A company cannot ratify a pre-incorporation contract though it is open to it to enter into a fresh contract.

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.