Comment on the following statements : Contracts made before the incorporation of the company cannot bind the company.

The above statement is partially correct. Although a contract made before the company's incorporation cannot bind the company, it is not wholly denied of legal effect. It takes effect as a personal contract with the persons who purport to contract on the company's behalf and they are liable to pay damages for failure to perform the promises made in the company's name, even though the contract expressly provides that only the company's paid-up capital shall be answerable for performance. Preliminary contracts are contracts purported to be made on behalf of a company before its incorporation. Before incorporation, a company is non-existent and has no capacity to contract. Consequently, nobody can contract as agent on its behalf because an act which cannot be done by the principal himself cannot be done by him through an agent. Hence, 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. Therefore, it has no legal existence. Even if the parties act on the contract it will not bind the company. [Northumberland Avenue Hotel Co., (1886) 33 Ch.D. 16 (CA)]. Further even after incorporation such a purported contract cannot be ratified by the company [Kelner v. Baxter (1866) L.R. 2C.P. 174]. The persons purporting to act as agents on behalf of the company would be personally liable. Even if the company takes some benefit from a contract purported to have been made before its formation, the contract is not binding on the company. The promoters alone, therefore, remain personally liable for any contract they purport to make on behalf of the company, unless the company enters into the contract in terms of such agreement after incorporation. A company cannot ratify a pre-incorporation contract, but it is open to it to enter into a new co its incorporation to give effect to a contract made before its formation [Howard v. Patent Ivory Co. (1888) 38 Ch.D]. Since the pre-incorporation contract is a nullity, even the company cannot sue the vendor of property if he fails to carry out such a contract. In India, however, Sections 15 and 19 of the Specific Relief Act, 1963 have considerably alleviated the difficulty. Section 15(h) provides that where the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of incorporation, the company may, if it has accepted the contract, and has communicated such acceptance to the other party to the contract, obtain specific performance of the contract. Under Section 19(e) under similar circumstances, specific performance may be enforced against the company by the other party to the contract.