Supreme Court Declares Kerala Revocation Of Arbitration Clauses And Reopening Of Awards Act 1998 As Unconstitutional [Read Judgment]

The Bench in this context observed –

"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."

However, the Court also observed that since the State Act had received the Presidential assent under Article 254(4) of the Constitution, the State Act is within the legislative competence of the State Legislature.

Senior Counsels Mr. Jaideep Gupta and Mr. Pallav Shishodia appeared for the State – Appellants while Senior Counsel Mr. Krishnan Venugopal appeared for the Respondents before the Apex Court.

In this case, the Apex Court dealt with two primary issues 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, and whether the State Act encroaches upon the judicial power of the State.

The Kerala High Court by its impugned judgment dated 9^th July 2013 had held that the State Act was unconstitutional and beyond the legislative competence of the State. The High Court had 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, therefore, held that the State Act encroaches upon the judicial power of the State. Aggrieved, the State of Kerala approached the Supreme Court.

The State of Kerala had earlier in the public interest to cancel the arbitration clauses in the agreements executed in terms of Local Competitive Bidding Specification (LCBS), revoked the authority of the arbitrators appointed thereunder and enabled the filing of appeals against the awards or decrees already passed by the arbitrators, the State Act was enacted on 14^th November 1997.

Thereafter, upon the enactment of the State Act, several petitions were filed before the Kerala High Court challenging its validity. The Kerala High Court allowed the petitions and declared the State Act to be unconstitutional, being beyond the legislative competence of the State.

The State Act had received the Presidential assent as required under Article 254(2) of the Constitution.

• Court's Analysis

i) Legislative Competence of State to enact State Law

The Apex Court while dealing with the issue noted that in this context, it will have to answer – whether the source of impugned legislation (State Act) is Entry 13 of List III of the Seventh Schedule to the Constitution or whether the impugned legislation (State Act) is referable to Entries 12, 13, 14 and 37 of List I of the Seventh Schedule and Article 253 of the Constitution and also examine the scope of clause 2 of Article 254 of the Constitution.

The Bench further noted that since the subject of arbitration is in the Concurrent List, the State can also make a law with regard to the same. The only requirement is that to validate such a law, the Presidential assent is required for the same.

The Court further in this context, held –

"When such an assent is obtained, the provisions of the State Law or Act so enacted would prevail in the State concerned, notwithstanding its repugnancy with an earlier Parliamentary enactment made on the subject. It is not in dispute that in the present case also, the State Act was reserved for consideration of the President of India and the assent of the President of India has been obtained. As such, the State Act so enacted would prevail in the State of Kerala."

Further, the Bench placed reliance on State of West Bengal v. Kesoram Industries Ltd. and Others where it was held that if the State is competent to legislate on the subject, any incidental encroachment on any item in List I would not affect the State Legislature.

The Court also held that in view of the Presidential assent under Article 254(2) of the Constitution, the State Legislature would prevail.

ii) State Legislature's encroachment on judicial powers

The Bench in this context referred to the list that contained details of the Kerala's arbitration cases and noted that in most of the cases, the awards were passed prior to the year 1992 and the awards were made rules of the Court prior to the year 1993.

The Court further placed reliance on G.C. Kanungo v. State of Orissa where it was observed on one hand that the judgments and decrees by which the civil courts make the awards "Rules of Court" are not passed in exercise of its judicial powers. As such, the awards do not merge in the judgments and decrees of the court. But on the other hand, the Court held that the awards passed by the Special Arbitration Tribunals are the awards passed by the Tribunals exercising the judicial power and as such, when the State nullifies such awards, it abrogates itself a judicial power and the Statute which annuls it is unconstitutional being encroachment on the judicial power of the State.

The Bench additionally noted that the State Act was enacted since the State Government was aggrieved by various awards passed against it.

The Court also noted that most of the awards were made 'Rules of Court' prior to 1993 and in most of the cases, appeals were preferred by the State Government.

The Court in this context held –

"As such, we find that the legislative prescriptions and legislative directions in the State Act undoubtedly interfere with the judicial functions. It is also clear that the legislation is targeted at the awards passed which have become "Rule of Court."

The Bench held that upon considerations of terms of the State Act, the issues with which it deals it is clear that the State Act interferes with the judicial functions.

"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 Court opined.

• Conclusion

The Bench gave the following observations –

"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. The State Act, therefore, 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. The finding of the High Court of Kerala, to the contrary, is erroneous in law."

"That 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."

In the light of these observations, the Court disposed of the appeals.