1. State enactment to cancel arbitration clauses and reopen awards in specific government project agreements — Challenge to legislative competence and encroachment on judicial power. (Para 1 , 2 , 3 , 4 )
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2022 Supreme(SC) 405
SUPREME COURT OF INDIA
L. NAGESWARA RAO, B.R. GAVAI, JJ.
The Secretary to Govt. of Kerala, Irrigation Department & Ors. – appellants
VERSUS
James Varghese & Ors. – Respondents
Civil Appeal Nos. 6258 OF 2014 With 9236, 9241, 9226, 6268, 6264, 6265, 6266, 6260, 6262, 6259, 6267, 6261, 8995, 9022, 9016, 9005, 8998, 9009, 8997, 9002, 8996, 8999, 9007, 9004, 9003, 9008, 9017, 9000, 9001, 9215, 9213, 9018, 9217, 9006, 9019, 9219, 9237, 9225, 9221, 9238, 9023, 9243, 9244, 9224, 9212, 9211, 9222, 9020, 9210 & 9239 of 2014 With Civil Appeal No. 295 of 2015 with Civil Appeal No. 3010 of 2017 and Civil Appeal Nos. 2824, 2825 & 2826 of 2022
Decided On : 04-05-2022
Advocates appeared:
For the parties:Nishe Rajen Shonker, Jogy Scaria, G. Prakash, Jaideep Gupta, Mr. Pallav Sisodia, C. K. Sasi, Sudha Gupta, Rajesh P., C.N. Sreekumar, Prakash Ranjan Nayak, P. I. Jose, K. V. Mohan, Krishnan Venugopal, Haripriya Padmanabhan, Kuriakose Varghese, V. Shyamohan, Surya Prakash, Akshat Gogna, Astu Khandelwal, Siddharth, Mohammed Sadique T.A., Anu K.Joy, Alim Anvar, Abraham C.Mathews, Merry S.Mathew, Hitesh Kumar, Akhileshwar Jha, K.M.Kavitha, Sanand Ramakrishnan, John Mathew, Aljo K.Joseph, Shelna K., Ritesh Kumar Chowdhary, Rabin Majumder, Roy Abraham, Himinder Lal, Prashanto Chandra Sen, M/S.KMNP Law, Advocates
For the parties:Nishe Rajen Shonker, Jogy Scaria, G. Prakash, Jaideep Gupta, Mr. Pallav Sisodia, C. K. Sasi, Sudha Gupta, Rajesh P., C.N. Sreekumar, Prakash Ranjan Nayak, P. I. Jose, K. V. Mohan, Krishnan Venugopal, Haripriya Padmanabhan, Kuriakose Varghese, V. Shyamohan, Surya Prakash, Akshat Gogna, Astu Khandelwal, Siddharth, Mohammed Sadique T.A., Anu K.Joy, Alim Anvar, Abraham C.Mathews, Merry S.Mathew, Hitesh Kumar, Akhileshwar Jha, K.M.Kavitha, Sanand Ramakrishnan, John Mathew, Aljo K.Joseph, Shelna K., Ritesh Kumar Chowdhary, Rabin Majumder, Roy Abraham, Himinder Lal, Prashanto Chandra Sen, M/S.KMNP Law, Advocates
Important Points
The State Act, while within the legislative competence of the State Legislature under Entry 13, List III, is unconstitutional because it encroaches upon the judicial power of the State by annulling arbitration awards made 'Rules of Court,' thereby violating the doctrine of separation of powers.
Subject
Constitutional Law - Legislative Competence
Act Referred
ARBITRATION ACT: S.20, S.34, S.46, S.39, S.15, S.16, S.30, S.17
ARBITRATION AND CONCILIATION ACT: S.34, S.8, S.11, S.85, S.2
CIVIL PROCEDURE CODE: S.9
Commercial Courts Act: S.2(c)
COMPANIES ACT: S.111, S.155
CONSTITUTION OF INDIA: Art.254(2), Art.253, Art.73(1)(b), Entry.37, List.I, Art.292, Art.14, Art.300(a), Art.13(2), Art.245, Art.246, Art.250, Art.251, Art.252, Art.249, Entry.13, Sch.VII, Art.136, Art.141, Art.309, Art.16
INCOME TAX ACT: S.54
KERALA REVOCATION OF ARBITRATION CLAUSES AND REOPENING OF AWARDS ACT: S.3, S.4, S.5, S.6, S.8
PRINCIPAL ACT: S.17
ARBITRATION AND CONCILIATION ACT: S.34, S.8, S.11, S.85, S.2
CIVIL PROCEDURE CODE: S.9
Commercial Courts Act: S.2(c)
COMPANIES ACT: S.111, S.155
CONSTITUTION OF INDIA: Art.254(2), Art.253, Art.73(1)(b), Entry.37, List.I, Art.292, Art.14, Art.300(a), Art.13(2), Art.245, Art.246, Art.250, Art.251, Art.252, Art.249, Entry.13, Sch.VII, Art.136, Art.141, Art.309, Art.16
INCOME TAX ACT: S.54
KERALA REVOCATION OF ARBITRATION CLAUSES AND REOPENING OF AWARDS ACT: S.3, S.4, S.5, S.6, S.8
PRINCIPAL ACT: S.17
Headnote
(A) Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 - Legislative competence - The Act annulled arbitration clauses and challenged judicial powers, hence declared unconstitutional as it infringes on separation of powers and legislative boundaries. (Paras 1, 87, 128)
(B) Separation of powers - Legislative power cannot encroach on judicial functions, impacting previously settled legal rights. (Para 121)
(C) Public interest - The state's interest cannot justify a violation of constitutional principles. (Para 124)
Facts of the case:
The Kerala State Legislature enacted the State Act to revoke arbitration clauses in the context of the Kallada Irrigation Project following perceived misconduct by arbitrators. The High Court deemed it unconstitutional, leading to appeals.
Findings of Court:
The Act, intended to serve public interest, was found to undermine judicial authority and infringe on rights accrued from existing awards and decisions.
Issues: The key issues included the legislative competence of the State Act and its implications for judicial authority.
Ratio Decidendi: The Supreme Court ruled that the Act's encroachment on judicial power violated constitutional norms, ultimately declaring it unconstitutional.
Result: Appeals dismissed, State Act struck down.
(B) Separation of powers - Legislative power cannot encroach on judicial functions, impacting previously settled legal rights. (Para 121)
(C) Public interest - The state's interest cannot justify a violation of constitutional principles. (Para 124)
Facts of the case:
The Kerala State Legislature enacted the State Act to revoke arbitration clauses in the context of the Kallada Irrigation Project following perceived misconduct by arbitrators. The High Court deemed it unconstitutional, leading to appeals.
Findings of Court:
The Act, intended to serve public interest, was found to undermine judicial authority and infringe on rights accrued from existing awards and decisions.
Issues: The key issues included the legislative competence of the State Act and its implications for judicial authority.
Ratio Decidendi: The Supreme Court ruled that the Act's encroachment on judicial power violated constitutional norms, ultimately declaring it unconstitutional.
Result: Appeals dismissed, State Act struck down.
Legal Category Hierarchy
- constitutional law
- practice and procedure
Table of Contents
2. Validity of State Act based on Concurrent List and Presidential assent — versus claims of lack of competence, violation of separation of powers, and arbitrariness. (Para 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 46 , 47 , 48 , 49 , 50 , 51 )
3. State Act is within legislative competence via Concurrent List and Presidential assent, but annulling judicial decrees making awards rules of court violates the separation of powers. (Para 57 , 58 , 59 , 60 , 61 , 62 , 63 , 66 , 67 , 68 , 69 , 70 , 71 , 72 , 73 , 74 , 75 , 76 , 77 , 78 , 79 , 80 , 81 , 82 , 83 , 84 , 85 , 86 , 87 , 88 , 89 , 90 , 91 , 92 , 93 , 94 , 95 , 96 , 97 , 98 , 99 , 100 , 101 , 102 , 103 , 104 , 105 , 106 , 107 , 108 , 109 , 110 , 111 , 112 , 113 , 114 , 115 , 116 , 117 , 118 , 119 , 120 , 121 )
4. Legislation annulling judicial decrees that make arbitral awards rules of court encroaches upon the judicial power of the State and violates the doctrine of separation of powers. (Para 122 )
5. State Act declared unconstitutional for encroaching upon judicial power, despite being within the legislative competence of the State Legislature. (Para 127 )
6. What is the legislative competence of a State to enact laws on arbitration?
Arbitration falls under Entry 13 of List III (Concurrent List). State Legislatures are competent to legislate on this subject. If such a law is reserved for the President's consideration and receives assent under Article 254(2), it prevails in that State notwithstanding repugnancy to earlier Parliamentary enactments. (Para 61 , 62 , 66 , 67 , 68 )
7. Does the adoption of the UNCITRAL Model Law create a binding obligation under Article 253?
No. The UNCITRAL Model Law is a recommendation by the General Assembly of the United Nations, not a binding treaty or decision. Therefore, legislation based on it is not referable to Article 253 in a manner that denudes the State's legislative power over domestic arbitration. (Para 75 , 77 , 78 , 79 , 80 , 81 , 85 )
8. Is the process of making an arbitral award a Rule of Court under the 1940 Act a judicial function?
Yes. Under Section 17 of the 1940 Act, the court must be satisfied that no cause for remitting or setting aside the award exists. This requires the court to apply its mind and exercise judicial discretion, making it an exercise of judicial power rather than a mechanical act. (Para 95 , 96 , 97 , 98 , 99 , 100 , 107 , 108 , 118 )
9. When does a legislative act violate the doctrine of separation of powers?
A law violates the separation of powers if it interferes with judicial functions, targets cases already finally decided, and the nature of the judgment establishes that the law interferes with the judicial process, such as by annulling judicial decrees. (Para 119 , 120 , 121 , 122 )
JUDGMENT
B.R. Gavai, J.
1. Two important questions of law, with regard to the legislative competence of the Kerala State Legislature to enact the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 (hereinafter referred to as the “State Act”) and as to whether the State Act encroaches upon the judicial power of the State, are involved in the present appeals.
BACKGROUND:
2. The High Court of Kerala at Ernakulam, by the impugned judgment dated 9th July 2013 delivered in O.P. No.4206 of 1998 and companion matters, has held the State Act to be beyond the legislative competence of the Kerala State Legislature and as such, held the same to be unconstitutional. The High Court has also held that the State Act had an effect of annulling the awards of the arbitrators and the judgments and decrees passed by the courts. It was therefore held that the State Act encroaches upon the judicial power of the State. Being aggrieved thereby, the State of Kerala has approached this Court by filing various appeals.
3. The State of Kerala had started the construction of Kallada Irrigation Project (hereinafter referred to the “said Project”) in the year 1961. The said project was proposed to be executed with the financial assistance from the International Bank for Reconstruction and Development (for short “World Bank”) from June 1982 to March 1989. As required by the World Bank, a special condition namely, the Local Competitive Bidding Specification (hereinafter referred to as “LCBS”) as envisaged by the World Bank Authorities was included in the agreements relating to the works connected with the said Project. Clauses 51 and 52 of the LCBS provided for the settlement of matters in dispute or difference through arbitration. The same was provided with a view to enable speedy settlement of matters in dispute or difference in a just and equitable manner. The State of Kerala found that on account of various disputes and differences, the arbitration references did not have the desired effect inasmuch as several arbitrators had wrongly and arbitrarily awarded unconscionable amounts against the provisions of agreements and without material on record, in collusion with the claimant contractors and officials of the department, thereby causing heavy losses to the State. As such, the State of Kerala considered it necessary, in public interest, to cancel the arbitration clauses in the agreements executed in terms of LCBS, to revoke the authority of the arbitrators appointed thereunder and to enable the filing of appeals against the awards or decrees already passed in certain arbitration references in respect of which the period of limitation had expired. As such, the State Act came to be enacted with effect from 14th November 1997.
4. The State Act is a short Act and therefore, we deem it appropriate to reproduce the same in its entirety as under:
“Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998
Preamble …………..
………..
Section 1 - Short title, extent, commencement and application
(1) This Act may be called the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998.
(2) It extends to the whole of the State of Kerala.
(3) It shall be deemed to have come into force on the 14th day of November, 1997.
(4) It shall apply to all agreements executed in terms of the local competitive bidding specification.
Section 2 - Definitions
(1) In this Act, unless the context otherwise requires,
(a) “agreement” means an agreement executed in terms of the local competitive bidding specification for various works of the Government of Kerala;
(b) “local competitive bidding specification” means the local competitive bidding specification adopted by the Government in their Order G.O. (Ms) No. 3/81/I&R dated the 20th January, 1981.
(2) Words and expressions used but not defined in this Act and defined in
(a) the ARBITRATION ACT , 1940 (Central Act 10 of 1940); or
(b) the Arbitration and Conciliation. Act, 1996 (Central Act 26 of 1996), in
