Sometimes contracts are made on behalf of the Co even before it is duly incorporated. But no contract can bind a company before it becomes capable of contracting by incorporation.

In Kelner v. Baxter. It was held that ‘two consenting parties are necessary to a contract whereas the company before incorporation is a non-entity.

In CIT v. city mills distributor, it was held that a company cannot have a legal status before incorporation and it cannot certainly have income before incorporation for tax purposes.

The promoters found it very difficult to carry on business in these circumstances and since the contracts prior to incorporation were void, people were not interested in providing goods and services.

The specific relief act 1963, came into play and was enacted as a solution to the above-mentioned problem. Before a  pre-incorporation contract never binds a Co’ since a person cannot contract before its existence & a Co before incorporation has no legal existence. Even when there is a request to enforce such a contract, Co cannot be bound because ratification is not possible as the principal did not exist at the time the contract was made.  A Co is also not entitled to sue on a pre-incorporation contract.

After the specific relief act was enacted, certain provisions helped in these matters:

S 15(h) of the Specific Relief Act provides that where the promoter of a public company have made a contract before its incorporation for the purpose of the Co and if the contract is warranted by the terms of incorporation, the Co may enforce it. S 19(e) of the SR Act allows the third party to enforce the contract against the company if-the Co had adopted the same after incorporation, the contract is warranted by the terms of incorporation.

Liability of a promoter for pre-incorporation contracts.

The promoter will be held liable in this circumstance and this has been explained in the following 3 cases,

• Phonogram Ltd v. Lane- Although a contract made before a Co’ incorporation cannot bind the Co’, the promoter can be held liable even if all the person negotiated the contract are aware that the Co has not yet been incorporated.
• Kelner v. Baxter- the contract takes effect as if it was a personal contract with the person who contracts on behalf of the company.
• Scot v. Lord Edbury- This will be the same even if the contract expressly provides that only the company’s paid-up capital shall be answerable for performance.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.