The Secretary to Govt. of Kerala, Irrigation Department and Others vs James Varghese and Others

Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 – Constitutional validity of – Challenged, on ground of encroachment upon judicial powers of the State – Agreements relating to a State Irrigation Project – Disputes – Arbitration references – State enacted Kerala Act of 1998 which provided for cancellation of arbitration clauses in the agreements, revocation of authority of the arbitrators appointed thereunder and filing of appeals against awards or decrees already passed in certain arbitration references in respect of which period of limitation had expired – Whether the Kerala Act of 1998 encroached on judicial powers of the courts and as such, was hit by the doctrine of separation of powers – Held: Though a law enacted by the Legislature may apparently seem to be within its competence but yet in substance if it is shown as an attempt to interfere with the judicial process, such law may be invalidated being in breach of doctrine of separation of powers – The Kerala Act of 1998, 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” – The Kerala Act of 1998 encroaches upon the judicial powers of the State and is therefore liable to be struck down as being unconstitutional on this count – Doctrines/Principles – Doctrine of “separation of powers”. Constitution of India, 1950 – Seventh Schedule, List III, Entry

13 –Arbitration – Legislative competence of the State Legislature – Held: The subject of arbitration finds place in Entry 13 of List III, i.e., the Concurrent List of the Seventh Schedule to the Constitution – Since the subject of arbitration is in the Concurrent List, the State can also make a law with regard to the same. Constitution of India, 1950 – Art.254, clause (2) – Conflict between the Central law and the State law – Held: Ordinarily, if there is any conflict between the Central law and the State law, in view of clause (1) of Art.254, the Central law would prevail – However, in view of clause (2) of Art.254, the State law would prevail when it is reserved for consideration and receives assent of the President of India.

Legislature – State Legislature – Legislative competence of – Challenge to, on ground that it encroached upon the legislative competence of the Parliament – Held: In such a situation, the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate to – Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence – Predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II, though it may incidentally affect any item in List I – If the State is competent to legislate on the subject, any incidental encroachment on any item in List I would not affect the State Legislature – Constitution of India, 1950 – Seventh Schedule – Lists I, II and III.

Arbitration Act, 1940 – Powers exercised by the court under provisions of the Act in passing judgments and decrees for making the arbitration awards “Rule of Court” – Nature of – Held: They are judicial powers – Power to make an arbitration award “Rule of Court” is not a mechanical power.

Doctrines / Principles – “Separation of powers doctrine” under the Constitution – Discussed.

United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration – Resolution dated 11th December 1985 passed by the United Nations General Assembly – Effect of – Held: The General Assembly only recommended the adoption of UNCITRAL Model Law insofar as international commercial arbitration practices are concerned – Parliament, with certain modifications, has given due consideration to UNCITRAL Model Law for legislation on 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 – Arbitration and Conciliation Act, 1996.

Disposing the appeals, the Court

HELD:

LEGISLATIVE COMPETENCE OF THE STATE

LEGISLATURE TO ENACT THE KERALA REVOCATION OF ARBITRATION CLAUSES AND REOPENING OF AWARDS

ACT, 1998:

1.1. 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. The legislation pertaining to the said entry could be made either by the Parliament or the State Legislature. 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 Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 (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. [Para 62][423-G-H; 424-A-B]

1.2. Ordinarily, if there is any conflict between the Central law and the State law, in view of clause (1) of Article 254 of the Constitution of India, the Central law would prevail. However, in view of clause (2) of Article 254 of the Constitution of India, the State law would prevail when it is reserved for consideration and receives assent of the President of India. [Para 66][425-G-H; 426-A]

1.3. 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 does a given piece of legislation relate to. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence. The court has to look at the substance of the matter. The true character of the legislation has to be ascertained. Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions. Incidental and superficial encroachments are to be disregarded. The predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II, though it may incidentally affect any item in List I. [Para 71][431-D-G]

1.4. If one looks at the scheme of the State enactment, the subject matter of the enactment is arbitration. If the State is competent to legislate on the subject, any incidental encroachment on any item in List I would not affect the State Legislature. [Para 72][431-G-H]

State of West Bengal v. Kesoram Industries Ltd. and Others (2004) 10 SCC 201 : [2004] 1 SCR 564 – followed.

G.C. Kanungo v. State of Orissa, (1995) 5 SCC 96: [1995] 1 Suppl. SCR 510; Madhya Pradesh Rural Road Development Authority and Another v. L.G. Chaudhary Engineers and Contractors (2018) 10 SCC 826 and G. Mohan Rao and Others v. State of Tamil Nadu and Others, 2021 SCC online SC 440 – relied on.

Maharaj Umeg Singh and Others v. State of Bombay and Others [1955] 2 SCR 164; State of Gujarat through Chief Secretary and Another v. Amber Builders (2020)

2 SCC 540; Madhya Pradesh Rural Road Development Authority and Another v. L.G. Chaudhary Engineers and Contractors (2012) 3 SCC 495 : [2012] 2 SCR 162; Hoechst Pharmaceutical Ltd. and Others v. State of Bihar and Others (1983) 4 SCC 45 : [1983] 3 SCR 130; Kavalappara Kottarathil Kochuni @ Moopil Nayar v. States of Madras and Kerala and Others [1960] 3 SCR 887; M. K. Ranganathan v. Government of Madras and Others [1955] 2 SCR 374; Calcutta Gas Company (Proprietary) Ltd. v. State of West Bengal and Others [1962] Supp 3 SCR 1; Sri Venkataramana Devaru and Others v. State of Mysore and Others [1958] SCR 895; Fuerst Day Lawson Limited v. Jindal Exports Limited (2011) 8 SCC 333 : [2011] 11 SCR 1; Rajiv Sarin and Another v. State of Uttarakhand and Others (2011) 8 SCC 708 : [2011] 9 SCR 1012; Maganbhai Ishwarbhai Patel Etc. v. Union of India and Another (1970) 3 SCC

400 : [1969] 3 SCR 254; State of Bihar and Others v. Bihar Chamber of Commerce and Others (1996) 9 SCC

136 : [1996] 2 SCR 184; Jayant Verma and Others v. Union of India and Others (2018) 4 SCC 743 : [2018]

2 SCR 679; Suraj Mall Mohta and Co. v. A.V.

Visvanatha Sastri and Another [1955] 1 SCR 448; B.B. Rajwanshi v. State of U.P. and Others (1988) 2 SCC

415 : [1988] 3 SCR 469; Satish Kumar and Others v. Surinder Kumar and Others [1969] 2 SCR 244; Andhra Pradesh Dairy Development Corporation Federation v. B. Narasimha Reddy and Others (2011) 9 SCC 286: [2011] 14 SCR 1; Ssangyong Engineering and

Construction Company Limited v. National Highways Authority of India (NHAI) (2019) 15 SCC 131 : [2019]

7 SCR 522; SREI Infrastructure Finance Limited v. Tuff Drilling Private Limited (2018) 11 SCC 470 : [2017]

12 SCR 933; Saverbhai Amaidas v. State of Bombay [1955] 1 SCR 799; T. Barai v. Henry Ah Hoe and Another (1983) 1 SCC 177 : [1983] 1 SCR 90; Gram Panchayat of Village Jamalpur v. Malwinder Singh and Others (1985) 3 SCC 661 : [1985] 2 Suppl.

SCR 28; State of Maharashtra v. Mrs. Kamal Sukumar Durgule and Others (1985) 1 SCC 234 : [1985] 2 SCR 129; Ashok Kumar alias Golu v. Union of India and Others (1991) 3 SCC 498 : [1991] 2 SCR 858; S.S. Bola and Others v. B.D. Sardana and Others (1997) 8 SCC 522 : [1997] 2 Suppl. SCR 507; Madras Bar Association v. Union of India and Another 2021 SCC OnLine SC 463; State of Kerala and Others v. Mar Appraem Kuri Company Limited and Another (2012) 7 SCC 106 : [2012 4 SCR 448; State of Tamil Nadu and Others v. K. Shyam Sunder and Others (2011) 8 SCC

737 : [2011] 11 SCR 1094; Deep Chand and Others v. State of Uttar Pradesh and Others [1959] Supp 2 SCR 8; Ladli Construction Co. (P) Ltd. v. Punjab Police Housing Corpn. Ltd. and Others (2012) 4 SCC 609 : [2012] 4 SCR 780; Hindustan Construction Co. Ltd. and Another v. Union of India and Others (2020) 17 SCC 324: [2019] 17 SCR 331; K. Nagaraj and Others v. State of Andhra Pradesh and Another (1985) 1 SCC

523 : [1985] 2 SCR 579; Nagpur Improvement Trust and Another v. Vithal Rao and Others (1973) 1 SCC 500; State of Kerala and Others v. T.M. Peter and Others (1980) 3 SCC 554; Cauvery Water Disputes Tribunal, 1993 Supp (1) SCC 96 (2) : [1991] 2 Suppl. SCR 497 and State of Bombay and Another v. United Motors (India) Limited and Others [1953] SCR 1069 – referred to.

WHETHER THE ARBITRATION AND CONCILIATION

ACT, 1996 HAVING BEEN ENACTED BY THE PARLIAMENT UNDER ARTICLE 253 OF THE CONSTITUTION AND IN ACCORDANCE WITH THE DECISION TAKEN AT THE

INTERNATIONAL CONFERENCE TO IMPLEMENT THE

UNCITRAL MODEL LAW, THE STATE LEGISLATURE IS NOT COMPETENT TO ENACT THE STATE ACT.

2.1. The Preamble of the Arbitration and Conciliation Act, 1996 reveals that the recommendation of the General Assembly of the United Nations is for adopting UNCITRAL Model Law insofar as international commercial arbitrations are concerned. Further, paragraphs (2) and (3) of the Statement of Objects and Reasons of the 1996 Act clearly reveals 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. There is thus 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. [Paras 77, 78 and 79][433-D-E; 434-D-F]

2.2. A perusal of the Resolution dated 11th December 1985 passed by the United Nations General Assembly (40/72. Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law) clearly reveals that what has been done by the United Nations General Assembly vide the aforesaid Resolution is to recommend to all the States to give due consideration to the Model Law on international commercial arbitration. However, it does not create any binding obligation on the States to enact the UNCITRAL Model Law as it is. [Paras 80, 81][435-G-H]

2.3. 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. The Resolution of the General Assembly of the United Nations is only recommendatory in nature and there is no binding decision taken thereat. [Para 85] [437-F-H]

S. Jagannath v. Union of India and Others (1997) 2 SCC 87 : [1996] 9 Suppl. SCR 848 and Mantri Techzone Private Limited v. Forward Foundation and Others (2019) 18 SCC 494 – held inapplicable.

STATE LEGISLATURE’S ENCROACHMENT ON

JUDICIAL POWERS:

3.1. The State Act is liable to be held unconstitutional on the ground of encroachment upon the judicial powers of the State. [Para 126][469-D]

3.2. In the present case, all the awards so also the judgments and decrees passed by the civil courts making such awards “Rules of Court” have been passed under the Arbitration Act, 1940. The perusal of the scheme of the Arbitration Act, 1940 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. The powers exercised by the court under the provisions of the 1940 Act are judicial powers and the power to make an award “Rule of Court” is not a mechanical power. [Paras 94, 100 and 113][444-H; 445A; 447-E-G; 461-A-B]

3.3. Though a law enacted by the Legislature may apparently seem to be within its competence but yet in substance if it is shown as an attempt to interfere with the judicial process, such law may be invalidated being in breach of doctrine of separation of powers. [Para 120][466-D-E]

3.4. A perusal of the various provisions of the State Act would clearly show that the State Act has been enacted since the State 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 thereunder and to enable the filing of appeals against the awards or decrees. 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, it is 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 have become “Rule of Court”. The powers exercised by the courts under Section 17 of the 1940 Act are judicial powers of the State. 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. [Para 121] [466-G-H; 467-A-C]

3.5. 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. 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. [Paras 122, 125][467-C-D; 469-C]

G.C. Kanungo v. State of Orissa (1995) 5 SCC 96 : [1995] 1 Suppl. SCR 510 – held per incuriam and also hit by rule of sub silentio.

Harinagar Sugar Mills Ltd. v. Shyam Sundar

Jhunjhunwala and Others [1962] 2 SCR 339;

Shankarlal Aggarwala and Others v. Shankarlal Poddar and Others (1964) 1 SCR 717; Bengal Immunity Company Limited v. State of Bihar and Others [1955] 2 SCR 603; SBP & Co. v. Patel Engineering Ltd. and Another (2005) 8 SCC 618 : [2005] 4 Suppl. SCR 688 and State of Tamil Nadu v. State of Kerala and Another (2014) 12 SCC 696 : [2014] 12 SCR 875 – followed. State of U.P. and Another v. Synthetics and Chemicals Ltd. and Another (1991) 4 SCC 139: [1991] 3 SCR 64; Sundeep Kumar Bafna v. State of Maharashtra and Another (2014) 16 SCC 623 : [2014] 4 SCR 486; Steel Authorityof India Ltd. v. J.C. Budharaja, Government and Mining Contractor (1999) 8 SCC 122 : [1999]

2 Suppl. SCR 155; P. Tulsi Das and Others v. Govt. of A.P. and Others (2003) 1 SCC 364 : [2002] 3 Suppl. SCR 306 and Ramachandra Reddy & Co. v. State of A.P. and Others (2001) 4 SCC 241 : [2001] 2 SCR 186 – relied on.

CONCLUSION:

4.1. 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. [Para 127][469-E-G]

4.2. 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. [Para 127][469-G-H]

4.3. 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. [Para 127][470-A-B]