# Pre-Incorporation / Preliminary / Promoters' Contracts

A company comes into legal existence only on its incorporation (the date on the Certificate of Incorporation). Before that, the company is a non-existent entity — it has no legal personality and therefore no capacity to contract. Yet, business arrangements (purchasing premises, hiring consultants, ordering machinery) often need to be finalised even before incorporation, to give the company a running start.

Such contracts entered into by the promoter, on behalf of the proposed company, before its incorporation, are called Pre-Incorporation Contracts (also: Preliminary Contracts or Promoters' Contracts).

## The Core Legal Position

> A contract by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company, because at the time the contract was concluded, the company was not in existence.

Reason: A non-existent entity cannot be a party to a contract; principles of agency cannot apply because there is no principal in existence.

## Consequence — Personal Liability of Promoters

The promoters alone remain personally liable for any contract they purport to make on behalf of the company.

The other contracting party can sue the promoter personally.
The promoter cannot escape liability merely by saying he was acting on behalf of the (then non-existent) company.

## Escape Route — Adoption / Novation After Incorporation

A pre-incorporation contract can become binding on the company only if the company, after its incorporation, adopts the contract (typically by novation — i.e., a fresh contract on identical terms entered between the company and the third party, with the promoter released).

Mere ratification by the company is NOT enough — because ratification requires the principal to have been in existence at the time of the original act.
A fresh contract (novation) post-incorporation is the correct legal mechanism.

## Visual Summary

```

Promoter signs contract with X ─► Company incorporated

│ │

▼ ▼

Promoter personally liable Company NOT bound unless it

to X for the contract ADOPTS by way of fresh

contract (novation) with X

```

## Practical Tip

Promoters drafting pre-incorporation contracts often include a clause stating: "This contract shall be assigned to/novated in favour of [proposed company] upon its incorporation, and the promoter shall thereupon stand discharged." — This protects the promoter once the company comes into existence and adopts the contract.

Worked example

### Example 1

Example 1 — Personal Liability:

Mr. A, as promoter of a proposed company XYZ Ltd, signs a lease deed with Mr. B for office premises on 1st January 2026. XYZ Ltd is incorporated on 1st March 2026 but refuses to take over the lease. Mr. B sues. Can Mr. B sue XYZ Ltd?

Solution: No. The lease is a pre-incorporation contract. XYZ Ltd was not in existence on 1st January, and it has not adopted the contract post-incorporation. Mr. B can only sue Mr. A personally — the promoter remains personally liable.

### Example 2

Example 2 — Adoption:

Same facts. Suppose that after incorporation, XYZ Ltd enters into a fresh lease deed with Mr. B on the same terms. Now what?

Solution: This is a novation — a new contract between the existing company and Mr. B replaces the pre-incorporation contract. XYZ Ltd is now bound. Mr. A is discharged from personal liability (subject to terms of the novation).

⚠️ Common exam mistakes

Believing the company is bound automatically once incorporated — it is NOT, unless it adopts/novates.
Treating post-incorporation 'ratification' as legally equivalent to adoption — ratification requires the principal to exist at the time of the original act. For pre-incorporation contracts, novation (fresh contract) is required.
Assuming the promoter is discharged from liability merely because the company has been incorporated — discharge requires the company to step into his shoes through a fresh contract.

Reference:

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Pre-incorporation Contracts (Promoters' Contracts)

Worked example

⚠️ Common exam mistakes