Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 Declared Unconstitutional: Supreme Court's Analysis in Secretary to Govt. of Kerala vs James Varghese and Others
Overview of the Dispute
The Supreme Court of India, in Secretary To Govt. of Kerala Vs James Varghese And Others (Civil Appeal No. 6258 of 2014, decided on 04/05/2022), examined two pivotal constitutional questions: first, whether the Kerala State Legislature possessed the legislative competence to enact the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998 (referred to herein as the "State Act"); and second, whether the State Act, in its operation, encroached upon the judicial power of the State.
The Kerala High Court at Ernakulam had, through its judgment dated 9th July 2013 in O.P. No.4206 of 1998 and companion matters, struck down the State Act as unconstitutional — holding it to be beyond the legislative competence of the State Legislature and an impermissible encroachment on judicial power. The State of Kerala challenged that determination before the Supreme Court.
Background: The Kallada Irrigation Project and Genesis of the State Act
The State of Kerala initiated the Kallada Irrigation Project in 1961. Between June 1982 and March 1989, the project received financial assistance from the International Bank for Reconstruction and Development (World Bank). As a precondition imposed by the World Bank, a special framework known as the Local Competitive Bidding Specification (LCBS), adopted through G.O. (Ms) No. 3/81/I&R dated 20th January 1981, was incorporated into all agreements relating to project works.
Clauses 51 and 52 of the LCBS provided for resolution of disputes and differences through arbitration, intended to facilitate expeditious and equitable settlement. However, the State of Kerala subsequently took the position that multiple arbitrators had rendered awards that were unconscionable, arbitrary, contrary to the terms of the agreements, and in collusion with claimant contractors and departmental officials — resulting in what the State described as heavy financial losses to the public exchequer.
Acting on this position, the State Legislature enacted the State Act, deemed to have come into force on 14th November 1997. The legislation pursued four primary objectives:
- Cancellation of all arbitration clauses in LCBS-governed agreements
- Revocation of authority of arbitrators appointed under such agreements
- Enabling parties to file fresh civil suits as though no arbitration clause had ever existed
- Permitting the State Government to file appeals against specified awards — including those where the limitation period had already expired — within prescribed timelines
Full Text of the State Act
The State Act, being a short piece of legislation, was reproduced in its entirety by the Supreme Court. Its key operative provisions are as follows:
Section 1 — Short Title, Extent, Commencement and Application
The Act is called the Kerala Revocation of Arbitration Clauses and Reopening of Awards Act, 1998, extends to the whole of Kerala, is deemed to have come into force on 14th November 1997, and applies to all agreements executed in terms of the Local Competitive Bidding Specification.
Section 2 — Definitions
- "Agreement" means an agreement executed under the LCBS for various works of the Government of Kerala.
- "Local competitive bidding specification" refers to the LCBS adopted vide G.O. (Ms) No. 3/81/I&R dated 20th January 1981.
- Words used but not defined in the State Act, and defined in the Arbitration Act, 1940 (Central Act 10 of 1940) or the Arbitration and Conciliation Act, 1996 (Central Act 26 of 1996) — in relation to arbitration proceedings commenced on or after 25th January 1996 — carry the meanings assigned therein.
Section 3 — Cancellation of Arbitration Clauses and Revocation of Authority of Arbitrator
"Notwithstanding anything contained in the Indian Contract Act, 1872 (Central Act 9 of 1872) or in the Arbitration Act, 1940 (Central Act 10 of 1940) or in the Arbitration and Conciliation Act, 1996 (Central Act 26 of 1996) or in any other law for the time being in force or in any judgement, decree or order of any court or other authority or in any agreement or other instrument, (i) the arbitration clauses in every agreement shall stand cancelled; (ii) the authority of an arbitrator appointed under an agreement referred to in clause (i) shall stand revoked; and (iii) any agreement referred to in clause (i) shall cease to have effect in so far as it relates to the matters in dispute or difference referred, with effect on and from the date of commencement of this Act."
Sub-section (2) of Section 3 further provided that parties remained free to file civil suits before the competent court, and all disputes were to be decided as though arbitration clauses had never been part of the agreement.
Section 4 — Period of Limitation for Filing Suits
Section 4 enabled suits under sub-section (2) of Section 3 to be filed within six months from the commencement of the State Act, or within the period allowed under the Limitation Act, 1963 (Central Act 36 of 1963), whichever was later — overriding anything to the contrary in the Arbitration Act, 1940, the Arbitration and Conciliation Act, 1996, or the Limitation Act, 1963.
Section 5 — Power of Government to File Appeal Against Certain Awards
Section 5 empowered the State Government to file an appeal against any award within ninety days of commencement of the State Act, where it appeared that:
- The award was not in accordance with the terms of the agreement; or
- Relevant data or particulars were not produced before the arbitrator; or
- The award was of unconscionable amounts.
This power operated notwithstanding anything in the Arbitration Act, 1940, the Arbitration and Conciliation Act, 1996, the Limitation Act, 1963, any other law, or any judgment, decree, or order of any court.
Section 6 — Procedure Before Court
Section 6 clarified that the Code of Civil Procedure, 1908 (Central Act 5 of 1908) governs all proceedings and appeals under the State Act.
Section 7 — Arbitration Act Not to Apply
Section 7 provided that the State Act's provisions prevail notwithstanding anything inconsistent in the Arbitration Act, 1940, the Arbitration and Conciliation Act, 1996, or any other law.