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Andhra Pradesh Tourism Development Corporation Limited And Another v. Pampa Hotels Limited .
Factual and Procedural Background
The respondent, Pampa Hotels Ltd., was incorporated on 9 April 2003. Prior to its incorporation, two documents dated 30 March 2002 were executed in the name of “Pampa Hotels Ltd.” and the appellant, Andhra Pradesh Tourism Development Corporation Ltd. (“A.P TDC”): (i) a 33-year lease for “Hill View Guest House” at Tirupathi and (ii) a development and management agreement to construct and operate a three-star hotel on the site. Both documents contained arbitration clauses.
A.P TDC terminated the agreements on 21 April 2004 and repossessed the property on 21 August 2004. In March 2005 the respondent filed Arbitration Application No. 24 of 2005 before the Andhra Pradesh High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of a sole arbitrator. A.P TDC opposed, arguing that no arbitration agreement existed because the respondent was not yet incorporated when the documents were signed.
On 16 August 2005 the Designate of the Chief Justice of the High Court appointed a retired Judge as arbitrator, holding—on the strength of the two Konkan Railway decisions—that the issue of the agreement’s validity should be left to the arbitrator. A.P TDC obtained special leave to appeal to the Supreme Court.
Legal Issues Presented
- Whether an arbitration clause can bind parties when the company seeking arbitration did not legally exist on the date the contract containing the clause was signed.
- Whether the existence or validity of an arbitration agreement should be decided by the Chief Justice/designate in a Section 11 proceeding or left to the arbitrator.
Arguments of the Parties
Appellant (A.P TDC)
- No arbitration agreement exists because the respondent company was not incorporated on 30 March 2002, the date of the agreements, making the contracts—and their arbitration clauses—non-existent in law.
- Consequently, the Chief Justice/designate ought to have dismissed the Section 11 application instead of appointing an arbitrator.
Respondent (Pampa Hotels Ltd.)
- Disputes had arisen under the 2002 lease and management agreements, both of which contained valid arbitration clauses.
- Under the then-prevailing Konkan Railway jurisprudence, the Chief Justice/designate’s role was limited to appointing an arbitrator, leaving all objections to the arbitrator.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Konkan Railway Corpn. Ltd. v. Mehul Construction Co. (2000) 7 SCC 201 |
Chief Justice’s role under Section 11 is administrative; contentious issues reserved for arbitrator. | Relied upon by the High Court designate to appoint an arbitrator without deciding the existence of an arbitration agreement. |
| Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd. (2002) 2 SCC 388 |
Same administrative-role principle as above. | Also followed by the High Court designate; later overruled in SBP. |
| SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618 |
Chief Justice/designate acts judicially and must decide existence of arbitration agreement; overruling of Konkan Railway; prospective overruling clause effective 26-10-2005. | Supreme Court notes that because the arbitrator was appointed before 26-10-2005, the appointment stands but the arbitrator must decide jurisdictional objections under Section 16. |
| National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009) 1 SCC 267 |
Reaffirmation that the Chief Justice/designate should decide if an arbitration agreement exists. | Cited to reinforce the principle stated in SBP. |
| Sarwan Kumar v. Madan Lal Aggarwal (2003) 4 SCC 147 |
Explained doctrine of prospective overruling and its discretionary use by courts. | Quoted to contextualise the prospective-overruling direction in SBP. |
| Maharshi Dayanand University v. Anand Coop. L/C Society Ltd. (2007) 5 SCC 295 |
Appointments of arbitrators made before 26-10-2005 remain valid even if challenged later. | Used to support the conclusion that the existing appointment cannot be disturbed. |
Court's Reasoning and Analysis
On Issue (i): Existence of Arbitration Agreement. The Court analysed Section 7 of the Arbitration and Conciliation Act, 1996, which requires an agreement “between the parties.” It noted that Pampa Hotels Ltd. was incorporated on 9 April 2003, long after the 30 March 2002 agreements. By combining Sections 34(2) and 149 of the Companies Act, 1956, the Court reasoned that a company gains contractual capacity only upon incorporation and entitlement to commence business. Because the respondent did not legally exist on 30 March 2002, no valid contract—and hence no arbitration agreement—could have come into being. Section 15(h) of the Specific Relief Act, 1963 was quoted to show that promoters may bind a future company only if they contract in that capacity, which was not done here.
On Issue (ii): Who Decides the Existence of the Agreement. Citing SBP and Boghara Polyfab, the Court affirmed that the Chief Justice/designate must decide the existence of an arbitration agreement. However, SBP prospectively overruled the Konkan Railway line only from 26 October 2005 onward. Since the arbitrator in this case was appointed on 16 August 2005—prior to that cut-off—the appointment remains “final” under Section 11(7) and paragraph 47(x) of SBP. Therefore, objections must be decided by the arbitrator under Section 16.
The Court rejected the appellant’s plea to treat the matter as “pending” so as to invoke the post-SBP regime, emphasising that Section 11 orders are final and not subject to appeal, and that Maharshi Dayanand University confirmed the validity of pre-26-10-2005 appointments even when challenged in the Supreme Court.
Holding and Implications
DISPOSED OF – The Supreme Court declined to set aside the appointment of the arbitrator made on 16 August 2005 but directed the arbitrator to decide, as a preliminary question of jurisdiction, whether a valid arbitration agreement exists between the parties.
Implications: The parties must proceed before the already-appointed arbitrator, who will first rule on the validity of the arbitration agreement. The decision clarifies the interplay between the prospective-overruling clause in SBP and appointments made before 26 October 2005 but sets no new substantive precedent beyond reinforcing existing principles.
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 “A.P TDC”) 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 A.P TDC 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 A.P TDC entrusted to the respondent, the development of a three-star hotel in Hill View Guest House property on construction, operation and management basis.
3. 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.
4. A.P TDC 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 of 2005 in March 2005 before the Andhra Pradesh High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (“the 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 (the respondent and A.P TDC) in regard to the lease agreement dated 30-3-2002 and the management agreement dated 30-3-2002 entered between the parties.
5. A.P TDC resisted the application. One of the contentions urged by A.P TDC 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 the 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.
6. 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 Corpn. Ltd. v. Mehul Construction Co. (2000) 7 SCC 201 and Konkan Railway Corpn. Ltd. v. Rani Construction (P) 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.
7. 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)
8. 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.
9. The lease agreement was made on 30-3-2002 between A.P TDC (lessor) and Pampa Hotels Ltd. (lessee). The opening part containing the description of the parties describes the lessee as follows:
“M/s Pampa Hotels Ltd., a Company incorporated under the provisions of the Companies Act, 1956, and having its registered office at 209, T.P Area, Tirupathi through its Managing Director Shri S. Jayarama Chowdary, hereinafter referred to as ‘lessee’, promoted inter alia for the purpose of implementing the project by M/s Sudalagunta Hotels Ltd. the successful bidder, of the other part.”
10. Similarly the management agreement which was also made on 30-3-2002 between A.P TDC (the first party) and Pampa Hotels Ltd. (the second party), described the second party as follows:
“M/s Pampa Hotels Ltd. (promoted for the purpose of implementing the project by ‘the bidder’, Sudalagunta Hotels Ltd.) a Company incorporated under the Companies Act, 1956, having its registered office at 209, T.P Area, Tirupathi represented by Shri S. Jayarama Chowdary, Managing Director (hereinafter referred to as ‘the Company’ which expression unless repugnant to the context or meaning thereto includes its successors, administrators and assigns on the second part).”
11. 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 the Chairman of A.P TDC and Mr S. Jayarama Chowdary as the Managing Director of Pampa Hotels Ltd.
12. Pampa Hotels Ltd. (with the registered office at 209, T.P Area, Tirupathi, 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.
13. 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.
14. Sub-section (3) of Section 149 provides that the 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.
15. A certificate under Section 149(3) of the Act was issued by the Registrar of Companies only on 6-6-2003 certifying that the respondent is entitled to commence business. It is thus clear that the applicant in the application under Section 11 of the Act was non-existent on 30-3-2002 when the arbitration agreement was entered into.
16. 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(1)(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.
17. 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, Tirupathi and represented by its Managing Director Shri 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, Tirupathi 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.
18. 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. The position would have been different, had the agreement been entered into 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.
19. Section 15 of the Specific Relief Act, 1963 provides as follows:
“15. Who may obtain specific performance.—Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by—
(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.”
(emphasis supplied)
20. It is evident from Section 15(h) of the 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 A.P TDC against whom such agreement is sought to be enforced.
Re: Question (ii)
21. 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.
22. It is held in SBP & Co. v. Patel Engg. Ltd. (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (P) 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.
23. 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 (2000) 7 SCC 201, (2002) 2 SCC 388 which were then holding the field.
24. In SBP (2005) 8 SCC 618, a seven-Judge Bench of this Court overruled the two decisions in Konkan Railway (2000) 7 SCC 201, (2002) 2 SCC 388. The decision in SBP (2005) 8 SCC 618 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 (2000) 7 SCC 201, (2002) 2 SCC 388, this Court, when it rendered its decision in SBP (2005) 8 SCC 618, resorted to prospective overruling by directing as follows: (SBP case (2005) 8 SCC 618)
“(x) Since all were guided by the decision of this Court in Konkan Railway 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)
25. This Court in Sarwan Kumar v. Madan Lal Aggarwal (2003) 4 SCC 147 observed:
“15. … 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 on those who had trusted to its existence. Invocation of the 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)
26. 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 (2005) 8 SCC 618 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 (2005) 8 SCC 618 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.
27. What the appellants contend, would have been the position if there was a statutory provision for appeal and SBP (2005) 8 SCC 618 had directed that in view of prospective overruling of Konkan Railway (2000) 7 SCC 201, (2002) 2 SCC 388 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 (2005) 8 SCC 618 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.
28. On account of the prospective overruling direction in SBP (2005) 8 SCC 618, 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 (2005) 8 SCC 618 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).
29. In view of this categorical direction in SBP (2005) 8 SCC 618, 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 Maharshi Dayanand University v. Anand Coop. L/C Society Ltd. (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.
30*. 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 (2005) 8 SCC 618 and the subsequent decision in Maharshi Dayanand University (2007) 5 SCC 295.
31. 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.
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