Legal Ramifications of Pre-Incorporation Contracts
The process of establishing a company often involves the active participation of individuals known as Promoters, who frequently engage in contracts on the company’s behalf. These contracts, executed prior to the formal incorporation of the company, are commonly referred to as Pre-incorporation Contracts. The legality and enforceability of such contracts are contingent upon the company’s acceptance or adoption of these agreements.
For example, let us consider a scenario in which a group of promoters intends to establish a real estate development company. Before the company attains its official corporate status, these promoters negotiate with a construction firm to initiate a development project. The contracts arising from these negotiations will only become enforceable under the law if the company subsequently acknowledges and adopts these pre-incorporation contracts.
A fiduciary relationship in Indian law is a position of trust. It’s like when you rely on someone, like a friend or a lawyer, to make decisions that benefit you. In this special trust, that person has a legal duty to always prioritise your interests, even above their own. This duty ensures they act honestly and selflessly, and if they don’t, they can face legal consequences.
Promoters who enter into Pre-incorporation contracts on behalf of a company that is yet to be formally established assume personal liability for these contractual agreements. In practical terms, this means that if, for any reason, the company fails to fulfill its contractual obligations, the promoters themselves bear the legal responsibility for ensuring that the terms of the contract are met. They may be held individually accountable for upholding the contractual obligations.
For instance, let us contemplate a situation where promoters of an emerging technology startup engage a software developer to create a proprietary application before the company attains official registration. In the event following incorporation, the company encounters difficulties in meeting its commitments to the software developer, the promoters may become personally liable for the fulfillment of the contractual terms.
Proprietary application refers to a software application or computer program that is owned and controlled by a specific entity or organization, typically a company or individual.