2010 (4) TMI 613 - SC - Companies Law

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 ? 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 ? 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 ?

Summary

Issues Involved:
1. Existence of an arbitration agreement between the parties.
2. Authority to decide the existence or validity of the arbitration agreement.

Detailed Analysis:

Issue 1: Existence of an Arbitration Agreement

The core issue was whether an arbitration agreement existed between the parties, given that the respondent company was not in existence on the date the agreements were signed.

Section 7 of the Arbitration and Conciliation Act, 1996 defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or may arise between them. The agreements in question were signed on 30-3-2002, but the respondent company was incorporated only on 9-4-2003. The agreements described the lessee as "M/s. Pampa Hotels Ltd., a company incorporated under the provisions of the Companies Act, 1956," which was factually incorrect as the company was non-existent at that time.

The court observed that an agreement enforceable by law is a contract, which must be between two or more persons. Since one of the parties (the respondent company) was not in existence when the contracts were made, there was no valid contract, and consequently, no arbitration agreement. The agreements were purportedly entered into by a non-existing company, making them void.

However, had the agreements been entered into by the promoters of the respondent company for the purposes of the company and warranted by the terms of incorporation, the contracts could have been valid under Section 15(h) of the Specific Relief Act, 1963. But this was not the case here, as the agreements were entered into by a non-existent company, not by its promoters.

Issue 2: Authority to Decide the Existence or Validity of the Arbitration Agreement

The second issue was whether the question of the existence or validity of the arbitration agreement should be decided by the Chief Justice/designate when considering the petition under Section 11 of the Act or by the arbitrator.

The court referred to the judgments 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, which established that the Chief Justice or his designate must decide whether there is an arbitration agreement before appointing an arbitrator under Section 11 of the Act. The designate of the Chief Justice of Andhra Pradesh, however, had followed the decisions in Konkan Railway Corpn. Ltd. v. Mehul Construction Co. [2000] 7 SCC 2011 and Konkan Railway Corpn. Ltd. v. Rani Construction (P.) Ltd. [2002] 2 SCC 388, which were later overruled by the seven-Judge Bench in SBP & Co.'s case.

The court noted that the decision in SBP & Co.'s case was rendered on October 26, 2005, after the designate's decision on August 16, 2005. The court in SBP & Co.'s case had directed prospective overruling, meaning that appointments of arbitrators made based on the earlier decisions would be treated as valid, with all objections to be decided under Section 16 of the Act.

Given this prospective overruling, the court concluded that any appointment of an arbitrator made before October 26, 2005, must be treated as valid, and all objections, including the existence or validity of the arbitration agreement, should be decided by the arbitrator. This was reaffirmed in Maharshi Dayanand University v. Anand Co-op. L/C Society Ltd. [2007] 5 SCC 295.

Conclusion:

The court disposed of the appeal without interfering with the appointment of the arbitrator but directed the arbitrator to decide the issue of the existence/validity of the arbitration agreement as a preliminary issue. This decision was necessitated by the specific direction in SBP & Co.'s case and the subsequent decision in Maharshi Dayanand University's case.