REVOCATION OF ARBITRATION CLAUSES AND RECALLING OF ARBITRAL AWARDS

[Mr. M. GOVINDARAJAN]

Arbitration

Arbitration is considered as alternative dispute resolution process.  The same has been adopted by the business community in large since the said process reduced the cost of litigation and time taken for resolution of the litigations by Court.  The Arbitration Act, 1940 was repealed and the Arbitration and Conciliation Act, 1996 was enacted.  The said Act provides for the procedure for settle the dispute through the Arbitrator.  The arbitration procedure is not covered by the procedure under Civil Procedure Code. 

There shall be an agreement for arbitration between the parties to resolve the disputes by means of arbitration.  The arbitrator may be appointed by the parties themselves or by the Court.  In case of two arbitrators are appointed by each party then the two arbitrators will appoint a third arbitrator who shall be act as an umpire.  The Arbitrator will call for the claim from the applicant and also the counter reply from the other party.  The Arbitrator will give reasonable opportunity of being heard and pass the award.  The award is binding on the parties unless appeal has been filed against the arbitral award.

Challenge against the award

The arbitral award can be challenged before the Court under section 34 of the Arbitration and Conciliation Act, 1996.  The Court may uphold the arbitral award or set aside the award or partially modify the order. 

Revocation of arbitration clauses

There is no provision in the Arbitration and Conciliation Act, 1996 for revocation of clauses in the arbitration agreement, which provides for the settlement of disputes by means of arbitration and also there is no provision in the said Act for recalling the arbitral award passed by the arbitrator.  The arbitral can be challenged but it cannot be recalled by the parties to the agreement.  Likewise the arbitration clauses once entered in the agreement cannot be revoked by the parties to the agreement.

Kerala Act

The State of Kerala started the construction of Kallada Irrigation Project in the year 1961with the financial assistance from World Bank.  The World Bank required that Local Competitive Bidding Specification (LCBS) was to be included in the agreements related to the said work.  Clause 51 and 52 of the LCBS provided for the settlement of matters in dispute or difference through arbitration.  The State of Kerala observed that several arbitrators had wrongly and arbitrarily awarded unconscionable amounts against the provisions of the agreement and without material on record on collusion with the claimant contractors and the officials of the department resulting in heavy losses to the State Government.   Therefore the State considered canceling the arbitration clauses in the agreements executed in terms of LCBS to revoke the authorities of arbitrators.  The State may file appeals against the arbitration awards passed before.  Therefore the State enacted ‘Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998’ (‘Act’ for short) which came into effect from 14.11.1997.  The said Act shall apply to all agreements executed in terms of the LCBS.

Section 3(1) of the Act provides for cancellation of arbitration clauses and revocation of authority of arbitrator. Any agreement shall cease to have effect insofar it relates to the matters in dispute or difference referred.  Section 3(2) of the Act provides that section 3(1) will be of no bar for any party to agreement to file a suit in the Court having the jurisdiction over the matter to which the agreement relates and all questions regarding the validity of the agreement.  The same shall be decided by the Court as if the arbitration clauses had never been included in the agreement.

Section 4 of the Act enables a party to file a suit within a period of 6 months from the date of commencement of the Act or within such period as is allowed by the provisions of Limitation Act, 1963 in relation to such suits whichever is later.  Section 5 of the Act enables the State Government to file an appeal against any award within a period of 90 days from the date of commencement of this Act.   This Act was reserved for the consideration of the President of India and has received his assent as required under Article 254(2) of the Constitution of India.  

Several writ petitions have been filed before the Kerala High Court against this Act.  The High Court of Kerala allowed all the petitions and declared the State Act to be unconstitutional, being beyond the legislative competence of the State Legislature.

Against the judgment of Kerala High Court, the State of Kerala filed appeal before the Supreme Court.  THE SECRETARY TO GOVT. OF KERALA, IRRIGATION DEPARTMENT AND OTHERS VERSUS JAMES VARGHESE AND OTHERS - 2022 (6) TMI 97 - SUPREME COURT.

The appellant State submitted the following before the Supreme Court-

• The High Court of Kerala committed a basic error in holding that the 1996 Act is universally applicable.
• What has been done by the State Act is a cancellation of contract by a statute and as such, the State Act or a part thereof would be  referable  to Entry 7 of List III of the Seventh Schedule to the Constitution of India.
• On cancellation of an agreement-

• Section 3(2) of the Act provides an opportunity to any party to the agreement to file a suit in a competitive court;
• Section 4 extended the period of limitation for filing the suit;
• Section 5 enables the State to challenge the award on various grounds within a specified period;

Therefore the State Act is referable to entries 7 and 13 of List III of the Seventh Schedule to the Constitution of India and as such within the legislative competence of the State Legislature.

• Unless and until there is any provision in the Constitution of India expressly prohibiting legislation on the subject either absolutely or conditionally, there can be no fetter or limitation on the plenary power which the State Legislature enjoys to legislate on the topic enumerated in Lists II and III of the Seventh Schedule to the Constitution of India.
• There is no repugnancy between the 1996 Act and the State Act.  The 1996 Act itself is a legislation enacted with reference to Entry 13 of List III of the Seventh Schedule to the Constitution of India.
• The State Act having been reserved for the consideration of the President of India and having received his assent, will prevail over the provisions of the 1996 Act, in view of Article 254 (2) of the Constitution of India.
• Since the impugned legislation is in pith and substance legislation in the field covered by Entries 7 and 13 of List III of the Seventh Schedule to the Constitution of India, the same would not invalidate the State Act.
• The Model Law is a suggested pattern for law makers which only recommends the practices to be adopted in the international arbitration and not for the domestic arbitration and as such, it cannot be held that it has any binding obligation insofar as domestic arbitration is concerned.
• Merely because some part of the said Project is financed by the World Bank, it cannot be a ground to invalidate the State Act which is referable to Entry 13 of List III of the Seventh Schedule to the Constitution of India.

There are more than fifty respondents in this case.  Each submitted reply to the appeal filed by the Department separately.   The said reply resembled in many a point.  Therefore the common points and other important points submitted by the opposite parties before the supreme Court are as below-

• The State Act is wholly arbitrary and violative of Article 14 of the Constitution of India.
• The State Act arbitrarily singles out the said Project started in the year 1961 out of all the projects in Kerala, for revocation of arbitration clauses in agreements.
• No material was placed by the State Government to show that collusive awards had been made because of a nexus between arbitrators and claimant contractors.
• The State has enacted a legislature which is exclusively within the domain of the Union Legislature.
• Since the State Act attempts to deal with the loans taken from the World Bank, it will be an encroachment on the legislative field reserved for the Union Legislature and it amounts to infringement of the basic structure of the Constitution of India.
• The State Act has been enacted, which acts to the prejudice of the private parties and undoubtedly favors the State Government.
• Therefore the State Act is beyond the competence of State Legislature.
• The Presidential assent would be of no consequence to save the State Act.
• Since the 1996 Act has been enacted by the Parliament in exercise of Legislative power under Article 253 of the Constitution of India, the State Legislature would not have the power to make a law which is repugnant thereto.
• The State Act is also discriminatory inasmuch as the State Government has been given an absolute discretion as to against which award.
• The State Act interferes with the doctrine of ‘separation of powers’ and encroaches upon the powers of the judiciary, inasmuch as the State Act empowers the State to interfere with the Awards, which is not permissible.
• If the State Act is permitted to operate now, it will amount to arbitrariness and unreasonableness.
• The Act came into effect on 23.10.2015, i.e., much after the enactment of the State Act.
• The legislature does not have the competence to enact a legislation which sets aside the judgment or an award passed by a court.
• The State Act has sought to alter the rights and remedies in the contracts executed with the State nearly a decade before the State Act was brought into effect.
• The State Act is not only in conflict with the 1996 Act but is also in conflict with the Commercial Courts Act, 2015.
• Only when the proceedings went against the State, they illegally enacted the State Act in order to either deny payments or delay them by compelling the respondents to face or to undergo an altogether different remedy for the very same cause of action.
• The State Act derogates from the principle of speedy settlement of disputes in an arbitrary and selective manner and therefore, is not valid being contrary to public interest.

The Supreme Court considered the arguments made by the appellant and the replies filed by the appellant and the respondents. 

The Supreme Court considered the first question to decide in the present appeal as to whether the State Act is within the legislative competence of the State Legislature or beyond the legislative competence of the State Legislature.  For this purpose the Supreme Court wanted to trace the source of the impugned legislation – whether it is Entry 13 of List III of the Seventh Schedule to the Constitution of India or as to 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 of India and also to examine the scope of Article 254(2) of the Constitution of India.

The Supreme Court analyzed the entries in Entry 13 of List III of the Seventh Schedule and entries 12, 13, 14 and 37 of List I of the Seventh Schedule and also the provisions of Article 253 (legislation for giving effect to international agreements).  The Supreme Court observed that the subject of arbitration finds place in Entry 13 of List III, i.e., the Concurrent List of Seventh Schedule to the Constitution on which the legislation could be made either by Parliament or the State Legislature. When there is already the legislation of Parliament made on this subject, it operates in respect of all States in India, if not excepted.  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.  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.

When the legislative competence of a State Legislature is questioned on the ground that it encroaches upon the legislative competence of the Parliament, since some entries are bound to be overlapping, in such a situation, the doctrine of pith and substance has to be applied to determine as to which entry a given piece of legislation relates to.  The court has to look at the substance of the matter. The true character of the legislation has to be ascertained.  Incidental and superficial encroachments are to be disregarded.

In regard to the binding nature of Resolution of the General Assembly of the United Nations is only recommendatory in nature and there is no binding decision taken thereat. 

The next question considered by the Supreme Court whether the State Act encroaches the judicial powers of the Court and as such is hit by Separation of Powers.  The Supreme Court observed that in most of the cases, the awards were passed prior to the year 1992 and the awards were made rule of the court prior to the year 1993.   In some of the matters, on the date of the enactment of the State Act, the appeals preferred by the State under Section 39 of the 1940 Act were pending before the competent courts.

The Supreme Court analyzed the provisions of section 15 (Powers of the Court to modify the award), Section 16 (Power to remit the award), Section 17 (Judgment in terms of the award), Section 30 (grounds for setting aside of the award) of Arbitration Act, 1940.

The Supreme Court observed that section 17 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.  The scheme contained in section 15,16 and 17 would clearly reveal that before making an award ‘Rule of Court’ by passing a judgment and decree, the court is required to take into consideration various factors, apply its mind and also exercise its discretion judicially.

The Supreme Court held that the contention 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 Arbitration Act, 1940 is not an exercise of judicial power is not correct. 

The Supreme Court further held that a perusal of the various provisions of the State Act would clearly show that the Government was aggrieved by various awards passed against it. It was therefore found expedient, in the public interest, to cancel the arbitration clause in the agreement, to revoke the authority of the arbitrators appointed there under and to enable the filing of appeals against the awards or decrees. As already discussed hereinabove, most of the awards were made ‘Rules of Court’ prior to 1993. In many of the cases, appeals were also preferred by the State Government. As such, the Supreme Court found 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 has become ‘Rule of Court’.

The Supreme Court held 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 Supreme Court further held 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.