"Interferes With Judicial Functions": Supreme Court Holds Kerala Law To Revoke Aribtral Awards Unconstitutional

The Supreme Court, on Wednesday, held that the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 to be unconstitutional as it had an effect of annulling the awards passed by the arbitrators and the judgments and decrees passed by the courts.A bench comprising Justices L Nageswara Rao and BR Gavai dismissed the appeals filed by the State of Kerala against a Kerala High Court judgment which had held the law to be unconstitutional(The Secretary of Govt. of Kerala Irrigation Department And Ors. v. James Varghese And Ors)."Upon consideration of the 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".To reach the above conclusion, the Court relied on the judgment in the case State of Tamil Nadu versus State of Kerala (2014) 12 SCC 696, which invalidated a Kerala law which was passed to nullify a Supreme Court order in the Mullaperiyar dam case.Factual Background In 1961, the State of Kerala started constructing the Kallada Irrigation Project, a part of which was proposed to be executed with the financial assistance from the World Bank. As per the requirement of the World Bank, a Local Competitive Bidding Specification (LCBS) condition was inserted in the agreement. Clause 51 and 52 of the said LCBS provided for arbitration. Eventually, the State found that arbitrators in cahoots with the contractors had arbitrarily and irregularly awarded unreasonable amounts against the provisions of the agreement. In public interest, the State cancelled the arbitration clauses. Subsequently, it passed the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 which received the assent of the President of India as required under Article 254(2) of the Constitution of India. The State legislation was assailed before the Kerala High Court, which had held it to be unconstitutional, primarily on two grounds - State Legislature did not have the competence to enact the Act; and The Act encroached upon the judicial power of the State. Contentions raised by the appellant Senior Advocate, Mr. Jaideep Gupta, appearing on behalf of the State of Kerala argued that the State Act is not repugnant to the Arbitration and Conciliation Act, 1996 ("1996 Act"). The 1996 Act enacted by the Parliament, would be applicable where the parties had agreed to refer the dispute to arbitration, whereas the State Act pertains to cancellation of contract and would be covered by Entries 7 and 13 of the Concurrent List of the Seventh Schedule of the Constitution. It was asserted that while tracing the source of the State Act, the doctrine of pith and substance ought to be applied and the enactment needs to be read as a whole along with its object, scope and effect. Mr. Gupta further argued that without any explicit prohibition in the Constitution, the State legislature cannot be restrained from legislating on entries enumerated in the State List and Concurrent list of the Seventh Schedule. Senior Advocate, Mr. Pallav Shishodia laid emphasis on the argument of repugnancy. Contentions raised by the respondents Senior Advocate, Mr. Krishnan Venugopal, appearing for some of the respondents argued that the State Act was arbitrary as it singled out the concerned Project for revoking the arbitration clauses. He averred that the State legislature had traveled beyond its jurisdiction to enact a statute which draws its power from Entries 12,13, 14, 37 of the Union List of the Seventh Schedule. It was asserted that when the Parliament enacts a statute for giving effect to international agreement (UNCITRAL Model Laws) under Article 253, the State would be divested from passing a legislature on the same subject matter, even when such subject matters falls in State or Concurrent List. Mr. Venugopal submitted that the impugned Act confers power on the State to pick and choose awards against which it would prefer an appeal. He argued that the State Act meddled with the doctrine of separation of powers and encroached upon the powers of the judiciary. Senior Advocate, Mr. P.C. Sen submitted that the State Act infringes upon the right to property under Article 300A as the awards passed had already been made a decree of the Court. It was also pointed out that as the awards had been acted upon and payments were made, the vested rights had crystallized in favour of the contractors, which cannot be taken away by the State. He argued that the State's act to unilaterally alter the contract violates fundamental principles of justice. Violation of basic structure was also contended, as the Act, he alleged, impinges on...

"Interferes With Judicial Functions": Supreme Court Holds Kerala Law To Revoke Aribtral Awards Unconstitutional

Sohini Chowdhury

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