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Mumbai University · FY LLB · Sem II
Pre-incorporation contracts
2 min read
Pre-incorporation contracts
Q2Short NotesAttempt Any Two • 6 marks each • Total: 12 marks2025
(a)Pre-incorporation contracts

Definition

A pre-incorporation contract is a contract entered into by promoters on behalf of a company before the company is legally incorporated. Since the company does not yet exist as a legal person, it cannot be a party to any contract at the time of its making.

Legal Position — Company Cannot Ratify

A fundamental principle is that a company cannot ratify a pre-incorporation contract after it comes into existence. Ratification requires a principal to have existed at the time of the act. Since the company was non-existent, no principal-agent relationship could exist, and therefore retroactive adoption through mere ratification is legally impossible.

Kelner v. Baxter (1866) — Promoters signed a contract "on behalf of" an unincorporated company. The Court held the company could not ratify the contract after incorporation and the promoters were personally liable.
Newborne v. Sensolid Ltd. (1954) — A contract signed in the name of the non-existent company itself (not "on behalf of") was held void — there was no contracting party at all.

Liability of Promoter

  • The promoter who signs a pre-incorporation contract is personally liable on it.
  • The promoter remains liable unless and until the company is incorporated and enters into a fresh contract (novation) with the third party, thereby substituting itself for the promoter.

Adoption via Novation

After incorporation, the company may adopt (not ratify) the pre-incorporation contract by entering into a new agreement — a novation — with the third party. Only upon novation does the company become bound and the promoter released.

Indian Position — Specific Relief Act

Under the Specific Relief Act, 1963 (Section 15(h)), a company may enforce a pre-incorporation contract if: (i) the memorandum contemplated such a contract; (ii) the contract was within the authority of the promoters to enter into; and (iii) the company adopted it after incorporation. Section 19(e) of the Specific Relief Act allows enforcement against the company if it ratifies or adopts the contract.

Practical Significance

Pre-incorporation contracts are common in modern business — promoters enter into leases, supply agreements, and employment contracts before the company is formed. The legal remedy is to ensure a proper novation is documented immediately after incorporation to transfer obligations from the promoter to the company.