PRE-INCORPORATION CONTRACTS:

A COMPARITIVE ANALYSIS OF
INDIAN AND ENGLISH LAWS

I Introduction

THE COMPANY is a legal entity or device normally adopted to establish

a business enterprise as an independent legal entity capable of employing
people and of buying and selling goods and services in its own right
capable in law of owning property, conducting business and entering into
contracts with other parties and capable of being bought and sold and
inherited by successive owners. The company is in fact a preferred
choice of business structure mainly because it offers many distinct
advantages like limiting liability, independent corporate existence,
opportunity to raise public funds, perpetual succession, contractual powers
etc. The company, which is of concern to us, now is what is known as
registered company. This is because it is brought into existence by
registration of documents the most important of which is the memorandum
of association and the articles of association. This registration is to be
done with the registrar of companies of the state in which the registered
office of the company is to be situated.1
It is very important that the process of incorporation takes place
before the company can be said to have come into existence. Unless the
process is complete, the independent legal entity does not come into
being. Only after incorporation does, the company attain its legal features;
therefore the contractual powers of the company can be exercised only
after incorporation. However it may be necessary at times for the people
incorporating the company to enter into contracts purportedly on behalf
of the yet to be formed company. Most of the times these contracts are
entered into for purchase of property or rights to be acquired or for
securing the services of some manager or expert. The persons incorporating
the company2 will want to offer the benefit of such agreements or contracts
as an inducement to the public to take shares hence it becomes necessary
that these contracts be made before the formation of the company. These
contracts are termed as pre-incorporation contracts. Pre-incorporation

1. S.33, The Companies Act, 1956.

2. These persons are called promoters in corporate parlance and stand in a
fiduciary relationship as regards the company.

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contracts are contracts purported to be made on behalf of a company

which is yet to come into existence i.e. before its incorporation. Pre-
incorporation contracts are also referred to as preliminary contracts or
preliminary agreements. The expenses incurred during the course of these
contracts are referred to as preliminary expenses and in corporate practice
are usually written of in the first few years account books.
The author in this paper has sought to address the problems, which
have arisen due to pre-incorporation contracts. The attempt has been to
look at the controversies and uncertainties created due to conflicting
judicial interpretations in case law and half-hearted legislative attempts.
The focus to a large extent is on common law since it still has great
relevance in the Indian context and in specific instances in English law
also.

II The common law position

The common law position as regards pre-incorporation contracts is

the same, which was in existence before the intervention of the legislature
whether it is the European Union legislation or the amendment to the
Companies Act, 1985. In common law before its incorporation the company
is not in existence therefore it has no capacity to contract. In a pre-
incorporation contract the promoter has two options; One is to enter into
the contract in the name of the company or secondly to enter into the
contract in his own name as agent of the company. In common law the
company cannot enter into the contract as it is not in existence and also
nobody can contract for it as agent because he cannot do an act, which
cannot be done by the principal, through an agent, nor can the company
ratify a pre-incorporation contract after its incorporation. 3 There is
however nothing to prevent the company from entering into a new contract
to put into effects the terms of the pre-incorporation contract. 4 The
company entering into the new contract is an act of novation. Novation
is when the parties to the contract agree to substitute the existing contract
with a new contract. Novation can be of two types 5 ; novation involving
change of parties 6 and novation involving substitution of a new contract
in the place of the old. As regards the principle of novation it must be
kept in mind that the mere acting after incorporation on the preliminary
contract does itself constitute sufficient evidence of the creation of the
new contract. 7 It should be clearly established that there came into
existence a new contract between the company and the third party.

3. Kelner v. Baxter, (1867) LR-2 CP 174.

4. Touche v. Metropolitan Railway Wearhousing Co, (1871) 6 Ch. App. 671.
5. Scarf v. Jardine, (1882) 7 App Cas 345 at p.351.
6. First illustration to s. 62 Indian Contract Act, 1872.
7. Re Northumberland Avenue Hotel Co, (1886) 33 Ch. D. 16.

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For a finer understanding of the common law position on pre-

incorporation contracts it is necessary that certain English cases be
understood and analysed in great detail. As early as 1851 the English
courts in Schmalz v. Avery^ ruled that where a person purports to act as
an agent he may nevertheless disclose himself as being the principal and
bring an action on his own. In the very important case of Kelner v.
Baxter9 the facts were as follows. The plaintiff intended to sell wine to
a company, which was to be formed, but under the contract he agreed to
sell the wine to the proposed director of the company. The proposed
directors intended to buy the wine on behalf of the company, but as it was
not in existence at the time of the contract or when the goods were
delivered, they took personal delivery. The court held that as the directors
had contracted on behalf of a principal who did not exist, they having
received the wine must pay for it.
It was the case of New Borne v. Sensolid10 that was the cause of much
confusion in the common law understanding of pre-incorporation contracts.
While claiming that they were not deviating from the earlier dictums,
they did create some confusion by making a differentiation between the
situations where the promoter is acting as agent of the unincorporated
company i.e. acting on behalf of the company and where the promoter is
just authenticating the fact that the company is entering into the contract.
That particular case had that kind of a weird fact situation that it was
possible to sustain the kind of strange logic, which the judges propounded.
In this case one Newborne wanted to go into business and was on the
point of registering his company to be called Newborne (London) Limited,
He also got stationary printed in the name of the company and started
using the stationary even before the company came into existence. He
entered into a contract with Sensolid and used the stationary of the
company for the contract. The contract was signed as Newborne (London)
Limited and underneath was written a hieroglyphic that was identified as
the signature of the plaintiff. Subsequently the market for the goods went
down and Sensolid did not take delivery and wanted to avoid the contract.
They first took up the defence that it was a sale by sample and the sample
had not been given to them. However, this contention was set aside by the
trial judge. At this juncture the defendants became aware of the fact that
the company had not been incorporated and hence they pleaded that they
had entered into contract with the company and not with Newborne and
so he could not recover.
This argument of the defendant was accepted by the court inspite of
the opposition put forth by the plaintiff based on the earlier cases discussed.

8. (1851) 16 QB 655.
9. Supra note 3.
10. (1953) 1 All E R 708.

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The judges said that they were not departing from the earlier cases cited
but held that in this particular case the plaintiff was not purporting to
contract as agent or as the principal. The lord judges ruled that the
plaintiff was making the contract for the company and it was the company,
which entered into the contract. The plaintiff raised the contention that
the company can act only through its agents but the court rightly overruled
this argument. However the court as regards the contract refused to
acknowledge the fact that Sensolid had in its actions as regards Newborne
acted as if he were the agent of the company. This is further made
obvious from the point that Sensolid did not even raise the point of the
non-existence of the company at the first instance.
The court held that in this case the company had entered into the
contract and the signature of Newborne was to authenticate the contract.
Newborne purported to sell the company's goods and not his goods. The
only contracting party was the company and Newborne just authenticated
the company's consent. Since the company was not in existence when the
contract was signed there never was a contract and the plaintiff cannot
come forward to say, "it was my contract". Therefore, the contract was
a nullity.
The differentiation made by the court was entirely incorrect. Now let
us take the instance, where the person acts as an agent of the company. 11
In such an instance the principal is not in existence therefore the agent has
no authority and hence the contract fails to come into existence. This is
because the agent has no independent existence separate from the principal.
The agent cannot do something that the principal could not have done.
The principal could not have entered into these contracts, as it was not in
existence at that time. Alternatively the company enters into a contract
that the promoter authenticates. 12 Such a contract is a nullity and therefore
in both situations there is no contract, which comes into existence.
However in the first instance the promoter has the option of declaring
himself to be the principal and continue to be party to the contract and
enforce it. It is interesting to note that in Phonogram v. Lane13 the
learned judges chose to more or less break down the distinction between
Kellner v. Baxter14 and Newborne's case, however, ultimately the decision
of the court was based on section 9(2) of the European Communities Act
1972. The court in its obiter dicta did rule that the promoter entering into
a contract could be considered as a party to the contract. Due to the fact
that the trial court had ruled that the contract couldn't be enforced against

11. Agent acts 'for and on behalf of the company.

12. Here there is created a clause of warranty. Therefore when the contract is
declared a nullity there is a breach of warranty.
13. [1981] 3 All ER 182.
14. Supra note 3.

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the promoter the appellate court could not go again into the issue of facts
and chose to interpret the European Act.
The effect of this is that there is conflict as to what really is the
common law position. Is it the law with subtle differentiation as laid
down in Newborne v. Sensolid or is it the obiter from Phonogram, which
criticized the earlier judgment, but itself relied on the European Act to do
justice. The solution for this lies in saying that the common law position
does not depend on the way in which the contract on behalf of the
unformed company is made but depends on the real intent, as revealed in
the contract. The question should be "Did the party intend to make
himself personally liable, or was the intention that the unformed company
should be the only person liable, in which was there is no contract?"
Oliver.J in Phonogram made the same position very clear when he said:
"The question I think in each case is what is the real intent as revealed in
the contract?"

Ill English law- The European Communities Act

The English position on pre-incorporation contracts is not the same

as the common law position. It has undergone a sea change due to the
entry of the United Kingdom to the European Union Community. The
courts had to implement article 7 of the First Company Law Directive of
which later became section 36C of the Companies Act, 1985. The
relevant provision reads as follows:
A contract that purports to be made by or on behalf of a company
at a time when the company has not been formed has effect,
subject to any agreement to the contrary, as one made with the
person purporting to act for the company or as agent for it, and
he is personally liable on the contract accordingly.
The aim of this provision is to increase security of transaction for
third parties by avoiding the consequences of the contract with the
company being a nullity.15 Giving the third party an enforceable
contractual obligation, not against the subsequently formed company, but
against the promoter, provides this protection unless the third party
agrees to forgo the protection.16 However the courts have made it very
clear that such consent could not be deduced simply from the fact that the
promoter signed as the agent of the company; an express agreement
presumably either in the contract itself or subsequently, on the part of the
third party that the promoter should not be personally liable was required.17

15. Paul.C.Davies, D.D. Prentice, Gower's Principles of Modern Company Lawy

Sweet and Maxwell, London, Edn-6, 142 (1997).
16. Ibid
17 Supra note 13.

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The coming into force of the statutory provision has also had an effect
on the court's perception of the common law in this area. In Phonogram
v. Lane18, OliverJ said that the "narrow distinction drawn" in Kellner v.
Baxter and the Newborne case19 did not represent the true common law
position, which simply was, but an analysis to find out whether the
contract purported to be one which is directly between the supposed
principal and the other party?20 The question should be answered by
"looking at the whole contract and not just at the formula used beneath
the signature"21
If this is taken to be the position then the difference between common
law and section 36(c) is narrowed. In common law, if the party intends
to contract with the non-existent company, the result will be a nullity and
the third party protected only to the extent that the law of restitution
provides protection.22 Under the statute, a contract, which purports to be
made with the company, will trigger the liability of the promoter, unless
the third party agrees to give up the protection. In other words, common
law approaches the question of the third party's contractual rights against
the promoter as a matter of the party's intentions with no presumption
either way, whereas the statute creates a presumption in favour of the
promoter being contractually liable. The common law position is still
important in those cases that fall outside the scope of the statute.23
The most important case that dealt with the provision of the statute
was Phonogram v. Lane?4 The facts of which were as follows. Prior to
the formation of a company to be called F.Ltd., which was for managing
a pop music group, negotiations took place between the defendant on
behalf of F. Ltd and the plaintiff regarding financing the pop group.
12,000 pounds was the amount agreed upon and a letter sent stating that
if the contract was not completed within certain period, the defendant will
undertake to repay the amount. The defendant signed a copy of the letter
"for and on behalf of F. Ltd." and returned the signed copy. The contract
was not completed. The defendant denied that he was personally liable
to repay the amount.
The trial court held that it couldn't enforce the contract based on the
letter.25 If this decision had been otherwise and reached the appellate

18. Ibid.
19 Supra note 10. "
20. Cotronic (UK) Ltd v. Dezonic, [1991] BCLC 721, Badgerhill Properties Ltd
v. Cottrell, [1991] BCLC 805.
21. Ibid
22. Supra note 15.
23. Supra note 20.
24. Supra note 13.

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court on the issue of the letter the common law as regarding pre-
incorporation contracts would probably have been clarified. However
the trial court held that the payment can be enforced under section 9(2)
of the European Communities Act, 1972 because the agreement to repay
was "a contract [purporting] to be made ... by a person [i.e., the defendant]
as agent of a company [i.e., F. Ltd.] at a time when the company had not
been formed and accordingly in the absence of anything to the contrary"
the contract to repay had effect under section 9(1) as a contract entered
into by the defendant under which he was personally liable.26
Despite the statutory intervention through the introduction of section
36(c) in The Companies Act, 1956, there still persist considerable problems
with its operation. The foremost among this is that perhaps as a
consequence of the legislature's concern with the promotion of third
party protection, the section does not make it clear whether the promoter
acquires a right under the statute to enforce the contract as well as
contractual obligations. It is however submitted that if principles of
contract are applied, the concept of contractual mutuality will cover the
issue and the effect will be that the promoter will also be able to enforce
the contract.27
The second issue is that section 36(c) is only applicable when the
contract "purports"28 to be made on behalf of a company, which has not
been formed. Both the parts of this provision must be satisfied, the effect
being that where the parties thought the company existed, though it has
in fact been struck off the register, the court of appeal29 held that the
contract did not purport to be made on behalf of the company of the same
name which was hurriedly incorporated when the parties later discovered
their mistake. Since all were in blissful ignorance when the contract was
drawn up and signed, it could not be said that the contract purported to
be on behalf of the company, the need for whose existence was not felt
necessary at that time. The contract in truth purported to be made on
behalf of that company which had been struck off, but that was not a
company of which could be said, it "has not been formed". The plaintiff
thus failed in his suit. The section thus has not been construed as
protecting third parties in all situations not only where there is in fact
attempt to contract with non-existent companies, but only in those
situations where the contract identifies a specific company as the purported
contracting party and where that company is one which has not been
formed.30

26. Ibid
27. Supra note 20.
28. See s. 36C of The Companies Act, 1985.
29 Oshkash B'Gosh Inc v. Dan Marbel, [1989] BCLC 507.
30 ibi4

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However the most serious of the defects of the new rule is that it has
done nothing to simplify the procedure for the companies to "assume"
the obligations of a pre-incorporation agreement. The European directive
left it to the member states to act upon such a provision, however, the
English legislature has chosen not to do anything about it in England.
The situation now is that a contract purporting to be made on behalf of
a company before it is incorporated cannot be adopted or ratified by it
after incorporation. It is necessary for a new contract to be made embodying
the terms of the old contract.31
In 1962 The Jenken's Committee Report recommended that the agent
who acted for the unformed company should be liable personally on the
contract. However once incorporated the company should be able to
adopt the contract unilaterally. At this point the promoter in the guise of
an agent would drop out. Such a proposal was also inset as clause 6 of
the Companies Bill, 1973, but the bill fell with defeat of the then
government and was not revived:32
We think that the Act should provide as do some Commonwealth
Acts, that a company may unilaterally adopt contracts which
purport to be made on it's name prior to incorporation and
thereby become a party to the same extent as if the contract had
been entered into alter incorporation. We also think that, unless
and until the company does so adopt such contracts the persons
who purported to act for the company should be entitled to sue
and liable to be sued thereon.
One of the common law jurisdictions where ratification of pre-
incorporation contracts by the company after it's formation is possible is
Singapore. The Singapore Companies Act, 1967 Section 35(1) after
amendment is:33
Any contract or other transaction purporting to be entered into by
a company prior to its formation or by any person on behalf of a
company prior to its formation may be ratified by the company
after its formation and thereupon the company shall become
bound by and entitled to the benefit thereof as if it had been in
existence at the date of the contract or other transaction had been
party thereto.
This provision was applied by the Privy Council on appeal from
Singapore in Cosmic Insurance Corporation Ltd v. Khoo Chiang Pob?4

31. Halsbury, Laws of England, Vol.9, Edn-4, (1973) 798 para 1366.
32. Extract from Report of the Company Law Committee.
33. Paul Davies & Palmer, Company Law, Edr-Geoffrey Morse, Sweet and
Maxwell, London, Edn-25, 3008 (1992).
34. July 10, 1980 [1981] New L J 286, c.f. Supra note 33

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In the course of business, pre-incorporation transactions are inevitable

features of every new incorporation and we ought to make it as easy as
possible to achieve what the parties intend so as to encourage business.
In this case if not generally, the legal technicality that ratification dates
back to the date of the transaction. So that it is not effective unless at that
time, the ratifying person existed and had capacity to enter into the
transaction should not be applied.35 Companies should be allowed to
ratify the contracts. Where the company has taken benefit of the promoter's
contract in such instances the promoter should have the right to force the
company to pay him consideration to the extent of benefit enjoyed.

IV Indian position of pre-incorporation contracts

The expression promoter has not been defined in the Companies Act.
The definition in sub section (6) is meant for the purpose of the prospectus
only. The term promoter actually is not a part of the legal regime but one
borrowed from the business world. The word promoter points to a person
who forms a company and gets it started. It indicates a person, who
originates the scheme for the formation of the company, has the
memorandum and articles prepared, executed and registered, and finds
directors, settles the terms of the preliminary contracts and prospectus (if
any) and makes the arrangement for advertising and articulating the
prospectus and placing the capital.36 The promoter controls the formation
and future of the company.37
The promoter as defined above may need to enter into contracts so as
to incorporate the company. These contracts entered into for the purposes
of the company are what are referred to as pre-incorporation contracts. In
England there is one basic principle of law i.e., the legal technicality that
ratification dates back to the date of the transaction so that it is not
effective unless at that time, the ratifying person existed and had the
capacity to enter into the transaction.38
The position in India as regards this legal technicality is different.
Section 182 of the Indian Contract Act 1872 defines 'agent' and 'principal'.
If this is read with section 196 of the Act which reads:
Where acts are done by one person on behalf of another, but
without his knowledge or authority, he may elect to ratify or to
disown such acts if he ratifies them, the same effects will follow
as if they had been performed by authority.

35. Supra note 15 at 144.

36. A.Ramaya, Guide to Companies Act, Wadhwa and Company, Agra, Edn-14,
574(1998).
37. Ibid.
38. Supra note 35.

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This ensures that it is possible for a subsequently incorporated company

to ratify the transaction as their own and claim the same. Therefore, in
India the problem faced by ratification from general principles of contract
is not there. In India however there are different legal problems with
regard to pre-incorporation contracts. Before the coming into force of
section 15(h) and section 19(e) of the Specific Relief Act39 the position
in India was the same as the common law position. However, after the
Act the position is drastically different.
One of the important Indian cases as regards pre-incorporation
contracts is Seth Sobhagmal Lodha v. Edward Mills Co. Ltd40 In this
case the attention of the court was not drawn to the provisions of the;
Specific Relief Act and the court decided on the basis of common law
decisions of England and held that contract entered into on behalf of the
company before its incorporation is not binding on the company.
If the logic of the English decisions is followed41 then a pre-
incorporation contract cannot bind the company. It takes effect as a
personal contract and the promoters themselves are personally liable.
However the problem is due to section 230 of the Indian Contract Act,
1872 that reads:
In the absence of any contract to that effect an agent cannot
personally enforce contracts entered into by him on behalf of his
principal, nor do they personally bind him.
Such a contract shall be presumed to exist in the following cases:
(1) where the contract is made by an agent for the sale or purchase
of goods for a merchant resident abroad.
(2) where the agent does not disclose the name of his principal.
(3) where the principal though disclosed cannot be used.
This would lead to a very big problem because under common law if
the contract is entered into in the name of the company, the contract is
void because the company does not exist.42
Entered into by the promoter as agent or on behalf of the company.
Then due to the effect of section 230 of the Indian Contract Act, 1872 the
agent cannot be sued unless there is a contract that provides to the
contract. The company under the common law cannot ratify the contract.43
Therefore the situation was such that unless it was expressly provided
that the promoter is the agent of the company and he will be liable for th?

39. These clauses allow for ratification.

40. (1972) 42 Comp. Cas 1 (Raj).
41. Robert R.Pennington, Company Law, Butterworths, London, Edn-6, 141
(1990).
42. Supra note 19.
43. Supra note 35.

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contract only then will the third party be protected if the company does
not enter into a new contract with him. In present English law the
presumption is that promoter as agent is liable if there is no contract to
the contrary.44 In the Indian position, the presumption is just the opposite.
Therefore what is needed is that a new clause should be added to section
230 of the Indian Contract Act adding a presumption that agent will be
liable if he is the promoter of an unincorporated company. This can
protect the interests of the third parties who contract with the promoters
and help in the formation of the company.
Claim for specific performance by the company against the promoter
The promoter though he fulfils some fiduciary duties45 cannot be described
as a trustee as there is no beneficiary as defined under section 3 of The
Indian Trusts Act, 1882.46 He cannot also be strictly construed as agent
since there is no principal. -Hence the promoter occupies the peculiar
position of quasi-trustee,47 The important question, which arises now, is
whether the declaration made by the promoter constitutes transfer of
property and whether the company can claim any interest in the property.
The declaration of the promoter that the property is held by him for the
company to be formed does not constitute either a sale, mortgage, lease,
exchange or gift and the company before its incorporation is not a living
person and hence section 5 48 of the Transfer of Property Act, 1882 is not
attracted.49 Such a declaration also does not constitute a transfer to
himself and the company has not come into force as a beneficiary and
hence it will not become a trust. Hence the transaction is outside the
purview of section 5 of the Transfer of Property Act and also Trust Act
and it does constitute a conveyance as a vesting instrument or other
assurance of property and can be made orally under section 9 of the
Transfer of Property Act, 1882.50
If the promoter purchases property from the third party, he will be
acquiring the title though apparently in his name for the benefit of the
company yet to be formed. The property vests in him for the benefit of
the company though his assurance is sufficient to clothe the company

44. S.36(c) The Companies Act, 1985 also The European Communities Act, 1972
S. 9.
45. Erlanger v. New Sombero Phosphate Co, (1818) L. R App Cas 1218.
46. S.3 Indian Trusts Act, 1882, beneficiary- the person for whose benefit the
confidence is accepted.
47. Vishwas Sridhar Sohoni, Sohoni's The Specific Relief Act, 1963, Premier
Publishing Co, Allahabad, Edn-1, 309(1994).
48. S. 5 of the Transfer of Property Act, 1872 requires both transferor and
transferee to be living persons.
49. Supra note 47.
50. Ibid.

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after its birth to claim full title. 51 In Weavers Mills v. Balkis Ammal52
the judge held that the benefit of the purchase made by the promoter
passed to the company, on its incorporation, without any registered deed.
The reasoning is that the company can claim property acquired by the
promoter after its incorporation without any need for conveyance. Even
if this reasoning is rejected just by the fact that the promoter is a quasi-
trustee he can be compelled to convey the property to the company and
if necessary on payment of consideration in view of the role of the
promoter for obtaining the benefit before its incorporation. 53
Until the coming into force of the Specific Relief Act the promoters
in India found it very difficult to carry on the work of incorporation.
Since contracts prior to the incorporation were void and also could not be
ratified, people hesitated to either supply goods or service for the cause
of incorporation. Promoters also felt shy of accepting personal
responsibility. 54
The clauses of the Specific Relief Act came as a relief to the promoters.
Section 15(h) of the Specific Relief Act, 1963 provides that:
Where the promoters of a company have before its incorporation,
entered into a contract for the purposes of the company, and such
contract is warranted by the terms of the incorporation of the
company:
Provided that the company has accepted the contract and has
communicated such acceptance to the other party to the contract.
The term "warranted by the terms of incorporation" means within the
scope of the company's object as stated in the memoradum. Thus in Vali
Pattabhirama Rao v. Sri Ramaija Ginning and Rice Factory Pvt Ltd.55
it was held that where a person who intended to promote a company,
acquired a leasehold interest for it, held it for sometime for partnership
firm, converted the firm into a company which adopted the lease, the
lessor was bound to the company under the lease. But it was held in
another case 5 6 that in a contract by the promoters of a company for
purchase of shares, when it came into existence, is not a contract for the
purposes of the company within the contemplation of s.15 (h) of the

51. Ibid
52. AIR 1969 Mad 462, Also see Income Tax Officers v. Bijli Cotton Mills, (1953)
23 Com Cases 114.
53. CIT\. Bijli Cotton Mills, (1953) 23 Com Cases 114.
54. A.K. Majumdar and G.K. Kapoor, Taxmann's Student Guide to Company
Law, Taxmann New Delhi, Edn-12, 61 (1998).
55. [1986] 60 Comp. Cas. 568 A.P.
56. Imperial Ice Manufacturing Co v. Mancheshaw, ILR 13 Bom 69

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Specific Relief Act. It should be clearly understood that the question

whether a particular contract is or not warranted by the terms of
incorporation of a company can be answered only by the facts and
circumstances of each case.57
The necessary conditions to enable the company to obtain specific
performance of a contract made by its promoters, before its incorporation
is:
1. The promoters must have entered into the contract for the
purposes of the company.
2. Such contracts must be warranted by the terms of incorporation
of the company.
3. The company on coming into existence by incorporation must
have accepted the contract.
4. The company must have communicated such acceptance to the
other party to the contract either expressly or impliedly.
5. Under s.149 of the Companies Act 1956 there are certain
restrictions on the commencement of business until certain
conditions are fulfilled. These conditions are enumerated under
s. 149 (1) a,b,c,d and (2) a,b,c. Therefore, even after the company
comes into existence, for the company to commence business
the company will have to follow these conditions. Therefore, it
is very obvious that an un-incorporated company cannot
commence business through the medium of pre-incorporation
contracts. Therefore, the term "warranted by terms of
incorporation" is limited by term not amounting to
"commencement of business". The logic behind this is very
simple, that the promoter acting for the company cannot do
what the company could itself not do. However the operation
of s.149 is limited to only non-private company that is public
companies.
It is not only the company which is allowed under the Specific Relief
Act to adopt and enforce its pre-incorporation claims against third parties
but s.19 (e) of the Specific Relief Act also allows the other party to
enforce the contract against the company - when the promoters of a
company have, before its incorporation, entered into a contract for the
purposes of the company and such contract is warranted by the terms of
incorporation of the company:
Provided that the company has accepted the contract and
communicated such acceptance to the other party to the contract.

57. P.M. Bakshi, S. C. Bannerjee 's Law of Specific Relief The Law Book Company,
Allahabad, Edn.9, 229 (1992).

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130 JOURNAL OF THE INDIAN LA W INSTITUTE [Vol. 44 : 1

The liability declared in clause (e) was established in England in

the course of the 19th century by the decisions of the court of equity:
58

[P]artly on the grounds of a distinct obligation having either been

imposed on the company on its original constitution or being
assumed by it after its formation and partly on a ground
independent of contract and analogous to estoppel, namely that
when a person has on certain terms assisted or abstained from
hindering the promoters of a company in obtaining the constitution
and the powers sought by them, the company when constituted
must not exercise its powers to the prejudice of that person and
in violation of those terms.
This clause (e) now provides that the company has accepted the
contract and communicated such acceptance to the other party to the
contract. This goes against the general rule for specific performance of
a contract of sale; a person who is not a party to the agreement is neither
a necessary nor a proper party. But it is acceptable as it is a rule provided
by the legislature by way of statute.

V Conclusion

Now that both the Indian and English positions have been analysed
and their faults identified it is necessary to see what could be the possible
reform. In England due to the intervention of the European Communities
Act, 1972 and subsequently the English Companies Act, 1985 the liability
of the promoter has been clearly and statutorily established and the
agreements entered into by the promoter purportedly for the company are
now deemed to be the contracts of the promoter and he is liable for them
as if he were the principal. This is so unless there is a contract to the
contrary. The English statute stops here and no ratification of the contract
by the company is possible. Therefore, the possibility of the company
taking over the contract from the promoter is completely ruled out. The
only way out for the company is the process of novation, i.e. the company
enters into a new contract with the other party to the same effect as the
contract made on its behalf before incorporation. However such a new
contract will not be inferred if the acts of the company after incorporation
are due to the mistaken belief that it is bound by the contract made before
incorporation.
The only change that the English statute has brought about is the
obliteration of the artificial difference created by the decision in the case
of Newborne v. Sensolid59 when it said that all promoters who enter into

58. R.K.Abichandani, Pollock and Mulla on Indian Contract and Specific Relief
Acts Vol-Il N.M. Tripathi Private Limited Bombay Edn-II, P 1303.
59. Supra note 10.

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2002] NOTES AND COMMENTS 131

the contract are liable. More or less the same effect was achieved by
Justice Oliver in Phonogram v. Lane60 but in that case it was still
accepted that a contract with an unincorporated company is void but the
intention of the parties must be looked into rather than the technicality as
to the contract was signed.
India like other common law jurisdiction such as Singapore, allows
for ratification by the company. The main problem with Indian Law
arises in the fact situation where there is no ratification by the company.
What this does is push the third party back into the quagmire of English
common law, which has arisen due to the decision of Newborne v.
Sensolid. The decision of Phonogram cannot be relied upon since it is
based on statutory law. Also adding to the confusion of common law is
s. 280 of the Indian Contract Act, which says that an agent cannot be
made liable for the contract he enters into on behalf of the principal.
Therefore, both English and Indian law needs reform. Both the laws
cover complementary parts and what is needed is a combination of both
the laws in each of the two jurisdictions. In England they need to follow
the recommendations of the Jenkins Committee Report and allow for
ratification on the lines of the Indian legislation. India needs a statute
clarifying the position of the promoter and the third party when the
company does not ratify the pre-incorporation contract. India should
move away from the common law position and adopt the logic of the new
s.36 C of the Companies Act, 1985. As regards the property held by the
promoter for the company a relationship of quasi-trusteeship should be
declared as being established. Hence the company should be entitled to
take the property or benefits from the promoter. However this does not
mean that the promoters' interests should be harmed. The company
should be liable to pay the promoter consideration for taking the trouble
of entering into the contract for the company before its incorporation.

H.R. Saviprasad*

60. Supra note 13.

*B.A. LL.B (Hons). NLSIU Bangalore, Advocate.

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