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.

"Leave to Defend" - Principles for Granting : The Law

Justice Beg

The Supreme Court in its landmark judgment, in M/s Mechalec Engineers and Manufactures v. M/s Basic Equipment Corporation (1977) 1 SCR 1060, has examined the principles which are to be considered while granting leave to defend in Summary Suits under the provisions of Order XXXVII of the Code of Civil Procedure, 1908. The Court has observed as under;

In Smt. Kiranmoyee Dassi & Anr. v. Dr. J. Chatterjee(1), Das. J., after a comprehensive review of authorities on the subject, stated the principles applicable to cases covered by order 17 C.P.C. in the form of the following propositions (at p. 253):

"(a) If the Defendant satisfies the Court that he has a good defence to the claim on its merits the plaintiff is not entitled to leave to sign judgment and the Defendant is entitled to unconditional leave to defend.

(b) If the Defendant raises a triable issue indicating that he has a fair or bona fide or reasonable defence although not a positively good defence the plaintiff is not entitled to sign judgment and the Defendant is entitled to unconditional leave to defend. 

(c) If the Defendant discloses such facts as may be deemed sufficient to entitle him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he has a defence, yet, shews such a state of facts as leads to the inference that at the trial of the action he may be able to establish a defence to the plaintiff's claim the Plaintiff is not entitled to judgment and the Defendant is entitled to leave to defend but in such a case the Court may in its discretion impose conditions as to the time or mode of trial but not as to payment into Court or furnishing security.

(d) If the Defendant has no defence or the defence set up is illusory or sham or practi- cally moonshine then ordinarily the Plaintiff is entitled to leave to sign judgment and the Defendant is not entitled to leave to defend. 

(e) If the Defendant has no defence or the defence is illusory or sham or practically moonshine then although ordinarily the Plaintiff is entitled to leave to sign judgment, the Court may protect the Plaintiff by only allowing the defence to proceed if the amount claimed is paid into Court or otherwise secured and give leave to the Defendant on such condition, and thereby show mercy to the Defendant by enabling him to try to prove a defence".

Specific Performance of Contracts : Concept of "Readiness and Willingness"

Justice Sathasivam

The Supreme Court, in M/S J.P.Builders & Anr. vs A.Ramadas Rao & Anr., has examined one of the most crucial aspects involved in a suit for specific performance. To succeed in a suit for specific performance the Plaintiff must show that he is ready and willing to perform the contract and that he has sufficient means to honour his obligations under the contract. Reiterating the aforesaid settled principles, the Supreme Court has observed as under;

Readiness and Willingness

8) Section 16(c) of the Specific Relief Act, 1963 provides for personal bars to relief. This provision states that specific performance of a contract cannot be enforced in favour of a person,

a) who would not be entitled to recover compensation for its breach; or

b) who has become incapable of performing, or violates any essential term of, the contract that on his part remains to be performed, or acts in fraud of the contract, or wilfully acts at variance with, or in subversion of, the relation intended to be established by the contract; or

c) who fails to aver and prove that he has performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than terms the performance of which has been prevented or waived by the defendant.

Explanation.- For the purposes of clause (c),- (i) where a contract involves the payment of money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in court any money except when so directed by the court; (ii) the plaintiff must aver performance of, or readiness and willingness to perform, the contract according to its true construction."

Among the three sub-sections, we are more concerned about sub-section(c). "Readiness and willingness" is enshrined in clause (c) which was not present in the old Act of 1877. However, it was later inserted with the recommendations of the 9th Law Commission's report. This clause provides that the person seeking specific performance must prove that he has performed or has been ready and willing to perform the essential terms of the contract which are to be performed by him.

9) The words "ready" and "willing" imply that the person was prepared to carry out the terms of the contact. The distinction between "readiness" and "willingness" is that the former refers to financial capacity and the latter to the conduct of the plaintiff wanting performance. Generally, readiness is backed by willingness.

10) In N.P. Thirugnanam vs. Dr. R. Jagan Mohan Rao & Ors., (1995) 5 SCC 115 at para 5, this Court held: ".....Section 16(c) of the Act envisages that plaintiff must plead and prove that he had performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than those terms the performance of which has been prevented or waived by the defendant. The continuous readiness and willingness on the part of the plaintiff is a condition precedent to grant the relief of specific performance. This circumstance is material and relevant and is required to be considered by the court while granting or refusing to grant the relief. If the plaintiff fails to either aver or prove the same, he must fail. To adjudge whether the plaintiff is ready and willing to perform his part of the contract, the court must take into consideration the conduct of the plaintiff prior and subsequent to the filing of the suit alongwith other attending circumstances. The amount of consideration which he has to pay to the defendant must of necessity be proved to be available. Right from the date of the execution till date of the decree he must prove that he is ready and has always been willing to perform his part of the contract. As stated, the factum of his readiness and willingness to perform his part of the contract is to be adjudged with reference to the conduct of the party and the attending circumstances. The court may infer from the facts and circumstances whether the plaintiff was always ready and willing to perform his part of the contract." 11) In P.D'Souza vs. Shondrilo Naidu, (2004) 6 SCC 649 paras 19 and 21, this Court observed:

"It is indisputable that in a suit for specific performance of contract the plaintiff must establish his readiness and willingness to perform his part of contract. The question as to whether the onus was discharged by the plaintiff or not will depend upon the facts and circumstance of each case. No strait-jacket formula can be laid down in this behalf.... The readiness and willingness on the part of the plaintiff to perform his part of contract would also depend upon the question as to whether the defendant did everything which was required of him to be done in terms of the agreement for sale."

12) Section 16(c) of the Specific Relief Act, 1963 mandates "readiness and willingness" on the part of the plaintiff and it is a condition precedent for obtaining relief of grant of specific performance. It is also clear that in a suit for specific performance, the plaintiff must allege and prove a continuous "readiness and willingness" to perform the contract on his part from the date of the contract. The onus is on the plaintiff. It has been rightly considered by this Court in R.C. Chandiok & Anr. vs. Chuni Lal Sabharwal & Ors., (1970) 3 SCC 140 that "readiness and willingness" cannot be treated as a straight jacket formula. This has to be determined from the entirety of the facts and circumstances relevant to the intention and conduct of the party concerned. It is settled law that even in the absence of specific plea by the opposite party, it is the mandate of the statute that plaintiff has to comply with Section 16(c) of the Specific Relief Act and when there is non- compliance with this statutory mandate, the Court is not bound to grant specific performance and is left with no other alternative but to dismiss the suit. It is also clear that readiness to perform must be established throughout the relevant points of time. "Readiness and willingness" to perform the part of the contract has to be determined/ascertained from the conduct of the parties.

Delhi Mosque Demolition : Contempt Petition against CM & Shahi Imam

Sheila Dikshit,
Chief Minister Delhi

Source : Times of India

The Jungpura Residents Welfare Association (RWA) on Saturday moved the Delhi High Court seeking initiation of contempt proceedings against chief minister Sheila Dikshit and Shahi Imam of Jama Masjid Syed Ahmed Bukhari for allegedly instigating people to trespass and offer prayers in a government land, retaken by DDA after razing an illegal mosque. The DDA action was done after court orders. 

Filing an application through counsel R K Saini, the Jangpura Residents Welfare Association (JRWA) also sought initiation of suo-motu contempt proceedings against Shoib Iqbal, MLA of Matia Mahal constituency, and Asif Mohd. Khan, MLA of Okhla Area, besides the CM and Shahi Imam of Jama Masjid. 

The RWA in its contempt plea alleged that the CM and Shahi Imam had "by their actions and words, scandalised and lowered the authority of the court, interfered with the due course of judicial process, interfered and obstructed the administration of justice and brought into disrepute the honour, majesty and authority of the law and the courts." 

According to the RWA, the structure was built "illegally" on DDA land which was earmarked for construction of a community centre. 

Acting on the Delhi high court order, the mosque was demolished by the housing body on Wednesday, leading to tension in the locality and the police had to use batons to disperse protesters who wanted to offer prayers at the site that day, the application said. 

Seeking dropping of contempt proceedings against it before the high court, DDA had on Friday filed a compliance report saying the illegal mosque had been demolished and it had repossessed its land. However, the same afternoon, prayers were offered there and the site is now being occupied continuously by about 100 persons at the instance of CM, Shahi Imam and other local politicians, which amounts to be an interference in administration of justice, the JRWA alleged. 

The contempt application is likely to be heard on Monday.