What is the significance of a pre incorporation contract

In Weavers Mills Ltd. In this case, promoters had agreed to purchase some properties for and on behalf of the company to be promoted.

On incorporation, the company assumed possession and constructed structures upon it. Conclusion Pre-incorporation contracts, though at first, might appear to be with no legal status and value, but they are very much important and legally valid as well as enforceable.

Pre-incorporation contracts may be undertaken by the company after its incorporation either by a incorporating the contract in the terms of incorporation, or b by entering into a fresh contract with the other party or with the promoters, or c By accepting the benefits from the contract, either expressly or impliedly.

And hence, the pre-incorporation contract becomes legally enforceable against the company. The author can be reached at: suryabhansingh legalserviceindia. For Further Details Contact: editor legalserviceindia. Legal Service India. College Attended: D. Similarly, under Section 19 e of the Specific Relief Act if the newly incorporated company has accepted the pre-incorporation contract and has communicated its acceptance to the other party, relief against parties can be claimed under subsequent title.

Therefore, pre-incorporation contracts can be enforced in India by i incorporating the contract in the terms of incorporation, b by entering into a new contract with the other party or the Promoter, c by expressly or impliedly accepting the benefits of the pre-incorporation contract.

There could be various types of preliminary or pre-incorporation agreements. It could also be an employment agreement with a manager or a company secretary whose skills are required for the company to be incorporated.

Any pre-incorporation contract must have the following items:. An ideal place of incorporation would be the State where the future company would conduct its business with other corporations. It is good to attach a draft copy of the Articles of Association and Memorandum of Association with the pre-incorporation agreement. The choice of entering into a preliminary or pre-incorporation agreement is up to the parties involved in the incorporation and whether the Promoters believe that it would benefit them and the future company.

However, it is always a good idea to enter into a written agreement with parties to clearly delineate the rights and responsibilities of each side.

Furthermore, it helps in resolving a lot of disputes that merely oral or handshake agreements could bring about. In the current COVID pandemic time when even parties to written contracts, an unwritten pre-incorporation agreement would add to confusion between the parties and a dispute which could have avoided had they entered into a written agreement.

Once the company is incorporated the parties can always ask the preliminary agreement to be ratified by the company or ask for novation. Novation is defined as entering into a new contract thereby either substituting new obligations or parties to the contract for the previous agreement.

Under novation, the old contract the pre-incorporation contract here and a new contract would be entered into between the parties. The principle of novation is also recognized under Section 62 of the Contract Act.

Therefore, it can be stated that it is always better to enter into a written agreement between parties before the incorporation of a company to demarcate the rights and liabilities of each party and to have a mechanism for damages in the event of a breach of a pre-incorporation agreement.

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