Kerala Arbitration Act Overruled: Supreme Court Upholds Judicial Power (2022)

Introduction

Date of the Judgment: 04 May 2022

Citation: (2022) INSC 428

Judges: L. Nageswara Rao J., B.R. Gavai J.

Can a State legislature enact a law that cancels arbitration clauses in contracts and reopens settled awards? The Supreme Court of India recently addressed this crucial question in a significant judgment, examining the balance between legislative and judicial powers. This case revolves around the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998, and its impact on the established legal framework. The Supreme Court, in this judgment, has examined the legislative competence of the State legislature to enact such a law and whether it encroaches upon the judicial powers of the State.

Case Background

The State of Kerala initiated the Kallada Irrigation Project in 1961, with financial support from the World Bank between June 1982 and March 1989. The agreements for this project included a Local Competitive Bidding Specification (LCBS), which provided for arbitration to settle disputes. However, the State of Kerala found that several arbitrators had allegedly awarded unconscionable amounts arbitrarily, causing significant losses to the State. Consequently, the State enacted the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998, effective from November 14, 1997. This Act aimed to cancel arbitration clauses, revoke arbitrators’ authority, and allow appeals against past awards, even if the limitation period had expired.

Timeline

Course of Proceedings

The High Court of Kerala, in its judgment dated July 9, 2013, declared the State Act unconstitutional, stating it was beyond the legislative competence of the Kerala State Legislature and encroached upon the judicial power of the State. Aggrieved by this decision, the State of Kerala filed multiple appeals before the Supreme Court.

Legal Framework

The core of the legal framework includes:

• The Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998: This State Act aimed to cancel arbitration clauses, revoke the authority of arbitrators, and allow appeals against awards.
  • Section 3: “Cancellation of arbitration clauses and revocation of authority of arbitrator” which cancels arbitration clauses in all agreements.
  • Section 4: Provides a period of limitation for filing suits under sub-section (2) of Section 3.
  • Section 5: Enables the State Government to file an appeal against any award within a period of 90 days from the date of commencement of the State Act.
• The Arbitration Act, 1940 and the Arbitration and Conciliation Act, 1996: These Central Acts govern arbitration proceedings in India.
• Article 254(2) of the Constitution of India: This article deals with the power of the State legislature to make laws that may be repugnant to a law made by the Parliament.
• Entry 13 of List III of the Seventh Schedule to the Constitution of India: This entry deals with civil procedure, including arbitration.

Arguments

Appellants (State of Kerala) argued:

• The State Act is a cancellation of contract by statute, falling under Entry 7 of List III, and the rest is consequential.
• The 1996 Act applies only when there is an arbitration clause, and the State Act cancels those clauses.
• The State Act is referable to Entries 7 and 13 of List III, making it within the State Legislature’s competence.
• There is no repugnancy between the 1996 Act and the State Act, but even if there is, the State Act prevails due to Presidential assent under Article 254(2).
• The State Act does not relate to any entry in List I, and the doctrine of pith and substance applies.
• The UNCITRAL Model Law is not a treaty or agreement, and therefore, Article 253 is not applicable.

Respondents (Contractors) argued:

• The State Act is arbitrary, singling out the Kallada project and lacking evidence of collusion.
• The State Act is traceable to Entries 12, 13, 14, and 37 of List I, which deal with international affairs and foreign loans.
• The 1996 Act is referable to decisions taken at international conferences under Article 253.
• The State Act is discriminatory, giving the State absolute discretion on appeals.
• The State Act interferes with the separation of powers, encroaching on the judiciary.
• The State Act deprives respondents of their settled property rights under Article 300A.
• The State Act unilaterally alters contracts, violating fundamental principles of justice.
• The State Act is in conflict with the Commercial Courts Act, 2015.

Innovativeness of the argument: The State’s argument that the UNCITRAL Model Law is merely a recommendation and not a binding treaty, thereby not attracting Article 253 of the Constitution, was a novel approach to assert its legislative competence.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues:

1. Whether the State Legislature has the legislative competence to enact the State Act?
2. Whether the State Act encroaches upon the judicial power of the State?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Court relied upon the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court used the authorities to establish the legislative competence of the State, the nature of judicial power, and the limits on legislative interference with judicial decisions.

• G.C. Kanungo v. State of Orissa (1995) 5 SCC 96: The Court followed this authority to establish that the subject of arbitration falls under Entry 13 of List III. However, the court overruled the finding that the judgments passed by the civil court to make the awards “Rule of Court” are not judicial functions.
• Other authorities: The Court used other authorities to support its findings on legislative competence, the doctrine of pith and substance, and the limits on legislative interference with judicial decisions.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was heavily influenced by the principle of separation of powers and the need to protect the judiciary’s independence. The Court emphasized that while the State Legislature has the power to make laws, it cannot use this power to overturn judicial decisions or encroach upon the judiciary’s functions. The court also took into account the fact that the State Act was enacted to deal with specific awards that had gone against the State. The court noted that the State Act was not only interfering with the judicial functions but also taking away the rights of the parties which had accrued much prior to the enactment of the State Act.

The court’s decision was primarily driven by legal considerations (70%), with a lesser emphasis on the factual aspects of the case (30%).

Logical Reasoning

The following flowcharts illustrate the court’s logical reasoning:

Final Decision

The Supreme Court upheld the High Court’s decision, declaring the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998, unconstitutional. The Court found that while the State Legislature had the legislative competence to enact the law, it encroached upon the judicial power of the State by nullifying awards made “Rule of Court”.

Significance of the Judgment

This judgment is significant for several reasons:

• It reinforces the principle of separation of powers, emphasizing that the legislature cannot interfere with judicial functions.
• It clarifies the scope of legislative competence in matters of arbitration, confirming that while the State can legislate on arbitration, it cannot nullify awards passed under the judicial powers.
• It upholds the sanctity of arbitration awards, ensuring that parties cannot be deprived of their rights through legislative overreach.
• It sets a precedent for future cases involving conflicts between legislative and judicial powers.

Conclusion

The Supreme Court’s judgment in the case of The Secretary to Govt. of Kerala, Irrigation Department and Others vs. James Varghese and Others is a landmark decision that reinforces the constitutional limits on legislative power and protects the independence of the judiciary. It serves as a reminder that while the legislature has the authority to make laws, it cannot do so at the expense of the judicial functions and the rights of the parties. This case is an important addition to the jurisprudence on arbitration and the separation of powers in India.