Legal Blog: Validity of Contracts by Unincorporated Companies : The Law

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Monday, January 17, 2011

Validity of Contracts by Unincorporated Companies : The Law

Justice Raveendran
The Supreme Court in Andhra Pradesh Tourism Development Corporation v Pampa Hotels Ltd. has held that an unincorporated company cannot not enter into a contract before its incorporation. The Supreme Court has examined the validity of such pre-incorporation contracts and there effects, on the rights and liabilities of parties. The Supreme Court, inter alia, held as under;

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 (i) 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.

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