Section 15(h): Pre-Incorporation Contracts and Who May Enforce Them

Section 15 lists the persons who may obtain specific performance of a contract. Most of its clauses are intuitive: a party to the contract, his representative in interest, a beneficiary. Clause (h) is the one that catches candidates out, because it deals with a paradox: how can a company enforce a contract made before the company existed? The answer lies in two conditions. This note explains clause (h), the logic of pre-incorporation contracts, and the two conditions the company must satisfy.

Figure: The path a promoters' pre-incorporation contract must travel before the company may enforce it under Section 15(h)

1. The Setting: Who May Obtain Specific Performance

Section 15 answers the question of standing: who is entitled to sue for specific performance. The obvious candidates are a party to the contract and his representative in interest or principal, subject to the personal-qualification proviso. The section then extends standing to certain others, including a beneficiary under a settlement, a remainderman, a reversioner, and, in clauses dealing with amalgamation and promotion, to companies in special situations. Clause (h) is one of these special extensions.

2. The Problem of the Pre-Incorporation Contract

3. The Two Conditions of Clause (h)

Section 15(h) closes the gap, but only where two conditions are satisfied. First, the contract must have been entered into by the promoters before the company was incorporated and the terms must be warranted by the terms of the incorporation, that is, the contract must fall within the objects for which the company was formed. Second, the company must have accepted the contract and communicated that acceptance to the other party to the contract. Only when both conditions are met does the company become a person who may obtain specific performance of the contract.

4. A Worked Example

Suppose the promoters of a proposed manufacturing company, before it is incorporated, contract with a landowner to buy a factory site for the company. The company is later incorporated with objects that include acquiring premises for manufacture. If the company, once born, accepts that purchase contract and communicates its acceptance to the landowner, it may sue the landowner for specific performance under Section 15(h), even though it was no party to the original bargain. But if the purchase were of something wholly outside the company's objects, or if the company never communicated its acceptance to the landowner, clause (h) would not apply, and the company would remain a stranger to the contract, unable to enforce it.

5. Frequently Asked Questions

Q. What does Section 15(h) deal with?
A. The right of a company to obtain specific performance of a contract entered into by its promoters before the company was incorporated, that is, a pre-incorporation contract.

Q. What are the two conditions the company must satisfy?
A. First, the contract must be warranted by the terms of the incorporation, that is, within the company's objects. Second, the company must have accepted the contract and communicated that acceptance to the other party.

Q. Is the company's internal acceptance enough?
A. No. Acceptance must be communicated to the other party to the contract. An acceptance the company keeps to itself does not satisfy clause (h).

Q. What happens if the contract falls outside the company's objects?
A. Clause (h) does not apply. A pre-incorporation contract outside the objects for which the company was formed cannot be adopted and enforced under this clause.