What is a Preliminary Contract? State its legal position. Can a company ratify such contracts?
Preliminary Contract or Pin-corporation Contracts: During promotion of the company, the promoters of the company enter into various contracts with third parties e.g. purchasing some property or hiring the services of professions like lawyers, technicians, etc. Legally, such contracts are not binding on the company after it is incorporated.
All such contracts which are entered into by the promoter’s before incorporation of the company are called Preliminary Contracts Company can neither sue nor it can be sued on the basis of such contracts because the company was not a party to such contracts. A company cannot even ratify or adopt such contracts to get the benefit of such contracts.
Features of Preliminary Contracts
- These contracts are entered into by the promoters on behalf of, the company which is yet to be incorporated.
- Company is not bound by pin-corporation contracts.
- Company cannot sue on the basis of such contracts.
- Promoters, themselves, remain personally liable on all such contracts, unless a new contract on the same terms as that of the old one is made by the company after incorporation.
- Company, after its incorporation, cannot even ratify such contracts.
- Specific performance of such contracts can be enforced by other parties against the company if such contracts are for the purposes of the company and are warranted by the terms of incorporation of the company. This is so provided under the provisions of Specific Relief Act, 1963. For this, company has to adopt such contracts in writing after its incorporation and communicate such acceptance to the other party to the contract.
However, whether a contract is for the purposes of the company depends upon the facts of each case.