Question

Mr. X is a promoter of a company. Before the company is fully incorporated, he enters into a contract on its behalf with a third party. Under the common law, would a valid contract exist and, if so, who would be the parties to the contract?

• A. No contract would exist.
• B. A contract would exist and it would be between the unformed company and the third party.
• C. A contract would exist and it would be between the X and the third party
• D. A contract would exist and it would be between X and the company

Answer 1

The correct option is C A contract would exist and it would be between the X and the third party

Preliminary contract are made before the formation of a company. For the formation of the company, the promoters are required to enter into various contracts with third parties e.g. purchasing some property or hiring the services of professions like lawyers, technicians, etc.

Company is not bound by pre-incorporation 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.