Andhra Pradesh Tourism Development Corpn. v. Pampa Hotels Ltd.

Court: Supreme Court of India

Date: 20 April 2010

Bench: RV Raveendran & HL Dattu, JJ.

Case: Civil Appeal No. 3272/ 2007

This case is a interesting for two reasons:

(a) it deals with the question as to whether an arbitration agreement is binding on a party which is a company, when it (the arbitration clause contained in a contract) was signed by a person who sought to represent the said company even before the said company was incorporated.

(b) In an application filed under S. 11 of the Arbitration and Conciliation Act, 1996 (Act) for the appointment of arbitrator prior to the decision of the 7 Bench Supreme Court in SBP & Co. v. Patel Engineering, whether, the designate (and thereafter the appellate court) should decide issue as to validity of the arbitration agreement or should leave such a question to the arbitral tribunal? 

Facts:

March 2002: Andhra Pradesh Tourism Development Corpn. (APTDC) and Pampa Hotels Ltd (Pampa) allegedly entered into two agreements, Lease Agreement (LA) and Development & Management Agreement (DMA), for a particular purpose. The two agreements contained arbitration clauses.

April 2003: Pampa was incorporated in terms of the Companies Act, 1956.

April 2004: Alleged termination and taking over possession of property that formed the subject matter of the said transaction by APTDC. Disputes arose between the parties.

March 2005: Pampa filed an application for appointment of arbitrators.

16.08.2005: Designate of the Chief Justice appointed an arbitrator in terms of Section 11 of the Act.

26.10.2005: A 7 Bench Supreme Court, in SBP & Co. v. Patel Engineering, overruling the law as it stood then, held, inter alia, that issues regarding the validity of arbitration agreements raised in applications for appointment of arbitrator under Section 11 ought to be decided finally by the Chief Justice or his designate under Section 11 and such a decision will be binding on the parties and the arbitral tribunal.

22.11.2005: A Special Leave Petition was filed by APTDC challenging the decision of the said designate.

Questions before the Court:

Two questions were raised before the court:

(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 ?

Decision and Comment:

On the first question, the court held that since Pampa was incorporated in 2003, a year after the two agreements were signed, there was no contract, let alone an arbitration agreement between Pampa and APTDC. Hence, the court held that Pampa had not become a legal entity at the time of signing of the agreements and hence the arbitration agreement is not binding on Pampa.

On the second question, the court correctly pointed out that the same was answered by a seven bench Supreme Court in SBP & Co. v. Patel Engineering (SBP). However, since the order for appointment of the arbitral tribunal was made prior to SBP on the basis of the law as it was existing then (as per Konkan Railway v. Mehul Construction and Konkan Railway v. Rani Construction, the court cited SBP [para 46(xi) of SBP] where it was held that SBP would not affect appointments made prior to SBP and the decision would prospectively apply to future applications and would apply to pending applications. In view of the same, the court came to the conclusion that in the instant case, since the appointment was made prior to the decision in SBP, the appointment was final and valid, and could not be challenged under Article 136 of the Constitution of India.

The Supreme Court in this case was right when it said that APTDC could not challenge the appointment in view of the law as it stood prior to SBP. The law on this aspect prior to SBP was that questions regarding the validity of arbitration agreement could only be taken before the arbitral tribunal and not before the appointing court under Section 11 of the Act. (see Food Corporation of India v. Indian Council for Arbitration, Konkan Railway v. Mehul Construction and Konkan Railway v. Rani Construction).

Having identified the correct law that the court could not decide on the validity of arbitration agreement, why did the court decide the first question?  The court  unnecessarily hijacked the jurisdiction of the arbitral tribunal. The court should have ideally held that it did not have the jurisdiction to interfere and should have left it to the tribunal to decide the issue as to validity of the arbitration agreement. Instead the court held that the arbitrator would have to decide on the question on the basis of the decision of the court and such a decision would only be an academic exercise. In fact, deciding on such a question was considered by the Supreme Court in Maharshi Dayanand University v. Anand Co-op. [AIR 2007 SC 2441: (2007) 5 SCC 295] as unnecessary and improper ("We think that in the circumstances, this is a question that must be left to be decided by the arbitrator, since in terms of Section 16 of the Act the question can be raised before the arbitrator. Considering that we are dealing with the pre S.B.P. & Company (supra) dispensation, we do not think that it is necessary or proper for us to go into that question and decide the same in these proceedings"). Having cited Maharshi Dayanand University, I wonder why the court went ahead and decided on the issue relating to validity of the arbitration agreement.

Though the decision is not clear, the court seems to have cited Sarwan Kumar v. ML Aggarwal for supporting its case. However, in Sarwan Kumar, the Supreme Court seems to have only said that a court could invoke (that is, resort to) the doctrine of prospective overruling in its discretion when justice requires so. Sarwan Kumar does not support the stand of the supreme court to decide a matter when the statute had clearly allocated the jurisdiction to somebody else. This is not judicial activism, this is judicial hijacking!