A pre-incorporation agreement is entered into
by the corporate promoters, who form the company by filing its Articles of
Incorporation. Since the corporation has not been formed yet, it cannot be a
party to the agreement. If the corporation is not formed or if it fails to
adopt the agreement, the promoters can be held personally liable for any breach
of the agreement.
The promoter is obligated to bring the company in the legal
existence and to ensure its successful running,; and in order to accomplish his
obligation he may enter into some contract on behalf of prospective company.
These types of contract are called ‘Pre-incorporation Contract’.
Nature
of Pre-incorporation contract is slightly different to ordinary contract.
Nature of such contract is bilateral, be it has the features of tripartite
contract. In this type of contract, the promoter furnishes the contract with
interested person; and it would be bilateral contract between them. But the
remarkable part of this contract is that, this contract helps the perspective
company, who is not a party to the contract.
One
might question that ‘why is company not liable, even if it a beneficiary to
contact’ or one might also question that ‘doesn’t promoter work under
Principal-Agent relationship’.
Answer
to all those question 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, and ‘Privity to Contract’ doctrine
excludes company from the liability. In Kelner v Baxter, Phonogram Limited v
Lane
In
pure common law sense, Pre-incorporation contract does not bind the company.
But there are certain exceptions to this contract, and these exceptions were
developed in USA, India and later in England.
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