2022 (6) TMI 97 - SC - Indian Laws

Supreme Court Rules Kerala State Act Unconstitutional: Impact on Arbitration

The Supreme Court held that the Kerala State Legislature had the legislative competence to enact the Kerala Revocation of Arbitration Clauses and ... Legislative competence - Entry 13 of List III (civil procedure, limitation and arbitration) - Article 254(2) - Presidential assent validating repugnant State law - Article 253 - legislation for giving effect to international agreements - pith and substance doctrine - separation of powers / encroachment upon judicial power - awards made 'Rule of Court' - nature of judicial power - per incuriamLegislative competence - Entry 13 of List III (civil procedure, limitation and arbitration) - Article 254(2) - Presidential assent validating repugnant State law - pith and substance doctrine - Validity of the Kerala State Act as within State legislative competence and effect of Presidential assent - HELD THAT: - The Court held that the subject matter of the State Act is arbitration and is referable in pith and substance to Entry 13 of List III. State legislatures may legislate on that entry and, having reserved the Act for the President and obtained his assent, the State Act prevails within Kerala notwithstanding any repugnancy with earlier Central enactments. Given receipt of Presidential assent under Article 254(2), further inquiry into repugnancy with the 1940 Act or the 1996 Act was unnecessary. [Paras 62, 66, 68, 127]The State Act is in pith and substance referable to Entry 13 of List III and is within the State Legislature's competence; having received Presidential assent under Article 254(2) it prevails in Kerala.Awards made 'Rule of Court' - nature of judicial power - separation of powers / encroachment upon judicial power - Whether the State Act unlawfully encroaches upon judicial power by annulling awards made rule of court - HELD THAT: - The Court examined the statutory scheme under the 1940 Act (notably Sections 15, 16 and 17) and authorities on the character of judicial functions. It concluded that courts exercise judicial power when deciding whether to pronounce judgment in terms of an award, remit, modify or set aside awards; making an award a 'Rule of Court' is not a mere formality. Applying the tests in State of Tamil Nadu v. State of Kerala, the Court found the State Act's legislative prescriptions targeted awards already made rule of court and interfered with judicial functions and finality of judicial proceedings. That interference amounted to a transgression of separation of powers and warranted invalidation of the State Act on that ground. [Paras 100, 107, 121, 122, 127]The State Act, having the effect of annulling awards which had become 'Rule of Court', encroaches upon the judicial power of the State and is unconstitutional.Per incuriam - awards made 'Rule of Court' - nature of judicial power - Treatment of the earlier decision in G.C. Kanungo regarding the non judicial character of courts' action making awards 'Rule of Court' - HELD THAT: - The Court held that the finding in G.C. Kanungo that courts' judgments and decrees making awards 'Rule of Court' are not an exercise of judicial power is per incuriam. That earlier view failed to account for the provisions of the 1940 Act (Sections 15, 16, 17) and overlooked Constitution Bench authorities distinguishing judicial from administrative functions. The present Court treated those aspects as determinative and contrary to the earlier pronouncement. [Paras 107, 112, 127]The finding in G.C. Kanungo that passing judgments to make arbitration awards 'Rule of Court' is not an exercise of judicial power is per incuriam.Final Conclusion: The State Act is, in pith and substance, an enactment on arbitration within Entry 13 of List III and - having received Presidential assent under Article 254(2) - would otherwise prevail in Kerala; however, the Act is unconstitutional because it intrudes upon the judicial power by annulling awards that had become 'Rule of Court', and the earlier contrary view in G.C. Kanungo regarding the non judicial character of such court action is per incuriam. Issues Involved:1. Legislative competence of the Kerala State Legislature to enact the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998.2. Whether the State Act encroaches upon the judicial power of the State.Detailed Analysis:Issue 1: Legislative Competence of the Kerala State LegislatureBackground and Arguments:- The Kerala High Court held that the State Act was beyond the legislative competence of the Kerala State Legislature and declared it unconstitutional. The High Court reasoned that the State Act encroached upon the judicial power of the State by annulling arbitration awards and court judgments.- The State of Kerala argued that the State Act was necessary to address the collusion between arbitrators and contractors, which led to unjust awards against the State.- The Supreme Court examined whether the State Act was referable to Entry 13 of List III (Concurrent List) or to Entries 12, 13, 14, and 37 of List I (Union List) of the Seventh Schedule to the Constitution of India.Supreme Court's Findings:- The Court referred to previous judgments, including G.C. Kanungo and MP Rural 2018, which held that arbitration falls under Entry 13 of List III, allowing both Parliament and State Legislatures to legislate on the subject.- The Court emphasized that the State Act had received the President's assent under Article 254(2) of the Constitution, making it valid within the State of Kerala despite any repugnancy with the Central Act.- The Court rejected the argument that the 1996 Act was enacted under Article 253 of the Constitution to implement international agreements, noting that the UNCITRAL Model Law recommended by the United Nations was not binding and only pertained to international commercial arbitration.- The Court concluded that the State Act was within the legislative competence of the Kerala State Legislature as it was referable to Entry 13 of List III, and the Presidential assent under Article 254(2) validated it.Issue 2: Encroachment on Judicial PowerBackground and Arguments:- The High Court held that the State Act encroached upon judicial power by annulling arbitration awards and court judgments, violating the doctrine of separation of powers.- The State of Kerala argued that the State Act was necessary to address the collusion and misconduct in arbitration awards, which caused heavy losses to the State.Supreme Court's Findings:- The Court examined the provisions of the 1940 Act, particularly Sections 15, 16, 17, and 30, which empower courts to modify, remit, or set aside arbitration awards and to pronounce judgments based on those awards.- The Court noted that the power exercised by courts under Section 17 of the 1940 Act is a judicial power, involving discretion and application of judicial mind, and not a mere formality.- The Court referred to previous judgments, including Harinagar Sugar Mills Ltd. and Shankarlal Aggarwala, which distinguished between administrative and judicial orders, emphasizing that judicial orders involve the exercise of discretion on objective considerations.- The Court held that the State Act, by annulling awards that had become 'Rules of Court,' encroached upon judicial functions and violated the doctrine of separation of powers.- The Court concluded that the State Act was unconstitutional as it transgressed judicial powers and interfered with judicial functions.Conclusion:1. The State Act is within the legislative competence of the Kerala State Legislature, being referable to Entry 13 of List III of the Seventh Schedule to the Constitution of India. The Presidential assent under Article 254(2) validates it within the State of Kerala.2. The finding in G.C. Kanungo that the powers exercised by courts in making arbitration awards 'Rules of Court' are not judicial powers is per incuriam the provisions of the 1940 Act and the judgments of the Constitution Bench in Harinagar Sugar Mills Ltd. and Shankarlal Aggarwala.3. The State Act encroaches upon the judicial power of the State and is therefore unconstitutional.The appeals are accordingly disposed of, and the State Act is struck down as unconstitutional.