations on Balderson/BI.
- The court held that a subsequently formed corporation can adopt a pre-incorporation agreement expressly or impliedly, including by knowingly accepting benefits and acting consistently with the contract.
- The court concluded Illinois Controls impliedly adopted the PIA by accepting and using Langham’s contributions and conducting business consistent with the PIA, making it liable for obligations it adopted.
- The court held promoters are presumed personally liable on pre-incorporation contracts unless clearly released by the other contracting party or by novation; corporate adoption alone does not discharge promoter liability.
- The court reversed in part the appellate judgment and remanded for further proceedings consistent with its analysis of obligations, breach, and allocation of liability.

## Legal Principles

- Contract provisions in operative sections introduced by language such as “NOW, THEREFORE” may create enforceable covenants even if earlier “whereas” recitals are generally prefatory.
- A duty to use reasonable efforts (including marketing efforts) may be implied when necessary to effectuate the bargain and where compensation depends on such efforts.
- A corporation not in existence at the time of a promoter contract is not initially bound but may later become bound through adoption or assumption.
- Corporate adoption of a pre-incorporation agreement may be express (formal action) or implied (knowing acceptance of benefits, performance, or other conduct showing intent to be bound).
- Promoters who contract for a non-existent corporation are personally liable unless the other party agrees to look solely to the corporation or a post-incorporation novation releases the promoters; adoption by the corporation may create concurrent liability.

## Conclusion

The Ohio Supreme Court treated the PIA’s marketing provisions as binding covenants, held that Illinois Controls impliedly adopted the pre-incorporation agreement by knowingly accepting its benefits, and reaffirmed that promoters remain personally liable absent a clear release or novation, requiring remand to determine breach and proper allocation of responsibility.


Illinois Controls, Inc. v. Langham, 70 Ohio St. 3d 512, 639 N.E.2d 771 (Ohio 1994)