Saturday, November 20, 2010

Andhra Pradesh Tourism Development Corpn. Ltd. & Anr. Vs. M/s. Pampa Hotels Ltd.

http://courtnic.nic.in/supremecourt/temp/3272200752042010p.txt
 
ITEM NO.1A                     COURT NO.4                 SECTION XIIA
 
 
             S U P R E M E      C O U R T   O F    I N D I A
                             RECORD OF PROCEEDINGS
                        CIVIL APPEAL NO(s). 3272 OF 2007
 
 
 
ANDHRA PRADESH TOURISM DEV. COPRN.& ANR                       Appellant (s)
 
                     VERSUS
 
M/S PAMPA HOTELS LTD.                                         Respondent(s)
 
 
Date: 20/04/2010      This Appeal was called on for judgment today.
 
 
For Appellant(s)        Mr. T.V. Ratnam,Adv.
 
 
For Respondent(s)       Mr. G. Ramakrishna Prasad,Adv.
 
 
             Hon'ble Mr. Justice R.V. Raveendran pronounced the
     judgment   of    the     Bench   comprising   of   His   Lordship   and
     Hon'ble Mr. Justice H.L. Dattu.
 
                Appeal is disposed of in terms of the signed
       order.
 
 
 
        ( Ravi P. Verma )                    ( M.S. Negi )
           Court Master                       Court Master
        [Signed reportable judgment is placed on the file]
                                                           Reportable
 
                   IN THE SUPREME COURT OF INDIA
 
                     CIVIL APPELLATE JURISDICTION
 
                     CIVIL APPEAL NO.3272 OF 2007
 
 
Andhra Pradesh Tourism Development
Corpn. Ltd. & Anr.                                 ... Appellants
 
Vs.
 
M/s. Pampa Hotels Ltd.                             ... Respondent
 
 
 
                            J U D G M E N T
 
R.V.RAVEENDRAN, J.
 
 
        The respondent is a company incorporated on 9.4.2003 under     the   Companies   Act,    1956.   The   appellant   (Andhra Pradesh    Tourism    Development   Corporation    Ltd.,   for   short `APTDC') is a "government company" within the meaning of that expression in section 617 of the Companies Act, 1956.
 
 
 
2.      According to the respondent, the parties had entered
 
into two agreements in regard to a property known as Hill
 
View Guest House, Alipiri, Tirupathi, measuring 1.08 acres.
 
The first was a lease agreement under which APTDC granted a
 
lease of the said property to the respondent for a term of
 
33 years; and the second was a development and management
 
agreement under which APTDC entrusted to the respondent,
 
the development of a Three-Star Hotel in Hill View Guest
 
House    property on    construction, operation and management

basis.     According      to    the        respondent,        both   agreements
 
contained a provision for disputes resolution (clause 17 of
 
the   lease     agreement      and    Article      18    of    the   management
 
agreement) providing that in the event of disputes, best
 
efforts     shall    be     made      to      resolve     them       by     mutual
 
discussions, amicably; and in the event of the parties not
 
finding an acceptable solution to the disputes within 30
 
days (60 days in the case of management agreement), the
 
same shall be referred to arbitration in accordance with
 
the procedure specified in the Act.
 
 
 
3.    APTDC     claims      that      it     had     terminated       the       said
 
agreements on 21.4.2004 and took possession of the property
 
on 21.8.2004. The respondent filed Arbitration Application
 
No. 24/2005 in March, 2005 before the Andhra Pradesh High
 
Court under section 11 of the Arbitration and Conciliation
 
Act, 1996 [`Act' for short], alleging that certain disputes
 
had arisen between the parties in regard to the said Lease
 
Agreement and Management Agreement, and the parties could
 
not arrive at a mutually acceptable solution in respect of
 
those disputes. The respondent therefore sought appointment
 
of a sole arbitrator for adjudication of the disputes and
 
differences between the parties (respondent and APTDC) in
 
regard     to    lease    agreement          dated      30.3.2002         and    the
 
management      agreement dated 30.3.2002 entered between the
 
parties.

4.     APTDC resisted the application. One of the contentions
 
urged by APTDC was that there was no arbitration Agreement
 
between them and therefore the question of appointing an
 
Arbitrator under section 11 of the Act did not arise. It
 
was    pointed    out    that    according      to     the     respondent,     the
 
arbitration       agreement     came    into    existence        on    30.3.2002,
 
when parties executed the Lease Agreement and Management
 
Agreement on 30.3.2002 containing the arbitration clause;
 
that admittedly the respondent was not in existence on that
 
date, as it was incorporated more than a year thereafter
 
on 9.4.2003; and that when it is alleged that the parties
 
to the petition had entered into contracts which contained
 
arbitration agreements on 30.3.2002, and one of the parties
 
thereof     had not     even come into existence on that date,
 
obviously there was no contract much less any arbitration
 
agreement between the parties.
 
 
 
5.     The Designate of the Chief Justice of Andhra Pradesh
 
allowed     the    application      filed      by    the     respondent     under
 
Section     11    of    the   Act   by    order        dated    16.8.2005      and
 
appointed     a    retired      Judge    of    the     said    High    Court    as
 
Arbitrator, with the observation that the appellant herein
 
is entitled to raise all its pleas including the validity
 
of    the   arbitration       agreement       before    the     Arbitrator.     He
 
however      noticed      the     contention         that      there     was    no
 
arbitration agreement. He held that having regard to the

decisions    in    Konkan    Railway   Corporation        Ltd.    v.   Mehul
 
Construction      Co.   [2000   (7)   SCC   201]    and   Konkan    Railway
 
Corporation Ltd. v. Rani Construction Pvt. Ltd. [2002 (2)
 
SCC 388], he had only a limited administrative role under
 
section 11 of the Act, that is, to appoint the                    arbitrator
 
as per the agreed procedure, leaving all contentious issues
 
including whether there was any arbitration agreement or
 
not, to be decided by the Arbitrator. The said order is
 
challenged in this appeal by special leave.
 
 
 
6.    On   the    contentions     urged,    two    questions      arise   for
 
consideration:
 
(i) where the party seeking arbitration is a company which
was not in existence on the date of the signing of the
contract containing the arbitration agreement, whether it
can be said that there is an arbitration agreement between
the parties ?
 
(ii) whether the question as to the existence or validity
of   the arbitration        agreement, has to be decided by the
Chief Justice/Designate when considering the petition under
section 11 of the Act        or by the Arbitrator ?
 
 
Re : Question (i) :
 
 
7.    Section 7 of the Act defines an arbitration agreement.
 
Sub-section       (1)   thereof    provides       that    an     arbitration
 
agreement means an agreement           by the parties to submit to
 
arbitration all or certain disputes which have arisen or
 
which may arise between them in respect of a defined legal

relationship, whether contractual or not. Sub-section (2)
 
provides that an arbitration agreement may be in the form
 
of an arbitration clause in a contract or in the form of a
 
separate      agreement.       Sub-section      (3)        provides     that   an
 
arbitration agreement shall be in writing. Sub-section (4)
 
inter alia provides that an arbitration agreement is in
 
writing if it is contained in a document signed by the
 
parties. The specific and clear case of the respondent is
 
that the arbitration agreement between the parties, is in
 
writing     contained    in    the    Lease    Agreement      and     Management
 
Agreement signed by them on 30.3.2002.
 
 
 
8.    The     Lease    Agreement      was    made    on    30.3.2002     between
 
`APTDC'      (Lessor)    and    Pampa       Hotels    Ltd.     (Lessee).       The
 
opening      part   containing       the    description      of   the    parties
 
describes the lessee as follows:
 
 
          "M/S   Pampa    Hotels   Limited,    a  company
          incorporated   under the    provisions of   the
          Companies Act, 1956, and having its registered
          office at 209, T.P.Area, Tirupati through its
          Managing Director Sri S. Jayarama Chowdary
          hereinafter referred to as "Lessee", promoted
          inter alia for the purpose of implementing the
          project by M/s Sudalagunta Hotels Limited the
          successful bidder, of the other part."
 
 
 
Similarly the Management Agreement which was also made on
 
30.3.2002 between APTDC (the first party) and Pampa Hotels
 
Ltd   (the    second    party).      described       the    second    party    as
 
follows:
       "M/S Pampa Hotels Limited (promoted for the
       purpose of implementing the project by "the
       Bidder" Sudalagunta Hotels Limited) a company
       incorporated under the Companies Act, 1956,
       having its registered office at 209, T.P.Area,
       Tirupati represented by Sri S.Jayarama Chowdary,
       Managing Director (hereinafter referred to as
       "Company" which expression unless repugnant to
       the context or meaning thereto include its
       successors, administrators and assigns on the
       second part)."
 
 
 
It    is    not   disputed       that    both     the    agreements   contain   a
 
provision for arbitration. It is also not disputed that
 
both       of   them    were    signed     by     Mr.    C.Anjaneya   Reddy     as
 
Chairman of APTDC and Mr. S.Jayarama Chowdary as Managing
 
Director of Pampa Hotels Ltd.
 
 
 
9.     Pampa Hotels Ltd., (with the registered office at 209,
 
TP Area, Tirupati, Chittoor District, represented by its
 
Managing Director Shri Jayarama Chowdary), the applicant in
 
the    application            under     section     11     of   the   Act,    was
 
incorporated           only     on      9.4.2003.        The    certificate     of
 
registration issued by the Registrar of Companies shows the
 
date of its incorporation as 9.4.2003. Section 34(2) of the
 
Companies Act, provides that from the date of incorporation
 
mentioned in the certificate of incorporation, such of the
 
subscribers of the memorandum and other persons, as may
 
from time to time be members of the company, shall be a
 
body corporate by the name contained in the memorandum,
 
capable forthwith of exercising all the functions of an

incorporated        company.       Sub-section          (3)     of       section    149
 
provides       that      Registrar        shall,         on     the       filing    of
 
declaration/statement as stated therein, certify that the
 
company is entitled to commence business. Section 149(4) of
 
the Companies Act provides that any contract made by a
 
company (which is already registered) before the date at
 
which     it   is     entitled      to        commence        business      shall   be
 
provisional only, and shall not be binding on that company
 
until that date, and on that date it shall become binding.
 
A certificate under section 149(3) of the Act was issued by
 
the Registrar of Companies only on 6.6.2003 certifying that
 
respondent is entitled to commence business. It is thus
 
clear that the applicant in application under section 11 of
 
the Act was non-existent on 30.3.2002 when the arbitration
 
agreement was entered into.
 
 
 
10.     Section 7 of the Act as noticed above, defines an
 
arbitration agreement as an agreement by the parties to
 
submit    to   arbitration.         The       word    `party'       is    defined   in
 
section    2(h)     of      the   Act    as    a     party    to    an    arbitration
 
agreement. An agreement enforceable by law is a contract.
 
An    agreement       has    to   be    between        two     or    more    persons.
 
Therefore if one of the two parties to the arbitration
 
agreement was not in existence when the contract was made,
 
then obviously there was no contract and if there was no
 
contract, there is no question of a clause in such contract

being an arbitration agreement between the parties. The two
 
agreements        dated    30.3.2002      categorically        refer      to     Pampa
 
Hotels      Ltd.    as    an    existing       company     (promoted       for     the
 
purpose of implementing the project by Sudalagunta Hotels
 
Ltd.) incorporated under the provisions of the Companies
 
Act,    having      its    registered       office      at   209,       T.P.     Area,
 
Tirupati and represented by its Managing Director Sri S.
 
Jayarama Chowdary. The agreements are not entered by the
 
promoters of the company, but purportedly by the company
 
itself, represented by its Managing Director. Admittedly on
 
30.3.2002         there     was    no     such     company         in    existence.
 
Admittedly there was no such company having its registered
 
office       at    209,     T.P.       Area,     Tirupati     on        that     date.
 
Admittedly,        S.     Jayarama      Chowdary     was     not    the    Managing
 
Director of any company of that name on that date. When one
 
of    the    parties      to    the     Lease    Agreement     and       Management
 
Agreement, was a non-existent imaginary party, there is no
 
contract. This is not a case of one of the parties being in
 
existence, but being under some legal disability to enter
 
into contracts. This is a case where there was no `party'
 
at all, but someone claiming that there was an existing
 
company capable of entering into contracts.
 
 
 
11.    The    position         would    have     been    different,        had     the
 
agreement been entered by the promoters of the respondent
 
company before its incorporation for the purposes of the
 
company and such contract was warranted by the terms of

incorporation.         Section 15 of the Specific Relief Act, 1963
 
provides as follows:
 
       "Except as otherwise provided by this Chapter,
       the specific performance of a contract may be
       obtained by ­ x x x x x (h) when 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
       the incorporation, the company, provided that the
       company   has accepted the contract and has
       communicated such acceptance to the other party
       to the contract."
 
 
 
It is evident from section 15(h) of Specific Relief Act
 
that if the lease agreement and the management agreement
 
had   been    entered        into    by     the           promoters      of     the    company
 
stating that they are entering into the contract for the
 
purpose      of   the        company       to        be        incorporated,      in     their
 
capacity as promoters and that such contract is warranted
 
by    the   terms      of    the    incorporation                of    the    company,       the
 
agreement would have been valid; and the term regarding
 
arbitration       therein         could     have           been       enforced.       But    for
 
reasons best known to themselves, the agreement was entered
 
not by the promoters of Pampa Hotels Ltd., on behalf of a
 
company proposed to be incorporated                             by them, but by a non-
 
existing company claiming to be an existing company. This
 
clearly      shows      that       there        is        no     arbitration      agreement
 
between the respondent (applicant in the application under
 
section      11   of        the    Act)     and           APTDC       against    whom       such
 
agreement is sought to be enforced.

Re : Question (ii) :
 
 
12.     Let us next consider the question as to who should
 
decide     the      question         whether      there        is        an    existing
 
arbitration agreement or not. Should it be decided by the
 
Chief Justice or his Designate before making an appointment
 
under section 11 of the Act, or by the Arbitrator who is
 
appointed under section 11 of the Act? This question is no
 
longer    res    integra.       It   is    held    in    SBP    &    Co.      v.     Patel
 
Engineering Ltd. [2005 (8) SCC 618] and National Insurance
 
Co. Ltd. v. Boghara Polyfab Pvt. Ltd. [2009 (1) SCC 267]
 
that the question whether there is an arbitration agreement
 
and whether the party who has applied under section 11 of
 
the Act, is a party to such an agreement, is an issue which
 
is to be decided by the Chief Justice or his Designate
 
under     section       11     of    the    Act     before          appointing           an
 
arbitrator. Therefore there can be no doubt that the issue
 
ought to have been decided by the learned Designate of the
 
Chief     Justice      and     could      not     have    been       left       to      the
 
arbitrator.      But    as     noticed     above,       the    learned        Designate
 
proceeded on the basis that while acting under                                  section
 
11 of the Act, he was not acting under a judicial capacity
 
but only under an administrative capacity and therefore he
 
cannot    decide       these    contentious         issues.         He    did      so    by
 
following the two decisions in Konkan Railway (supra) which
 
were then holding the field.

13.   In   SBP   (supra),   a   seven-Judge   Bench   of   this    Court
 
overruled the two decisions in Konkan Railway. The decision
 
in SBP was rendered on 26.10.2005, a few weeks after the
 
impugned   decision   by    the   Designate   on   16.8.2005.     Having
 
regard to the fact that several decisions rendered under
 
section 11 of the Act had followed the decisions in Konkan
 
Railway, this court, when it rendered its decision in SBP,
 
resorted to prospective overruling by directing as follows:
 
 
      "(x) Since all were guided by the decision of
      this Court in Konkan Rly. Corpn. Ltd. v. Rani
      Construction (P) Ltd. [2002 (2) SCC 388] and
      orders under Section 11(6) of the Act have been
      made based on the position adopted in that
      decision,   we   clarify  that   appointments   of
      arbitrators or Arbitral Tribunals thus far made,
      are to be treated as valid, all objections being
      left to be decided under Section 16 of the Act.
      As and from this date, the position as adopted in
      this   judgment    will   govern    even   pending
      applications under Section 11(6) of the Act."
 
                                              (emphasis supplied)
 
This Court in Sarwan Kumar v. Madan Lal Aggarwal [2003 (4)
 
SCC 147] observed:
 
      "The doctrine of "prospective overruling" was
      initially made applicable to the matters arising
      under the Constitution but we understand the same
      has since been made applicable to the matters
      arising under the statutes as well. Under the
      doctrine of "prospective overruling" the law
      declared by the Court applies to the cases
      arising in future only and its applicability to
      the cases which have attained finality is saved
      because the repeal would otherwise work hardship
      to those who had trusted to its existence.
      Invocation    of    doctrine   of    "prospective
      overruling" is left to the discretion of the
      court to mould with the justice of the cause or
      the matter before the court."
                                                  (emphasis supplied)
 
 
 
14.    Learned counsel for the appellants contended that the
 
impugned      order    was    rendered    on   16.8.2005;   that       as   on
 
26.10.2005 when the decision in SBP was rendered, the time
 
for filing a special leave petition under Article 136 of
 
the Constitution had not expired; that the special leave
 
petition was filed by the appellant on 22.11.2005, which
 
has    been   entertained      by   granting    leave.   The     appellants
 
therefore contend that this appeal should be considered as
 
a continuation of the application under section 11 of the
 
Act or as pending matter to which the decision in SBP would
 
apply, even though the Designate had rendered the decision
 
on    16.8.2005.      The    appellants   submitted      that    a    pending
 
matter would refer not only to the original proceedings but
 
also    would    include      any   appeal     arising    therefrom         and
 
therefore any proceeding which has not attained finality is
 
a pending matter.
 
 
 
15.    What   the     appellants    contend,     would    have       been   the
 
position if there was a statutory provision for appeal and
 
SBP had directed that in view of prospective overruling of
 
Konkan Railwa,y pending matters will not be affected. But
 
sub-section (7) of Section 11 of the Act makes the decision
 
of the Chief Justice or his designate final. There is no
 
right of appeal against the decision under Section 11 of

the Act. Further, the seven Judge Bench in SBP issued the
 
categorical direction that appointment of Arbitrators made
 
till then are to be treated as valid and all objections are
 
to be left to be decided under Section 16 of the Act.
 
 
 
16.   On account of the prospective overruling direction in
 
SBP, any appointment of an arbitrator under Section 11 of
 
the Act made prior to 26.10.2005 has to be treated as valid
 
and all objections including the existence or validity of
 
the   arbitration     agreement,    have   to     be   decided   by   the
 
arbitrator under section 16 of the Act.            The legal position
 
enunciated in the judgment in SBP will govern only the
 
applications to be filed under Section 11 of the Act from
 
26.10.2005 as also the applications under section 11(6) of
 
the Act pending as on 26.10.2005 (where the Arbitrator was
 
not yet appointed). In view of this categorical direction
 
in SBP, it is not possible to accept the contention of the
 
appellant that this case should be treated as a pending
 
application.    In    fact   we   may   mention   that   in   Maharishi
 
Dayanand University v. Anand Coop. L/C Society Ltd. & Anr.
 
[2007 (5) SCC 295], this Court held that if any appointment
 
has been made        before 26.10.2005, that appointment has to
 
be treated as valid even if it is challenged before this
 
Court.
 
 
 
17.   In view of the above, we are not in a position to

accept the contention of the appellant. But the arbitrator
 
will have to decide the issue as to whether there is an
 
arbitration agreement, with reference to the legal position
 
explained by us in regard to the existence of arbitration
 
agreement. Though such an exercise by the arbitrator will
 
only be an academic exercise having regard to our decision
 
in this case, such an exercise becomes inevitable in view
 
of    the    peculiar    position       arising     out    of   the   specific
 
direction contained in para 47 (x) of the decision in SBP
 
and    the     subsequent         decision     in     Maharishi       Dayanand
 
University.
 
 
 
18.    We    accordingly          dispose     of    the     appeal      without
 
interfering with the appointment but with a direction to
 
the    Arbitrator       to   decide     the   issue    in    regard     to    the
 
existence/validity           of   the    arbitration        agreement    as     a
 
preliminary issue relating to jurisdiction in the light of
 
what has been stated above.
 
 
 
 
                                                          ................J.
                                                            (R V Raveendran)
 
 
 
New Delhi;                                                ................J.
April 20, 2010.                                                  (H L Dattu)