SC strikes down law allowing Kerala to annul arbitration clause, awards

In a setback to Kerala, the Supreme Court on Wednesday struck down a 1998 local law empowering the state government to revoke the arbitration clause and the judicially enforceable arbitral awards, saying it was “unconstitutional” as it violated the doctrine of separation of powers by encroaching into the judicial powers of courts.

The top court's verdict came on an appeal of the state government against the Kerala High Court verdict holding that the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 encroached upon the judicial power of the State and was therefore liable to be struck down as being unconstitutional.

“We are ...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 the doctrine of 'separation of powers. As such, the State Act is liable to be declared unconstitutional on this count,” a bench comprising Justices L Nagesara Rao and B R Gavai said while upholding the high court verdict.

As per the chequered background of the case, Kerala had started the construction of the Kallada Irrigation Project in 1961 with financial assistance from the World Bank which had put a special condition that there must be an arbitration clause related to the project work.

Later, several arbitral awards were passed against the state which claimed that the awards of “unconscionable amounts” were passed “wrongly and arbitrarily” in collusion with the claimant contractors and officials of the department, causing heavy losses to the state.

As such, the state came up with the law, enacted with effect from November 14, 1997, in the public interest to cancel the arbitration clauses in the agreements executed.

Justice Gavai, writing the 125-page judgement, took note of the submissions of parties and held that the state government was well within its legislative competence to enact the law which was valid to the extent it got the Presidential assent under Article 254(2) of the Constitution of India.

However, the bench concurred with the findings of the high court on the breach of the doctrine of separation of power holding that it empowered the executive government to annul the judicially enforceable arbitral awards.

Referring to various verdicts of the apex court, it said, “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 the doctrine of separation of powers.

“As already discussed, 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 high court verdict had come in July 2013 holding that the State Act to be beyond the legislative competence of the Kerala State Legislature and as such, it was unconstitutional.