Which contract is known as pre-incorporation contract?

Contracts which are entered into by promoters with parties to acquire some property or right for and on behalf of a company yet to be formed are called as ‘pre-incorporation contracts’ or ‘preliminary contracts’.

Are promoters liable for contracts prior to incorporation of a company?

Promoters are generally held personally liable for pre-incorporation contract. If a company does not ratify or adopt a pre-incorporation contract under the Specific Relief Act, then the common law principle would be applicable and the promoter will be liable for breach of contract.

When do promoters enter a pre incorporation contract?

A pre-incorporation contract is contract entered into by promoters on behalf of the unformed company. It is clear that a company does not come into existence until the promoters have completed the registration requirements and the Registrar of Companies issues a certificate of incorporation.

Can a promoter be considered as an agent to an unformed company?

Hence, a promoter cannot be considered as an agent to the unformed company (Kelner v Baxter). On the strength of these, the promoters will be held personally liable for the pre-incorporation contract. There are several ways for a promoter to avoid personal liability to the pre-incorporation contract.

Who is liable for a pre incorporation contract?

The reason behind is that the promoter is party who enters into the contract, and not the company. The rule of privity of contract keeps away the company from pre-incorporation contract. But recent development in corporate law and contract law makes the company liable for pre-incorporation contract.

Can a company ratify a pre incorporation contract?

The company can ratify pre-incorporation contracts after it has been incorporated. Prior to ratification (and if the company eventually does not ratify), the promoter (who purported to act on behalf of the company) would personally bear the responsibility and benefits of the contract.