Authored By: Sankha Brata Mitra
St. Xavier's University
INTRODUCTION
A pre-incorporation contract is an agreement entered into by a promoter on behalf of a company before the company has come into legal existence. Since an unformed company cannot, at that stage, legally enter contracts, common law historically treated such agreements as void ab initio, thereby imposing personal liability upon the promoters who set the machinery of incorporation in motion. In practice, promoters often need to make arrangements on behalf of the intended company, but the legal effect of such contracts has varied across jurisdictions. English common law firmly established that a company, not being in existence at the time of the agreement, could neither ratify nor be bound by it, with the liability falling squarely on the promoter. This approach significantly influenced jurisdictions such as India, which adopted similar reasoning within its corporate framework. In contrast, civil law jurisdictions such as Germany and France developed statutory mechanisms allowing a company, upon incorporation, to adopt and become bound by such contracts, thereby relieving the promoter of liability. The modern understanding of pre-incorporation contracts thus reflects a synthesis of common law and civil law approaches, balancing the protection of third parties with the practical realities of corporate formation.
NATURE AND LEGAL POSITION OF PRE-INCORPORATION CONTRACTS
The nature of a pre-incorporation contract is distinct from that of an ordinary contract. While essentially bilateral in form, it also carries features resembling a tripartite arrangement. In such a contract, the promoter enters into an agreement with a third party, creating a bilateral relationship between them. However, the noteworthy aspect lies in the fact that the contract is intended to benefit the prospective company, which itself is not a party to the contract.
One might question why the company is not held liable despite being the beneficiary, or whether the promoter operates under a principal–agent relationship. The answer is straightforward: at the time of a pre-incorporation contract, the company does not possess legal existence. An entity without legal existence cannot be a party to a contract, and by the doctrine of privity of contract1, the company is excluded from liability. Consequently, the promoter cannot be regarded as an agent of a non-existent principal, and the liability falls personally upon the promoter. This position was affirmed in Kelner v. Baxter2 and Phonogram Ltd. v. Lane3.
HISTORICAL ORIGINS AND EARLY DOCTRINES
The roots of pre‑incorporation contract law trace back to civil‑law concepts and early corporate charters. In Roman law, a party could contract for the benefit of a third party, a doctrine later reflected in continental codes. For example, French law long provided that founders who act “in the name of” a not‑yet‑formed company are personally liable for obligations, unless the company later formally assumes those acts.4
In 19th-century England, courts addressed the issue in Kelner v. Baxter (1866)5. In that case three persons who were to become the directors of a company signed a -contract, while the company was not yet in existence, for the supply of goods that were to be used in the business of the company. The signatures were followed by the words “on behalf of the Gravesend Royal Alexandra Hotel Co. Ltd.”. The company was subsequently registered but quickly became insolvent. The supplier therefore sued the signatories personally. The action succeeded. The Court held that the company could not acquire rights or incur obligations by reason of acts antecedent to its formation. Therefore, one of two possible consequences had to follow: either the Court would attach personal liability to the signatories or the contract would fail altogether. In fact, the Court, professing to apply the principle “ut res magis valeat quam pereat”6, held that the signatories were personally bound by the written terms of the contract and refused to allow them to introduce extrinsic evidence to show that they had not intended to incur personal liability.7
Similarly, Phonogram Ltd. v. Lane8and Newborne v. Sensolid (Great Britain) Ltd.9 reaffirmed that pre-incorporation contracts are binding on the promotor, not on the company.10 In short, the classic rule is that a company cannot affirm an agreement made prior to its incorporation11. Unless the contract expressly provides that it is entered for and on behalf of the company to be formed, a promoter signing the deal remains the obligor. Thus, at common law promoters were “personally liable for the breaches of pre-incorporation contracts”
English jurisprudence consistently followed Kelner. Subsequent cases reaffirmed that a person contracting purportedly as agent for a non-existent company incurs personal liability. For instance, in Newborne v. Sensolid (1954)12, a promoter signed a goods-supply contract in the name of an apparently formed company. The court held that, because the company was not incorporated at the time, there was never a contract, the company could not sue or be sued, and the promoter could not treat it as his personal contract13. English courts thus maintained the rule that pre-incorporation contracts are void as against the company and binding on the promoter, absent a clear novation or other agreement.
INDIAN STATUTORY FRAMEWORK
In India the Specific Relief Act addressed this historic gap. Section 15(h)14 provides that when promoters have made a contract “for the purposes of the company” before incorporation, the company may enforce that contract after its formation, provided the contract was “warranted by the terms of incorporation”. Likewise, section 19(e)15 empowers the third party to enforce such a contract against the company if the company adopts it after incorporation. In other words, once a company is formed it can, by a board resolution or inclusion in its articles, “ratify” the promoter’s contract and become bound.
Under the Indian Contract Act, 1872, section 19616 of the Contract Act states that an act done on behalf of another person without authority may be ratified by that person later; after ratification the act is deemed authorized from the outset. Applied to companies, this means a firm can retrospectively approve the promoter’s earlier unauthorized act once it comes into being. However, ratification must cover the entire contract, not just parts of it. By contrast, section 23017 underscores that an agent cannot bind a principal not yet in existence. Thus, under agency law a promoter’s acts are validated only through full ratification by the company. 18
The Companies Act 2013 does not create an express regime for pre-incorporation contracts, but it does define “Promoter” inclusively in section 2(69)19. This statutory definition, however, concerns liability for prospectus mis-statements and takeovers, not pre-incorporation contracts. The Act’s provisions on fraud (s. 447)20 do make promoters liable if fraud in incorporation comes to light, but this applies on winding-up and is ancillary to contract law.21
Overall, Indian law today gives companies relatively generous options to assume pre incorporation obligations: via express ratification or even implied assent by taking benefits. At the same time, the promoter’s ultimate liability is preserved unless the contract is effectively taken over by the company. As one legal commentator summarizes, “promoters acting for the corporation… do so with the capacity to have the company’s actions ratified”, but “promoters are held legally responsible for [pre-incorporation contracts] unless discharged by the third party or the ratification substitutes the promoter’s liability.”22.
CONCLUSION
The law on pre-incorporation contracts has evolved from the strict common law rule that a non existent company cannot be bound, leaving liability with promoters, to more flexible statutory frameworks that allow companies to adopt such contracts after incorporation. Different legal systems developed distinct approaches to resolve this tension. The traditional common law position placed liability solely on the promoters, while civil law systems created mechanisms for companies to adopt such contracts once incorporated. Modern frameworks, including that of India, have gradually sought to balance both perspectives. They allow companies to accept beneficial contracts made on their behalf before incorporation, while at the same time ensuring that third parties are protected if the company chooses not to assume those obligations.
In effect, the law in this area is designed to protect all stakeholders: promoters are discouraged from acting carelessly, companies are given flexibility to embrace advantageous arrangements, and third parties are assured that their interests will not be ignored. Pre-incorporation contracts, therefore, are not merely technical instruments but a reflection of how corporate law evolves to meet commercial necessity while maintaining fairness and accountability.
REFERENCE(S):
- Adv. Devshree Dangi, Pre-Incorporation Contracts (Oct. 17, 2024), iPleaders, https://blog.ipleaders.in/pre-incorporation-contracts/ (last visited Aug. 30, 2025).
- Global Law Experts, Company Law – Acts Before Incorporation (Nov. 29, 2023), https://globallawexperts.com/company-law-acts-before-incorporation/ (last visited Aug. 30, 2025).
- Karthik Raghavan & Shreya Negandhi, Doctrine of Privity of Contract Case Law: Should It Be Discarded or Not? (Mar. 28, 2019), Lawyered, https://www.lawyered.in/legal disrupt/articles/doctrine-privity-contracts-advocate-karthik-raghavan/ (last visited Aug. 30, 2025).
- Lakshmi Dwivedi & Varun Byreddy, Pre-Incorporation Contracts: A Legal Puzzle in India, 5 NLIU L. Rev. I, 37 (Jan. 2022), https://nliulawreview.nliu.ac.in/wp content/uploads/2022/01/Volume-V-Issue-I-53-79.pdf (last visited Aug. 30, 2025).
- LawBhoomi, Ut res magis valeat quam pereat, https://lawbhoomi.com/ut-res-magis-valeat quam-pereat/ (last visited Aug. 30, 2025).
- Law Reform Committee of South Australia, Sixty-Second Report of the Law Reform Committee of South Australia on Reform of Company Law Relating to Pre-Incorporation Contracts (Jan. 1968), https://law.adelaide.edu.au/system/files/2019-02/62-Company-Law Relating-to-Pre-Incorporation-Contracts_0.pdf (last visited Aug. 30, 2025).
- Law Teacher, Pre-Incorporation Contracts and the Promoter (Feb. 2, 2018), https://www.lawteacher.net/free-law-essays/contract-law/pre-incorporation-contracts-and the-promoter.php (last visited Aug. 30, 2025).
- Wiseman Ubochioma, Pre-Incorporation Contract: A Comparative Analysis of the Canadian and Nigerian Corporate Law Regimes, 3 Corp. L. & Gov. Rev. 29 (2021), https://doi.org/10.22495/clgrv3i1p3 (last visited Aug. 30, 2025).
- Who Owns Pre-Incorporation Profits?, Bus. Standard (Apr. 30, 1998), https://www.business standard.com/article/specials/who-owns-pre-incorporation-profits-198043001140_1.html (last visited Aug. 30, 2025).
1 Karthik Raghavan & Shreya Negandhi, Doctrine of Privity of Contract Case Law: Should It Be Discarded or Not? (Mar. 28, 2019), Lawyered, https://www.lawyered.in/legal-disrupt/articles/doctrine-privity-contracts advocate-karthik-raghavan/ (last visited Aug. 30, 2025).
2 Kelner v. Baxter, (1866) L.R. 2 CP 174.
3 Phonogram Ltd. v. Lane, [1982] QB 938 (CA).
4Global Law Experts, Company Law – Acts Before Incorporation (Nov. 29, 2023), https://globallawexperts.com/company-law-acts-before-incorporation/ (last visited Aug. 30, 2025). 5 Kelner v. Baxter, (1866) L.R. 2 CP 174.
6 LawBhoomi, Ut res magis valeat quam pereat, https://lawbhoomi.com/ut-res-magis-valeat-quam-pereat/ (last visited Aug. 30, 2025).
7 Law Reform Committee of South Australia, Sixty-Second Report of the Law Reform Committee of South Australia on Reform of Company Law Relating to Pre-Incorporation Contracts (Jan. 1968), https://law.adelaide.edu.au/system/files/2019-02/62-Company-Law-Relating-to-Pre-Incorporation Contracts_0.pdf (last visited Aug. 30, 2025).
8 Phonogram Ltd. v. Lane, [1982] QB 938 (CA).
9 Newborne v. Sensolid (Great Britain) Ltd, [1954] 1 QB 45 (CA).
10 Law Teacher, Pre-Incorporation Contracts and the Promoter (Feb. 2, 2018), https://www.lawteacher.net/free law-essays/contract-law/pre-incorporation-contracts-and-the-promoter.php (last visited Aug. 30, 2025).
11 Adv. Devshree Dangi, Pre-Incorporation Contracts (Oct. 17, 2024), iPleaders, https://blog.ipleaders.in/pre incorporation-contracts/ (last visited Aug. 30, 2025).
12 Newborne v. Sensolid (Great Britain) Ltd, [1954] 1 QB 45 (CA).
13 Wiseman Ubochioma, Pre-Incorporation Contract: A Comparative Analysis of the Canadian and Nigerian Corporate Law Regimes, 3 Corp. L. & Gov. Rev. 29 (2021), https://doi.org/10.22495/clgrv3i1p3 (last visited Aug. 30, 2025).
14 Specific Relief Act, 1963, No. 47 of 1963, § 15(h), (India).
15 Specific Relief Act, 1963, No. 47 of 1963, § 19(e), (India).
16 Indian Contract Act, 1872, No. 9 of 1872, § 196, (India).
17 Indian Contract Act, 1872, No. 9 of 1872, § 230, (India).
18 Lakshmi Dwivedi & Varun Byreddy, Pre-Incorporation Contracts: A Legal Puzzle in India, 5 NLIU L. Rev. I, 37 (Jan. 2022), https://nliulawreview.nliu.ac.in/wp-content/uploads/2022/01/Volume-V-Issue-I-53-79.pdf (last visited Aug. 30, 2025).
19 Companies Act, 2013, No. 18 of 2013, § 2(69), (India).
20 Companies Act, 2013, No. 18 of 2013, § 447, (India).
21 Supra “18”.
22 Who Owns Pre-Incorporation Profits? (Business Standard, Apr. 30, 1998), https://www.business standard.com/article/specials/who-owns-pre-incorporation-profits-198043001140_1.html (last visited Aug. 30, 2025).
