pre incorporation of contracts by promoters

Posted on 02-04-2016        By ADMIN

Statusof pre incorporation of contracts by promoters 
The promoter is obligated to bring the company in the legal existence and toensure its successful running and in order to accomplish his obligation he mayenter into some contract on behalf of prospective company. These types ofcontract are called ‘Pre-incorporation Contract.

Nature of Pre-incorporation contract is slightly different to ordinarycontract. Nature of such contract is bilateral, be it has the features oftripartite contract. In this type of contract, the promoter furnishes thecontract with interested person and it would be bilateral contract betweenthem. But the remarkable part of this contract is that, this contract helps theperspective company, who is not a party to the contract.

One might question that ‘why is company not liable, even if it a beneficiary tocontact' or one might also question that ‘doesn't promoter work underPrincipal-Agent relationship. Answer to these entire questions would be simple.The company does not in legal existence at time of pre-incorporation contract.If someone is not in legal existence then he cannot be a party to contract.

Before the passing of the Specific Relief Act 1963, the position in India,regarding pre-incorporation contract, was similar to the English Common Law.This was based on the general rule of contract where two consenting parties arebound to contract and third party is not connected with the enforcement andliability under the terms of contract. And because company does not come inexistence before its incorporation, so the promoter signs contract on behalf ofcompany with third party, and that is why the promoter was solely liable forthe pre-incorporation contract.

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