2022 (6) TMI 97 - SC - Indian Laws

Power to annual the arbitration award through the amendment act - Legislative competence of the Kerala State Legislature to enact the Kerala Revocation of Arbitration Clauses - Reopening of Awards Act, 1998 - whether the State Act encroaches upon the judicial power of the State? Legislative competence of the Kerala State Legislature to enact the State Law? - HELD THAT - This Court has observed that the subject of arbitration finds place in Entry 13 of List III, i.e., the Concurrent List of the Seventh Schedule to the Constitution of India. It has been held that the legislation pertaining to the said entry could be made either by the Parliament or the State Legislature. It has been held 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, it is necessary to reserve the same for consideration of the President of India and obtain his assent. 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 - It will further be pertinent to note that in the case of MP Rural 2012, the M.P. Madhyastham Adhikaran Adhiniyam, 1983 (State enactment) provided for mandatory statutory arbitration in the State of M.P. irrespective of the arbitration agreement in respect of works contracts in the State of M.P. or its instrumentalities. This Court, in the cases of G.C. KANUNGO VERSUS STATE OF ORISSA 1995 (5) TMI 264 - SUPREME COURT and MP Rural 2018, has specifically held that the 1940 Act, the 1996 Act and the State Acts legislated by the Orissa and M.P. Legislatures are referable to Entry 13 of List III of the Seventh Schedule to the Constitution of India. As such, in view of the Presidential assent under clause (2) of Article 254 of the Constitution of India, the State Legislature would prevail. UNCITRAL Model Law, a decision or recommendation? - HELD THAT - The General Assembly of the United Nations has recommended that all countries give due consideration to the UNCITRAL Model Law, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international commercial arbitration practices are concerned - there is no binding decision at the General Assembly of the United Nations to implement the UNCITRAL Model Law. In any case, that recommendation is with regard to only international commercial arbitration practices. No doubt that the Parliament, with certain modifications, has given due consideration to the UNCITRAL Model Law for legislation on the domestic arbitration. However, that cannot by itself be said to be binding on the Parliament to enact the law in accordance with UNCITRAL Model Law. Whereas, the 1986 Act and the NGT Act have been enacted specifically to implement the decisions taken at the international conferences, the 1996 Act is enacted on the basis of the Resolution passed by the General Assembly of the United Nations in 1985, whereby the General Assembly only recommended the adoption of UNCITRAL Model Law insofar as international commercial arbitration practices are concerned. As such, the 1986 Act and the NGT Act are directly referable to Entry 13 of List I of the Seventh Schedule and Article 253 of the Constitution of India. State Legislature's encroachment on Judicial powers - HELD THAT - This Court has observed that the judgments and decrees made by the civil courts in making the awards of the Special Arbitration Tribunals the Rules of Court are for the sole purpose of their enforceability through the machinery of courts and therefore, cannot be such judgments and decrees of civil courts made in exercise of the judicial power of the State exclusively vested in them under the Constitution of India. This Court, therefore, held that the 1991 Amendment Act, which nullifies the judgments and decrees of the court by which awards of Special Arbitration Tribunals are made Rules of Court , cannot be said to be an encroachment upon the judicial powers of the State exercisable by the courts under the Constitution of India. The Court goes on to hold that the awards made under the 1984 Amendment Act by the Special Arbitration Tribunals are sought to be nullified by the 1991 Amendment Act. As such, the legislative power of the State Legislature is used by enacting the impugned 1991 Amendment Act to nullify or abrogate the awards of the Special Arbitration Tribunals by abrogating to itself a judicial power - the Court goes on to hold 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 to itself a judicial power and the Statute which annuls it, is unconstitutional being encroachment on the judicial power of the State. The perusal of the scheme of the 1940 Act would itself reveal that the passing of the judgment and decree under Section 17 of the 1940 Act is not a mere formality. The judgment can be pronounced only when the court is satisfied that no cause is made out for remitting the award or setting aside the award. The court is also entitled to remit or modify the awards. As such, it cannot be said that the court, while passing a judgment, which is followed by a decree, does not exercise judicial power. The court is not supposed to act mechanically and be a Post Office - It has been held by this Court that the restrictions which inhere the exercise of the power of the court also apply to the exercise of the appellate power by the Central Government. It has been held that the Central Government has to decide whether in exercising their power, the directors are acting oppressively, capriciously or corruptly, or in some way mala fide. The perusal of the judgment in the case of G.C. Kanungo would reveal that though the court has recorded the submissions of the counsel for the petitioners therein, that the Legislature has no power to render ineffective the earlier judicial decisions by making a law and though judgments were cited in support of the said proposition, the court did not consider it necessary to refer to the said decisions. However, without considering the provisions of the 1940 Act or the two judgments of the Constitution Bench in the cases of HARINAGAR SUGAR MILLS LTD. VERSUS SHYAM SUNDER JHUNJHUNWALA 1961 (4) TMI 23 - SUPREME COURT and SHANKARLAL AGGARWALA VERSUS SHANKARLAL PODDAR 1963 (1) TMI 40 - SUPREME COURT , it went on to hold that the powers exercised by a court while making an award Rule of Court , are not judicial powers. We find that the finding to that effect in the case of G.C. Kanungo, apart from being per incuriam the provisions of the 1940 Act and the law laid down by the Constitution Bench in the cases of Harinagar Sugar Mills Ltd. and Shankarlal Aggarwala and Others, would also be hit by the rule of sub silentio. It could thus be seen that this Court in unequivocal terms has held that the powers exercised by the Chief Justice of the High Court or Chief Justice of India under Section 11(6) of the 1996 Act are not administrative but are judicial powers. It would thus not sound to reason, that when a power under Section 11(6) of the 1996 Act for appointment of an arbitrator has been held to be a judicial power, the power to make an award a Rule of Court , which can be made only upon the satisfaction of the court on the existence of the eventualities set out in Section 17 of the 1940 Act, is not an exercise of judicial power. Thus, 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 - what has been done by the State Act, is annulling the awards and the judgments and decrees passed by the court vide 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. It is thus concluded in summary as follows (i) 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; (ii) That the finding in the case of G.C. Kanungo 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. and Shankarlal Aggarwala and Others; and (iii) 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. Appeal disposed off.

Summary

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 Legislature
Background 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 Power
Background 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.