Theoretical & Practical Issues around Implementing PreIncorporation Contracts

Manu Mishra and & Udita Malviya

Introduction
The term pre-incorporation contracts, as the name suggests has its greatest nexus with the law
relating to contractual obligations and therefore derives the basic principles from the same but under
the realm of law relating to business and corporate ethos its spectrum cannot be made as vivid and
vibrant. When talking with reference to Companies Act ones cognizance straight away goes to the
process or the steps that are to be taken before a company has been incorporated or registered and
whether it has conformed to all the legal formalities required for attaining the status of a juristic person
and therefore being subject to the benefits and burden of specified contractual obligations. This can
be explained as a contract that a person makes with another person(s) acting as an agent or a
1
promoter on behalf of a company which has yet to come into existence.
It is a matter of practice in the corporate/business culture that person or persons venturing on a
business expedition have to promote their cause and to do so he/they, as the case may be, have to
be able to have something to fascinate and attract people or other companies/organizations, in the
process if, before a company has been incorporated, they want to agree on something with someone
and that results into an agreement between both the parties, there are going to be obligations to
which both the parties would be subject to. The promoter acting on behalf of a company which has yet
to come into existence, can it be bound by the obligations and can it enjoy the benefits of the
2
agreement.
In the law of contract the matter falls within the domain of privity. The common law rules are simple
and state that a person who have neither paid nor contributed towards the consideration of a contract
has no locus standi to enforce the contract in its favour if any or all the terms of the said contract are
breached. This obviously created many difficulties and did not favour the whole idea underlying the
law of contract which is, to augment the economic activity on a whole, in a society. The rules
3
however, evolved and thus a number of exceptions to this general rule evinced. One should be
mindful that these rights are only to the extent of the third partys benefit and thus no obligations are
to be imposed.
Basic Understanding
A Contract is a written or spoken agreement between two or more parties, intended to be enforceable
4
by law for the performance or non-performance of something specified or agreed to be done.
5
However, certain other conditions need to be satisfied as well. Contract entered into companies may

Semester VIII, B.A. LL.B. (Hons.), Hidayatullah National Law University

Semester VIII, B.A. LL.B. (Hons.), Symbiosis Law School, NOIDA
LUCY JONES, INTRODUCTION TO BUSINESS LAW at page 381 (Oxford University Press, 2011)

2
Issues Relating to Pr-Incorporation Contracts (08th October, 2013), http://umna-ishfaq.blogspot.in/2012/ 07/issues-relating-topre-incorporation.html
3

EWAN MCKENDRICK, CONTRACT LAW at page 243 (Palgrave Macmillan, 2005)

K.M. GHOSH & K.R. CHANDRARATRE, COMPANY LAW WITH SECRETARIAL PRACTICES at page 915 (14th Edition,
Bharat Law House, New Delhi)

10, Indian Contract Act, 1872

be divided into Post-Commencement Contracts, Pre-Incorporation Contracts and Post-Incorporation

6
but Pre-Commencement Contracts.
46 of the Companies Act, 1956 lays down special conditions entered into on behalf of the company.
7
This would override the provisions of the Indian Contract Act, 1872 if in conflict. A company being
an artificial legal person and having no legal existence has to act through the human agency. This
8
declares that a contract made according to this shall bind the company. A contract can be in writing
9
or oral if the person acting on behalf of the company is within the scope of his apparent or actual
10
11
authority. This depends on the articles of association of the company. The representation of
12
authority should emanate from the company. This section enables a company as a general rule to
make a contract without affixing the common seal thereto covering any person acting under its
13
authority except in special circumstances. The Companies Act, 1956, does not provide a common
definition of Promoter. A promoter is one who undertakes to form a company with reference to a given
14
project and to set it going and who takes the necessary steps to accomplish that purpose. Preincorporation contracts are contracts purported to be made on behalf of an unformed company before
15
its incorporation to be made by or for a company which in non-existent.
Certificate of Incorporation
A document issued by a state authority granting a corporation its legal existence and the right to
16
function as a corporation is the certificate of incorporation. It is the instrument by which a company
is formed, under general statutes, executed by several persons as incorporators and setting forth the
name of the proposed corporation, the objects for which it is formed, and such other particulars as
may be required or authorized by law and filed in some designated public office as evidence of the
17
18
corporate existence. Incorporation means the act of forming a legal corporation. After scrutinizing
the documents filed and on being satisfied that they are in order, that the requisite fee has been paid
and that all other legal documents have been duly complied with, the Registrar will enter the name of
the Company in the Register of Companies and shall certify under his hand that the company is

C.R. DATTA, COMPANY LAW at page 697 (6th Edition, Wadhwa & Wadhwa Company, Nagpur)

CIT v. Shahzada Nand & Sons, AIR 1966 SC 1342

46 (2), Companies Act, 1956; Societe De Traction et D electricite Societe, Anonyme v. Kamini Engineering Company Ltd.,
AIR 1964 SC 558

Valapad Co-operative Stores Limited v. Srinivasa Iyer, AIR 1964 Ker 176

10

Khader v. Rami Reddy, AIR 1979 SC 553

11

PALMERS COMPANY LAW at page 244 (Thomson Sweet & Maxwell, 2008)

12

A. RAMAIYYA, GUDIE TO THE COMPANIES ACT at page 599 (16th Edition, Wadhwa & Company, Nagpur); Northside
Developments Pvt. Ltd. v. Registrar-General, (1990) 170 CLR 146 (Aust.); First City Capital Ltd. v. 105383 BC Ltd., (1985) 28
BLR 274 (CA- Columbia); Panorma Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd., (1971) 2 QB 711

13

K.M. GHOSH & K.R. CHANDRARATRE, COMPANY LAW WITH SECRETARIAL PRACTICES at page 917 (14th Edition,
Bharat Law House, New Delhi)

14

Twycross v. Grant, 1877 2 CPD 469, Pre-Incorporation Contracts & the Promoter (07th October, 2013),
http://www.lawteacher.net/contract-law/-essays/pre-incorporation-contracts-and-the-promoter.php

15

PALMERS COMPANY LAW at page 3005 (Thomson Sweet & Maxwell, 2008)

16

GARNER BRYAN, BLACKS LAW DICTIONARY at page 678 (8th Edition, West Group Publications)

17

What is Certificate of Incorporation (02nd October, 2013), http://thelawdictionary.org/certificate-of-incorporation

18

K.M. GHOSH & K.R. CHANDRARATRE, COMPANY LAW WITH SECRETARIAL PRACTICES at page 776 (14th Edition,
Bharat Law House, New Delhi)

incorporated and, in the case of a limited company that the company is limited. The certificate so
19
issued is called the Certificate of Incorporation.
From the date of incorporation, such of the subscribers of the memorandum and other persons, as
may from time to time be members of the company, shall be a body corporate, capable forthwith of
exercising all the functions of an incorporated company and having perpetual succession and a
common seal but with such liability on the part of the members to contribute to the assets of the
20
company in the event of its being wound up as per the Act. The Certificate of Incorporation shall be
conclusive evidence that all the requirements of the Act have been compiled with in respect of
registration; all the pre-conditions of registration have been complied with and the company is duly
21
22
registered. The certificate of incorporation of a company is conclusive and precludes a party from
23
seeking a declaration that the registration was illegal and the company is not an incorporated body.
24
Once a company is born, the only method to get it extinguished is by winding up.
Pre-incorporation Contracts

PRE-INCORPORATION CONTRACTS IN COMMON LAW

Before its incorporation a company has no capacity to contract. Consequently, in company law
nobody can contract for it as agent because an act which cannot be done by the principal himself
cannot be done by an agent, nor can a pre-incorporation contract be ratified by the company after its
25
incorporation. When incorporated, the company can enter into a new contract to put into effect the
26
terms of it. This would be an act of novation. But the mere acting after incorporation on the
27
preliminary contract is not enough. If a pre-incorporation contract is purported to be made by a
28
company which does not exist, the contract is a nullity but the promoters themselves will be
personally liable. The company after incorporation may enter into a fresh agreement though on
29
identical terms and conditions. The common law position depends on the real intent, as revealed in

19

A.K. MAJUMDAR & G.K. KAPOOR, COMPANY LAW & PRACTICE at page 132 (18th Edition, Taxmann Publications, New
Delhi)

20

34, Companies Act, 1956

21

35, Companies Act, 1956; C.R. DATTA, COMPANY LAW at page 607 (6th Edition, Wadhwa & Wadhwa Company, Nagpur)

22

Moosa v. Ibrahim, ILR 1913 40 Cal. 1 (PC)

23

Certificate of Incorporation in India (02nd October, 2013), http://www.indiacompanysetup.com/certificate-of-incorporation-inindia/

24

Salim Akbarali Nanji v. Union of India, (2003) 111 Comp. Cas. 141 (Bom.) (DB)

25

Kelner v. Baxter, (1866) LR 2 CP; Natal Land & Colonisation Co. Ltd. v. Pauline Colliery & Development Syndicate Ltd.,
(1904) AC 120

26
Touche v. Metropolitan Railway Warehousing Co. (1871) 6 Ch. App. 671; Howard v. Patent Ivory Manufacturing Co., (1888)
Ch.D. 156
27

Re Northumberland Avenue Hotel Co., (1886) 33 Ch.D; Natal Land & Colonisation Co. Ltd. v. Pauline Colliery &
Development Syndicate Ltd., (1904) AC 120

28

Newborne v. Sensolid (Great Britain) Ltd., (1954) 1 QC 45; Tinnevelly Sugar Refining Co. v. Mirrlees Watson & Varyan Co.,
1894, 21 R. 1009

29
Newborne v. Sensolid (Great Britain) Ltd., (1954) 1 QC 45; Kelner v. Baxter, (1866) LR 2 CP; Natal Land & Colonisation Co.
Ltd. v. Pauline Colliery & Development Syndicate Ltd., (1904) AC 120; See also 15(h) & 19(e) of the Specific Relief Act,
1963 (14 of 1963)

30

the contract. It is the promoter who carried on the business and received the income when it
31
accrued, who is liable to bear the burden of tax thereon.

UNDER ENGLISH COMPANIES ACT, 1985

32

This provision provides that such a contract, whether purported to be made by the company on its
behalf, has effect subject to any agreement to the contrary, as one made with the person purporting to
act for the company, and he is personally liable on the contract accordingly. This provision means that
in all cases such as the present, where a person purports to contract on behalf of a company not yet
33
formed, then however he expresses his signature, he himself is personally liable on the contract.
Promoters who wish to make a pre-incorporation immediately binding would have to assume personal
responsibility, though restricted. If not immediately binding, a draft may be prepared, to execute after
34
incorporation.

POSITION IN INDIA BEFORE 1963

A pre-incorporation contract never binds a company since a person cannot contract before his
existence and a company before incorporation has no legal existence. The promoters are proverbially
profuse in their promises and if the corporation were to be bound by them, it would be subject to many
35
unknown, unjust & heavy obligations. Even where there is a request purported to enforce such a
36
contract, the company cannot be bound. The Company is also not entitled to sue on a pre37
incorporation contract.

POSITION IN INDIA SINCE 1963

With the introduction of the Specific Relief Act, 1963, there was a marked deviation from the common
law principles. Specific performance may be enforced against a company where its promoters have,
before its incorporation, entered into a contract for the purposes of the company and such contract is
38
warranted by the terms of incorporation of the company. It is, however, necessary that the company
in such a case must have accepted the contract after its incorporation and communicated such
39
acceptance to the other party to the contract. 15 (h) of the same Act, which is identically worded,
40
provides for obtaining specific performance by a company. These two provisions make it clear that
the pre-incorporation contracts entered into by the promoters of a company before its incorporation
are enforceable by or against the company after it is incorporated, and the contract is warranted by

30

PALMERS COMPANY LAW at page 3006 (Thomson Sweet & Maxwell, 2008); Phonogram Ltd. v. Lane, [1982] QB 938;
Cotronic (UK) Ltd. v. Dezonie, [1991] B.C.L.C. 721

31

CIT v. City Mills Distributors (Pvt.) Ltd., (1996) 86 Comp. Cas. 546 (SC)

32

36 (C); See 9, European Communities Act, 1972

33

Phonogram Ltd. v. Lane, [1982] QB 938

34

PALMERS COMPANY LAW at page 3008 (Thomson Sweet & Maxwell, 2008)

35

Parke v. Modern Woodman, 181 All 214

36
Kelner v. Baxter, (1866) LR 2 CP; Newborne v. Sensolid (Great Britain) Ltd., (1954) 1 QC 45; Ramkumar Potdar v. Sholapur
Spinning & Weaving Co. Ltd., AIR 1934 Bom 427
37

Natal Land & Colonisation Co. Ltd. v. Pauline Colliery & Development Syndicate Ltd., (1904) AC 120

38

19 (e), Specific Relief Act, 1963

39

A. RAMAIYYA, GUDIE TO THE COMPANIES ACT at page 600 (16th Edition, Wadhwa & Company, Nagpur)

40

Ibid

41

the terms of incorporation. But, a contract by a person with the promoters of a company to take
42
shares in the company after its incorporation is not a contract for the purposes of the company. It
seems that the desire of the courts is to protect the new company from the burden of the promoters
43
promises which may be unjust & heavy obligations.

41

K.M. GHOSH & K.R. CHANDRARATRE, COMPANY LAW WITH SECRETARIAL PRACTICES at page 921 (14th Edition,
Bharat Law House, New Delhi)

42

Imperial Ice Mfg. Co. Ltd. v. Manchershaw Barjorji Wadia, (1889) ILR 13 Bom 415

43

Parke v. Modern Woodmen, 181 Ill 214 (S.C. of Illinois, U.S.A.)

ISSUES IN IMPLEMENTING PRE-INCORPORATION CONTRACTS

That the contract is not enforceable against the corporation seems to follow naturally from the fact
that the corporation did not exist when the contract was made and could not have been a party to it.
44
An erroneous opinion in this regard does not make it a good contract binding on the company.
Promoters who want to bind the other party to contract must assume personal responsibility under the
45
contract; which may be limited as well. The courts would require very clear evidence for the same. A
company cannot by adoption or ratification obtain the benefit of a contract purporting to have been
made on its behalf before the company came into existence; and in order to do so a new contract
46
must be made with it after its incorporation on the terms of the old one. Because the corporation
named in the promoters contract has not been formed at the time the contract is made, the
corporation when formed is not bound by the contract. However, adoption of the contract is
anticipated by the parties to the contract. If the corporation in fact adopts the contract, then it will
47
assume those rights and liabilities set out in the contract. Where the promoters of a company
purchased certain properties as representatives of the company to be formed, and on incorporation
the company assumed possession of the property and improved them, the property was deemed to
48
49
be of the company. However, this is against 54 of the Transfer of Property Act, 1882. In case the
promoter acquired property after he became promoter, the company would have had the option either
50
to rescind or affirm the contract to claim profits. If affirmed, it is deemed that a new contract was
51
made after incorporation. A company cannot acquire shares prior to its incorporation nor can any
52
agreement to take or pay for any shares of a company to be formed cannot be enforced generally.
The reason for the refusal to impose such obligations on the corporation seems to derive primarily
from concern for the shareholders. What needs to be seen here is that the vast majority of preincorporation contracts have been entered into by persons who remain closely associated with the
corporation after its formation, and frequently by the person who becomes the controlling
53
shareholder. If the refusal to hold the corporation liable on a pre-incorporation contract made in its
name can be justified on the basis of protecting its shareholders, the only reason for denying it the
benefit of such a contract would seem to be the lack of reciprocity. Even this objection is not entirely
convincing; if the other party intended that the contract should be with the corporation, as is usually
54
the case, he or she can scarcely complain if the corporation seeks to enforce the contract. Even if
considerations of reciprocity prevent a corporation adopting a contract and then enforcing it, there
would seem to be no similar objection to permitting the other party to enforce the contract once the
corporation has indicated that it has adopted the contract.

44

Re, Northemberland Avenue Hotel Co. Ltd., (1886) 33 Ch D 16 (CA)

45

Bagot Pneumatic Tyre Co. v. Clipper Pneumatic Tyre Co., (1902) 1 Ch 146 (CA)

46

Land and Colonization Co. Ltd. v. Pauline Colliery and Development Syndicate Ltd., [1904] A.C. 120; Wearne Brothers Ltd. v.
Russia Engineering Works, (1928) ILR Rang 144 (PC); Ramkumar Potdar c. Sholapur Spinning & Weaving Co. Ltd., AIR 1934
Bom 427; Surrendro & Co. v. Liquidator, Punjab Tannery Co. Ltd, AIR 1923 Lah 100

47
Pre-Incorporation Contracts of Promoters (08th October, 2013), http://www.setzler-scott.com/newsletters/ business-law/preincorporation-contracts-of-promoters/
48

Vali Pattabhirama Rao v. Sri Ramanuja Ginning & Rice Factory Pvt. Ltd., [1986] 60 Comp. Cas. 568 AP; Banner Homes
Gropu Plc. v. Luff, (2000) BCLC 269 (CA)

49

A. RAMAIYYA, GUDIE TO THE COMPANIES ACT at page 602 (16th Edition, Wadhwa & Company, Nagpur)

50

Bank of London v. Tynell, (1862) 10 HLC 26

51

Howard v. Patent Ivory Manufacturing Co., (1888) Ch.D. 156

52

Supra Note 51

53

Andres v. Morgan, 62 Ohio St. 236; 56 N.E.875 (1900).

54

Kelner v. Baxter, (1866) LR 2 CP

55

For many years the decision in Kelner was taken as authority for the proposition that, where an
individual purports to contract on behalf of a named corporation before that corporation has in fact
56
come into existence, the individual is personally liable on the contract. In some cases this rule has
been treated as part of a wider proposition that, where an agent contracts in the name of a non57
existent principal, the agent is personally liable. Subsequent cases, notably the decisions in
58
59
Newborne v. Sensolid and Black v. Smallwood have established that no such general principle
60
exists. In Kelner the parties intended (or were deemed to have intended) that the promoters would
61
62
be personally liable. In Newborne and in Black it was held to be the intention that they should not.
To base the decision upon the intention of the parties would certainly seem to be more satisfactory.
But the problem with the intention test is that, in the vast majority of cases, the parties will simply not
have addressed their minds to the question of what is to happen if the corporation turns out not to
have been incorporated. The promoter will normally not intend to accept personal liability, and the
other party will simply not have considered the question. The result will normally be that no contract
was made thus thwarting their primary purpose.
An alternative approach, based upon the knowledge of the parties fits better. In almost all cases
where both parties have known that the corporation is not yet in existence the courts have found a
valid contract and held the promoter liable. Where both parties wrongly believe the corporation to be
in existence the result has usually been to hold that no contract was made. In situations where the
promoter knows that the corporation has not yet been incorporated, but leads the other party to
believe that it is in existence the situation is confused: in some cases the promoter has been held
personally liable, in others not. However, if a test based on knowledge rather than intention reduces
uncertainty, it does not produce a more just result. Indeed, it seems somewhat perverse that the law
grants better protection to a person who knowingly enters into a contract with a non-existent
corporation than to someone who does so unwittingly. These circumstances have led some courts to
suggest that, in cases where the promoter escapes liability on the contract, he or she might be held
63
liable for breach of warranty of authority. There are two problems with this suggestion. First, in order
to be actionable a misrepresentation must be material and be found to have induced the third party to
64
enter into the contract. Another difficulty is the measure of damages if there is a breach of
65
warranty. For now it can safely be stated that there is no clear or explicit precedent from which
parties may become certain enough that their actions as promoters of a company not yet registered
66
falls within which scheme of the spectrum.

55

Id

56

Natal Land and Colonization Co. Ltd. v. Pauline Colliery and Development Syndicate Ltd., [1904] A.C. 120; Westcom Radio
Group Ltd. v. Maclsaac (1989), 63 D.L.R.(4th) 433; Cranson v. International Business Machines Corp. 234 Md. 477, 200 A.2d.
33 (1964);

57

Wells v. J.A. Fare & Egan Co. 143 Ga.732, 85 S.E.873 (1915).

58

(1954) 1 QC 45

59

(1966), 117 C.L.R. 52

60

Kelner v. Baxter, (1866) LR 2 CP

61

(1954) 1 QC 45

62

(1966), 117 C.L.R. 52

63

General Motors Acceptance Corp. of Canada Ltd. v. Weisman, (1979), 96 D.L.R.(3d) 159

64

Wickberg v. Shatsky (1969), 4 D.L.R.(3d) 540

65

HAMBROOK, PRE-INCORPORATION CONTRACTS AND THE NATIONAL COMPANIES CODE: WHAT DOES SECTION
81 REALLY MEAN? at page 123 (1982-83) 8 Adelaide L. Rev. 119; Delta Construction Co.Ltd. v. Lidstone (1979), 96
D.L.R.(3d) 457

66

DINE, JANET & MARIOS KOUTSIAS, COMPANY LAW at page 184 (Palgrave Macmillan , 2007 Ed., London)

All legislative attempts to deal with the pre-incorporation contracts problem have been introduced in
the basic corporate legislation. Thus, it would appear that the statutory provisions apply not to all
contracts made within the jurisdiction in the name of corporations but only to contracts made in the
name of corporations subsequently incorporated under the statute in question. A contract entered into
on behalf of a company before its incorporation is not binding on the company. After the company
comes into existence it cannot ratify the contract entered into prior its incorporation. It can, of course,
67
enter into a new contract upon the same terms. It is open to doubt whether a person claiming to be
an agent of a non-existent principal can be rendered personally liable on the contracts made by him
68
on the behalf of such principal. Under the terms of 230 of the Indian Contract Act, in the absence
of any contract to that effect, an agent cannot personally enforce such contracts and he cannot sue
69
on such contract nor can he be sued on such contract except on the principle of quantum meruit or
70
for breach of warranty of authority. From a business standpoint the promoter both takes a risk for
71
personal profit and represents the interests of the fetal corporation. The courts have recognized this
economic reality by applying fiduciary principles. But they have not as readily synchronized legal
principles with reality in determining the legal consequences of promoters pre-incorporation
transactions with third persons. Most courts have refused to place promoters in the common-law
category of agency. There are two doctrines in the law of agency which might be applied. The
promoter might be regarded as an authorized agent, inasmuch as the business enterprise he
represents is the same economic unit before and after incorporation. Two objections may be raised to
this solution for the problem. Technically, this legal person cannot vest the promoter with authority
72
before it is chartered. The second objection to treating the promoter as an authorized agent is more
substantial. A board of directors elected by the stockholders does not assume management of the
corporation until it is granted a charter. Consequently, many who are financially interested are not
represented during the pre-incorporation period. Therefore, the courts have thought it undesirable to
saddle a new corporation with liabilities previously incurred by promoters. Second, the promoter might
be regarded as an unauthorized agent whose acts the enterprise can ratify after it gains corporate
status, if for reasons of theory or policy it seems undesirable to regard him as an authorized agent.
However, the courts have rejected both doctrines.
The Courts dismissed the doctrine of ratification. Yet the policy which prevents a promoter from being
considered an authorized agent of the embryo corporation does not compel the conclusion that his
acts cannot be treated as those of an unauthorized agent, susceptible of ratification. A corporation
can ratify unauthorized acts done on its behalf after incorporation; there is no substantial difference
when the acts are done before the incorporation date. To allow the corporation to ratify the acts of
promoters would not violate the principle that a corporation should be free of liability other than that
created by its duly authorized directors, officers, and agents. The corporation would be free to ratify or
not. The rejection of agency principles with respect to promoters created a vacuum into which the
pressure of business usage forced the present law applicable to promoters contracts. Recognizing
that a corporation should be able to capitalize upon the activities of promoters, who in fact serve as its
73
pre-incorporation management, the courts attempted to adapt contract principles to that end. At
least three theories have been advanced to rationalize the results that the courts have achieved by
dealing with promoters contracts on contract principles. The first theory is that the corporation adopts
the promoters contract, which serves as a basis for a new contract with the third person. The chief
difficulty with the adoption theory is that the facts rarely justify the inference that a new contract is in

67

Seth Sobhag Mal Lodha v. Edward Mills Co. Ltd., (1972) 42 Comp Cas 1 (Raj)

68

A. RAMAIYYA, GUDIE TO THE COMPANIES ACT at page 601 (16th Edition, Wadhwa & Company, Nagpur)

69

Cotronic (UK) Ltd. v. Dezonie, (1991) BCLC 721 (CA)

70

Royal Bank of Canada v. Starr, (1985) 31 BLR 123 (Canada)

71

DEWING, FINANCIAL POLICY OF CORPORATIONS at page 460 (4th ed. 1920)

72

Buffington v. Bardon, 80 Wis. 635, 639, 50 N.W. 776, 778 (1891).

73

Outmoded Concept Dominates Law of Promoters Pre-Incorporation Contracts, 3 Stanford Intramural Law Review, 122
(June, 1948)

74

fact made between the corporation and the third person. The second contract theory is that the
promoters contract constitutes or includes a continuing offer to the future corporation, which it may
75
accept or reject after incorporation. The third contract theory is called novation. It does not strictly
accord with the facts with which the court normally is dealing. In attempting to apply contract
principles to promoters contracts, the courts have involved themselves in difficulties of both analysis
and semantics. Writers who have analyzed the cases find them hopelessly confused in rationale;
however, some contend that they are essentially sound in result. It has been accepted that ratification
76
is impossible unless purported principal was in existence at the time of the unauthorized act.
Until the passing of the Specific Relief Act, 1963 in India, the promoters found it very difficult to carry
out the work of incorporation. People hesitated to either supply any goods or service for the cause of
77
incorporation and the promoters also felt shy of accepting personal responsibility. 15 (h) and 19
(e) of the Specific Relief Act, 1963 make it clear that in India the pre-incorporation contracts entered
into by the promoters of a company before its incorporation are enforceable by or against the
78
company after it is incorporated, if the contract satisfies the requirements of these provisions. These
79
are only concerned with executory contracts.
SOLUTION TO COMMON LAW PROBLEMS
When a promoter enters into a contract on behalf of a corporation to be formed, the promoter may be
considered personally liable to meet the obligations of the corporation if for some reason the
corporation is not formed or does not adopt the contract. When the pre-incorporation contract is
made, the corporation is not in existence and therefore cannot be a party to the contract. The
promoter thus must be a party to the contract, and, under agency law principles, the promoter will be
personally bound as an agent acting on behalf of a non-existent principal. Because the corporation
named in the promoters contract has not been formed at the time the contract is made, the
corporation when formed is not bound by the contract. However, adoption of the contract is
anticipated by the parties to the contract. If the corporation in fact adopts the contract, then it will
80
assume those rights and liabilities.
Keeping in mind the problems discussed in the previous section, there are certain practical solutions
that can be applied to overcome the problems in relation to the common law principles. The promoter
could be treated as a trustee of a chose in action for the corporation. This would put the promoter
under a fiduciary obligation to enforce the contract and would allow an order permitting the company
to sue in the name of the promoter as trustee. The circumstances may allow the court to treat the
contract as having been assigned to the company (as opposed to ratification by the company). The
court might accept that although there was no valid contract with the corporation there was a quasi
contract allowing for a restitutionary based remedy. This could allow a court to redress an enrichment
of one party by the performance of another in the belief that there was a valid contract. The court
might look at par performance of the terms of the original attempted contract and infer another
contract between the third party and corporation. The promoter might be viewed as an agent of the
third party with authority to make an offer to the corporation on the same terms as those involved in
the dealing between the promoter and the third party. A purported ratification or adoption by the

74

In Re Super Trading Co., 22 F.2d 480 (CCA. 2d 1927); McArthur v. Times Printing Co., 48 Minn. 319, 51 N.W. 216 (1892)

75

Wall v. Niagara Mining & Smelting Co., 20 Utah 474, 59 Pac. 399 (1899); Pratt v. Oshkosh Match Co., 89 Wis. 406, 62 N.W.
84 (1895)

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Stone v. Walker, 201 Ala. 130, 134, 77 So. 554, 558 (1917)

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A.K. MAJUMDAR & G.K. KAPOOR, COMPANY LAW & PRACTICE at page 72 (18th Edition, Taxmann Publications, New
Delhi)
78

A.K. MAJUMDAR & G.K. KAPOOR, COMPANY LAW & PRACTICE at page 921 (18th Edition, Taxmann Publications, New
Delhi)

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Vali Pattabhirama Rao v. Sri Ramanuja Ginning & Rice Factory Pvt. Ltd., [1986] 60 Comp. Cas. 568 AP

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company could then be considered an acceptance of an offer conveyed by the promoter as agent for
the third party. One more alternative is to consider the contract a provisional contract to take effect on
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the incorporation and its adoption of the contract.
CONCLUSION
If it is desirable that ratification be available in the ordinary case of unauthorized agency, there would
seem to be no reason for excluding it when a promoter acts for a future corporation. Indeed, the
development of the contract theories illustrates a real need for a satisfactory method of permitting a
corporation to take advantage of, and be bound by, a promoter's contract with a third person.
But experience with the contract theories indicates that they do not present a wholly satisfactory
approach to the problem. Although there may be valid policy reasons for refusing to treat the promoter
as an authorized agent, it does not follow that his contracts should not be treated as those of an
unauthorized agent, capable of being ratified. At the time of ratification the corporation is represented
by managers selected by the stockholders who can pursue the best interests of the corporation
without jeopardy to the interests of any group.
The conception that the principal must be in existence at the time of the unauthorized act rests solely
on an outmoded legal formula. Therefore, no sound reason appears why a corporation which can
ratify unauthorized acts done after incorporation cannot ratify such acts done before incorporation.
For these reasons corporations should be able to ratify promoters contracts.
Reform has proved a difficult process, even though no one had any interest in preserving the old
rules. The difficulty lay in the complexity of the problem itself: what at first appeared to be a simple
little exercise was really quite intricate. It may be argued that there is no need for the legislature to
provide a complete solution. Some questions may best be left to the courts, though their past
performance in the field of pre-incorporation contracts scarcely inspires confidence. It is probably
undesirable to attempt to provide any greater degree of guidance to courts in the exercise of their
discretion to apportion liability between promoter and corporation. One would also hope that the
courts would deal satisfactorily with questions such as the identification of the promoter and the
corporation, and the appropriate measure of damages to be awarded against a promoter where the
contract is one that could only be performed by the corporation.
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