Preliminary Contracts
During the promotion of the company, promoters enter into certain contracts with third parties on behalf of the company. These are called preliminary contracts or pre-incorporation contracts. The preliminary contract is known in practice as a promise for conclusion of contract. It is important to remember that despite the title of the contract, its nature is determined by its terms, rather than its name.
These are not legally binding on the company. A company after coming into existence may, if it so chooses, decides to enter into fresh contracts with the same terms and conditions to honor the contracts made by the promoters. Note that it cannot ratify a preliminary contract. A company thus cannot be forced to honor a preliminary contract. Promoters, however, remain personally liable to third parties for these contracts. The purpose of the preliminary contract is to make a promise to conclude a final agreement in future. So the preliminary contract is essentially a legal promise.
