Lakshmi Dwivedi & Varun Byreddy from National Academy of Legal Studies and Research, Hyderabad analyse the validity of a pre-incorporation contract.

Abstract

This paper attempts to examine the validity of a pre-incorporation contract i.e. of a contract entered into by a company before its incorporation. The problem arises because at the time of contracting, the company is non-existent and hence the contract has been entered into with an incapable party. It is surprising that such a contemporary aspect hasn’t received much scrutiny in Indian legal literature. Even though Specific Relief Act lays down the procedure for a contract to be enforceable against the company, how must a lawyer advise the promoters of the company, liability on whom can be cast by law, especially if the company refuses to accept the contract? Proper drafting of the contract can eliminate the need for law to resolve the dispute. However, due to inadequate drafting, when law does come into picture, how is to one clarify the position of all the parties to the contract. The paper begins with probing who can be considered as a promoter. By a comparative analysis, the paper tries to trace the common law and provide answers. This paper attempts to examine the law regarding the enforceability of the contract, against the company by interpreting the section of the specific relief act. On the basis of common law, it attempts the answer on the question of promoter’s personal liability on a preincorporation contract. It answers the question, if the promoter can recover any reincorporation expenses from the company and from the co-promoters, if any. Drawing a distinction between a pre-incorporation contract and a contract by a company defectively incorporated, it concludes with some drafting suggestions for a preincorporation contract.