Preliminary or Pre-Incorporation Contracts :

Pre-incorporation contracts are those contracts, which are entered into, by agents or trustees on behalf of a prospective company before it has come into existence, e.g., with the proprietor of a business to sell it to the prospective company. Since a company comes in to existence from the date of its incorporation, it follows that any act purporting to be performed by it prior to that date is of no effect so far as the company is concerned. It will very likely be the intention of the promoters or persons concerned in the company that the company should, on its formation acquire some property or takeover the existing business, and for this purpose, a preliminary contract for the acquisition may be entered into before the company is formed. But as the company is non-existent before incorporation it cannot be bound, by any purported ratification [Kelner vs. Baxter (1862) L.R. 2 C.P. 174].

The rules in respect of preliminary contracts may be summarised as follows:

(a) The vendor cannot sue, or be sued by the company thereof, after its incorporation;

(b) Person who acts for the intended company remains personally liable to the vendor even if the company purports to ratify the agreement, unless the agreement provides that:

(i) his liability shall cease if the company adopts the agreement; and

(ii) either party may rescind the agreement, if the company does not adopt it within a specified time;

(c) After incorporation, the company may adopt the preliminary agreement. But this must be by novation which may be implied from the circumstances. But in some cases, the memorandum directs the directors to execute such contracts. The company can enforce a pre-incorporation contract if it is warranted by the terms of incorporation and for purposes of company.

A pre-incorporation contract can be enforced against the company if it is warranted by the terms of incorporation and it is adopted by the company and communicated in acceptance. [Sections 15 and 19 of the Specific Relief Act, 1963]. In such a case, the directors have no discretion in the matter.