In CIVIL APPEAL NO.6258 OF 2014-SC- Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 unconstitutional on ground of encroachment upon judicial powers of State, declares Apex Court Justices L. Nageswara Rao & B.R. Gavai [04-05-2022]

Read Judgment: THE SECRETARY TO GOVT. OF KERALA, IRRIGATION DEPARTMENT AND OTHERS v. JAMES VARGHESE AND OTHERS 

Tulip Kanth

New Delhi, May 05, 2022: Terming the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 as unconstitutional, the Supreme Court has observed that the Act having the effect of annulling the awards which have become Rules of Court, is a transgression on the judicial functions of the State and violative of doctrine of separation of powers. 

The Division Bench of Justice L.Nageswara Rao and Justice B.R.Gavai affirmed, “…the High Court of Kerala is right in law in holding that the State Act encroaches upon the judicial power of the State and is therefore liable to be struck down as being unconstitutional.”

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 (State Act) and as to whether the State Act encroaches upon the judicial power of the State, were involved in the present appeals.

The State of Kerala had started the construction of Kallada Irrigation Project and the said project was proposed to be executed with the financial assistance from the International Bank for Reconstruction and Development (World Bank) from June 1982 to March 1989. As required by the World Bank, a special condition namely, the Local Competitive Bidding Specification was included in the agreements and some Clauses therein 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 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 November 14, 1997.

Immediately after the enactment of the State Act, several petitions came to be filed before the Kerala High Court. By the impugned judgment, the High Court 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 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 approached this Court by filing various appeals.The State Act was reserved for the consideration of the President of India and had received his assent as required under Article 254 (2) of the Constitution of India.

At the outset, the Bench noted that once the State Act was reserved for consideration and received the assent of the President of India, it would prevail. Once that is the position, any endeavour to find out any repugnancy between the two, would be futile.

According to the Bench since the State Act is referable to Entry 13 of List III of the Seventh Schedule to the Constitution of India, it is within the competence of the State Legislature.On the issue of whether there was an attempt to interfere with the judicial process, the Division Bench referred to the judgment of the Constitution Bench in  State of Tamil Nadu v. State of Kerala. 

As per the Top Court, a perusal of the various provisions of the State Act clearly showed that the State Act had been enacted since the State Government was aggrieved by various awards passed against it. It was therefore found expedient, in the public interest, to cancel the arbitration clause in the agreement, to revoke the authority of the arbitrators appointed thereunder and to enable the filing of appeals against the awards or decrees and most of the awards were made Rules of Court prior to 1993. In many of the cases, appeals were also preferred by the State Government. 

As such, the Bench found that the legislative prescriptions and legislative directions in the State Act undoubtedly interfered with the judicial functions. It was also clear that the legislation is targeted at the awards passed which have become the Rule of Court. Noting that the powers exercised by the courts under Section 17 of the Arbitration Act, 1940  are judicial powers of the State and upon consideration of the terms of the State Act and the issues with which it deals, the Bench clarified that the State Act interferes with the judicial functions.

The Bench asserted, “We are therefore of the considered view that the State Act, which has the effect of annulling the awards which have become Rules of Court, is a transgression on the judicial functions of the State and therefore, violative of doctrine of separation of powers. As such, the State Act is liable to be declared unconstitutional on this count.”

The Apex Court was of the stern opinion that the State Act has been annulling the awards and the judgments and decrees passed by the court by which the awards were made Rule of Court. As such, the rights which accrued to the parties much prior to the enactment of the State Act have been sought to be taken away by it.

Hence, the Bench held that the State Act in pith and substance is referable to Entry 13 of List III of the Seventh Schedule to the Constitution of India and not to the Entries 12, 13, 14 and 37 of List I of the Seventh Schedule nor to Article 253 of the Constitution of India. It was declared by the Bench that the State Act is within the legislative competence of the State Legislature. In any case, in view of the Presidential assent under Article 254(2) of the Constitution of India, the State Act would prevail within the State of Kerala and the finding of the High Court of Kerala, to the contrary,was held to be erroneous in law.

Referring to some set precedents, the Bench opined that the finding in the case of G.C. Kanungo v. State Of Orissa to the effect that the powers exercised by the courts in passing judgments and decrees for making the arbitration awards Rule of Court is not an exercise of judicial power, is per incuriam the provisions of the 1940 Act and the judgments of the Constitution Bench in the cases of Harinagar Sugar Mills Ltd. V. Shyam Sundar Jhunjhunwala & Other and Shankarlal Aggarwal And Ors. V. Shankarlal Poddar And Ors.

Affirming Kerala High Court’s view that the State Act encroaches upon the judicial power of the State and is therefore liable to be struck down as being unconstitutional, the Bench disposed of the present appeals.