Regulating India – III – A Tribunal without Parallel

Author(s): Sanjay Sen

This is the third and final essay in a three-part series. 

Regulating India – A Tribunal without parallel

This essay discusses the public law concerns that emerge from vesting legislative, executive and judicial powers in the same body, namely Tribunals. Furthermore, the author argues that the soft approach of traditional courts regarding this constitutional deficiency has severely undermined the legal integrity of tribunals, with resultant loss of public and investor confidence.

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The Supreme Court has held that creating tribunals is well within the power of the legislature. However, it has also held consistently over several years that the doctrine of separation of power is a basic structure of the Constitution. In Indira Nehru Gandhi vs. Raj Narain¹, a Constitutional Bench of the Supreme Court observed that the Constitution recognises separation of powers in a broad sense without there being any rigid separation of powers as there is under the American Constitution or the Australian Constitution². It held thus:

“60. It is true that no express mention is made in our Constitution of vesting the judiciary the judicial power as is to be found in the American Constitution. But a division of the three main functions of Government is recognised in our Constitution. Judicial power in the sense of the judicial power of the State is vested in the judiciary. Similarly, the executive and the legislature are vested with powers in their spheres. Judicial power has lain in the hands of the judiciary prior to the Constitution and also since the Constitution. It is not the intention that the powers of the judiciary should be passed to or be shared by the executive or the legislature or that the powers of the legislature or the executive should pass to or be shared by the judiciary.

(SCC pp. 44-45, para 60)

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555. … ‘[The] Constitution’ has a basic structure comprising the three organs of the Republic: the executive, the legislature, and the judiciary. It is through each of these organs that the sovereign will of the people has to operate and manifest itself and not through only one of them. Neither of these three separate organs of the Republic can take over the function assigned to the other. This is the basic structure or scheme of the system of Government of the Republic….

(SCC p. 210, para 555)

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688. … But no constitution can survive without a conscious adherence to its fine checks and balances. Just as courts ought not to enter into problems entwined in the ‘political thicket’, Parliament must also respect the preserve of the courts. The principle of separation of powers is a principle of restraint….” (SCC p. 260, para 688) (Underlines supplied)

Kurien Joseph, J. in his separate and concurring opinion in Supreme Court Advocate on Record Association³ additionally held:

“987. Separation of powers or say distribution of powers, as Brother Lokur, J. terms it, is the tectonic structure of the Constitution of India. The various checks and balances are provided only for maintaining a proper equilibrium amongst the structures and that is the supreme beauty of our Constitution. Under our constitutional scheme, one branch does not interfere impermissibly with the constitutionally assigned powers and functions of another branch. The permissible areas of interference are the checks and balances. But there are certain exclusive areas for each branch which Khehar, J. has stated as “core functions”, and which I would describe as powers central. There shall be no interference on powers central of each branch. What the Constitution is, is only for the court to define; whereas what the constitutional aspirations are for the other branches to detail and demonstrate.” (underline supplied)

Though separation of power is part of the Constitutional scheme, the legislature from time to time has sought to establish one-stop tribunals – where tribunals are vested with the powers to adjudicate disputes as well as frame regulations i.e. make laws. These are substantive regulation and not the ones that regulate procedures for conducting their daily business. These regulations are placed before Parliament, under a laying provision and then published and become part of the statute under which it is framed. They are coercive in nature, having the force of law. In addition to being vested with such judicial and law-making powers, some tribunals have been given executive powers to grant licenses and permits and also regulatory powers of regulating contracts and fixing tariffs.

The Supreme Court in Clariant International Ltd. v. Securities & Exchange Board of India⁴, observed that:

“72. The conflict of jurisdiction between an expert Tribunal vis-à-vis the courts in the context of the doctrine of separation of powers poses a problem even in other countries.

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75. The SEBI Act confers a wide jurisdiction upon the Board. Its duties and functions thereunder, run counter to the doctrine of separation of powers. Integration of power by vesting legislative, executive and judicial powers in the same body, in future, may raise several public law concerns as the principle of control of one body over the other was the central theme underlying the doctrine of separation of powers.

76. Our Constitution although does not incorporate the doctrine of separation of powers in its full rigour but it does make horizontal division of powers between the legislature, executive and judiciary. (See Rai Sahib Ram Jawaya Kapur v. State of Punjab [AIR 1955 SC 549 : (1955) 2 SCR 225].)

77. The Board exercises its legislative power by making regulations, executive power by administering the regulations framed by it and taking action against any entity violating these regulations and judicial power by adjudicating disputes in the implementation thereof. The only check upon exercise of such wide-ranging powers is that it must comply with the Constitution and the Act. In that view of the matter, where an expert Tribunal has been constituted, the scrutiny at its end must be held to be of wide import. The Tribunal, another expert body, must, thus, be allowed to exercise its own jurisdiction conferred on it by the statute without any limitation.”

(underline supplied)

The Supreme Court in Clariant International, 2004 does notice that the integration of power by vesting legislative, executive and judicial powers in the same body may violate the constitutional scheme, but then the Court defers a decision on this subject with an observation that “in future, [this] may raise several public law concerns”. If the public concerns arise on account of a violation of the Constitutional scheme, surely the remedy has to be immediate. Having detected a violation of the basic structure doctrine of separation of power, the public law concerns that arises cannot then be pushed into a timeless future.

The Supreme Court in Supreme Court Advocates on Records Association judgment⁵ while approving the held:

“119. In BrahmDutt v. Union of India [BrahmDutt v. Union of India, (2005) 2 SCC 431] it has been observed that if there are advisory and regulatory functions as well as adjudicatory functions to be performed, it may be appropriate to create two separate bodies for the same. That is, however, an aspect, which is in the wisdom of the legislature and that course is certainly open for the future if the legislature deems it so. However, at present there is a single Commission, which inter alia performs adjudicatory functions and, thus, the presence of a man of law as a member is a necessity in order to sustain the provision, as otherwise, it would fall foul of the principles of separation of powers and judicial review, which have been read to be a part of the basic structure of the Constitution.”

 If legislation suffers from an inherent constitutional deficiency, the solution is not within the realms of self-correction by the legislature, of possible appropriateness in future conduct. The result of taking the soft approaches in both has severely undermined the legal and constitutional integrity of tribunals, with resultant loss of public confidence.

The Electricity Act, 2003 invests in the Commissions the power to make regulations on nearly 42 subjects. From that list, leaving aside 5 or 6 items that relate to fees and matters of general administration, the rest deal with substantive rights and interests of stakeholders. The legislative safeguard in the statute for framing regulations are entirely in terms of procedure, in the form of prior public consultation and laying in the Parliament or State Assembly. Like all subordinate legislations, once it is published it has the force of law.

The Supreme Court in PTC India Ltd.⁶ examined in sufficient details the provisions of the Electricity Act, 2003 and noticed that Commissions have legislative powers, apart from the power to issue judicial orders. The following observations of the court make essential reading:

“49. On the above analysis of various sections of the 2003 Act, we find that the decision-making and regulation-making functions are both assigned to CERC. Law comes into existence not only through legislation but also by regulation and litigation. Laws from all three sources are binding. According to Professor Wade, “between legislative and administrative functions we have regulatory functions”. A statutory instrument, such as a rule or regulation, emanates from the exercise of delegated legislative power which is a part of administrative process resembling enactment of law by the legislature whereas a quasi-judicial order comes from adjudication which is also a part of administrative process resembling a judicial decision by a court of law. (See Shri Sitaram Sugar Co. Ltd. v. Union of India [(1990) 3 SCC 223].)

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53. Applying the abovementioned tests to the scheme of the 2003 Act, we find that under the Act, the Central Commission is a decision-making as well as regulation-making authority, simultaneously. Section 79 delineates the functions of the Central Commission broadly into two categories —mandatory functions and advisory functions. Tariff regulation, licensing (including inter-State trading licensing), adjudication upon disputes involving generating companies or transmission licensees fall under the head “mandatory functions” whereas advising the Central Government on formulation of National Electricity Policy and tariff policy would fall under the head “advisory functions”. In this sense, the Central Commission is the decision-making authority. Such decision-making under Section 79(1) is not dependent upon making of regulations under Section 178 by the Central Commission. Therefore, functions of the Central Commission enumerated in Section 79 are separate and distinct from functions of the Central Commission under Section 178. The former are administrative/adjudicatory functions whereas the latter are legislative.

58. One must understand the reason why a regulation has been made in the matter of capping the trading margin under Section 178 of the Act. Instead of fixing a trading margin (including capping) on a case-to-case basis, the Central Commission thought it fit to make a regulation which has a general application to the entire trading activity which has been recognised, for the first time, under the 2003 Act. Further, it is important to bear in mind that making of a regulation under Section 178 became necessary because a regulation made under Section 178 has the effect of interfering and overriding the existing contractual relationship between the regulated entities. A regulation under Section 178 is in the nature of a subordinate legislation. Such subordinate legislation can even override the existing contracts including power purchase agreements which have got to be aligned with the regulations under Section 178 and which could not have been done across the board by an order of the Central Commission under Section 79(1)(j).

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66. While deciding the nature of an order (decision) vis-à-vis a regulation under the Act, one needs to apply the test of general application. On the making of the impugned 2006 Regulations, even the existing power purchase agreements (PPA) had to be modified and aligned with the said Regulations. In other words, the impugned Regulations make an inroad into even the existing contracts. This itself indicates the width of the power conferred on CERC under Section 178 of the 2003 Act. All contracts coming into existence after making of the impugned 2006 Regulations have also to factor in the capping of the trading margin. This itself indicates that the impugned Regulations are in the nature of subordinate legislation. Such regulatory intervention into the existing contracts across the board could have been done only by making regulations under Section 178 and not by passing an order under Section 79(1)(j) of the 2003 Act. Therefore, in our view, if we keep the above discussion in mind, it becomes clear that the word “order” in Section 111 of the 2003 Act cannot include the impugned 2006 Regulations made under Section 178 of the 2003 Act.” (underline supplied)

While accepting the wide jurisdiction that the statute confers on the Central Commission, the Supreme Court concludes that regulations are delegated legislations and, therefore, a source of law. It confirms that both decision-making and regulation (i.e. law) making powers have been vested in a single body. The Court notes that it is the mandatory functions of the Central Commission to issue licenses apart from framing regulations and adjudicating disputes. The Court effectively recognises that the Central Commission in order to discharge its statutory functions has at its disposal a large array of weapons, much like the US arms market. When it needs to interfere with contracts across the board, the weapon of choice is a regulation. By making a regulation or amending an existing one, it can modify contracts across the board. The Supreme Court justifies the power to hold that this result of modification of contracts across the board cannot be achieved by issuing orders that are born out of a process of adjudication between litigating parties.

What the court does not notice, or chooses to ignore, is that the underlying legislation that allows integration of powers offends the doctrine of separation of power, which doctrine has been placed in the pedestal of being a basic and inalienable structure of the Constitution. Contracts modified through the force of regulation can then be enforced by the same Commission when it adjudicates disputes arising from such contract. The Commission that wears a hat of a lawmaker in the morning session to sign off a regulation, at the post-lunch session the same Commission dons a judge’s wig – to now interpret and apply the regulation it has framed earlier that morning. The grievous consequence of such action on stakeholders and investors (and litigants) has not concerned either the Parliament or Constitutional Bench.

With such powers with the tribunals, contractual bargains can be refashioned at will. Sanctity of contracts ends the moment a tribunal is empowered to modify contracts on the basis of its power to make laws (i.e. regulations).  Financial investments made on the foundations of legal certainty and rule of law stands hostage to an ad hoc regime empowered to move the goal post in the middle of the game.  If separation of power is a basic structure of the Constitution, it was certainly overstepped by Parliament when it made laws that create one-stop tribunals.

Interestingly the Supreme Court has not been consistent on whether or not a statute (ordinary legislation) can be tested on the anvil of the basic structure doctrine, which doctrine was originally crafted to test constitutional amendments. In the Madras Bar Assn., 2014 judgment (5 judges) it was held that:

 “109. … This Court has repeatedly held that an amendment to the provisions of the Constitution would not be sustainable if it violated the ‘basic structure’ of the Constitution, even though the amendment had been carried out by following the procedure contemplated under ‘Part XI’ of the Constitution. This leads to the determination that the ‘basic structure’ is inviolable. In our view, the same would apply to all other legislations (other than amendments to the Constitution) as well, even though the legislation had been enacted by following the prescribed procedure, and was within the domain of the enacting legislature, any infringement to the ‘basic structure’ would be unacceptable.” (underline supplied)

 This view of five judges was not accepted by Kehar J., in his majority opinion in Supreme Court Advocate on Record Association (which was incidentally also five judges), who went back and relied on a prior seven judges opinion⁷. The Supreme Court through Kehar J., then said:

“857. Strictly speaking, therefore, an amendment to the Constitution can be challenged only if it alters the basic structure of the Constitution and a law can be challenged if:

(1) It is beyond the competence of the Legislature;

(2) It violates Article 13 of the Constitution;

(3) It is enacted contrary to a prohibition in the Constitution; and

(4) It is enacted without following the procedure laid down in the Constitution.”

One has to now examine whether a law enacted by Parliament that is contrary to the doctrine of separation of power can strictly speaking be held to be enacted contrary to a prohibition in the Constitution. There is no question that there is a prohibition from violating an inalienable feature or the basic structure of the constitution. The Apex Court as the chef executif for constitutional diners has not enumerated the prohibitions on legislative powers of Parliament (in paragraph 857(3) of the judgment). If there is a prohibition for a making a Constitutional Amendment in violation of the basic structure, say the doctrine of separation of power, can such prohibition be circumvented by making an ordinary law. Having said that, it does not at all appeal to common sense and judicial propriety to ignore the five judges view in Madras Bar Asso., 2014 that conclusively holds that a statute violative of the doctrine of separation of power will not survive, and will suffer the same ignominy like a constitutional amendment displaying similar extravagance. The Court again in Rojer Mathew’s, 2019, sitting in 5, applied the basic structure doctrine of separation of power to test the “rules” framed by the Central Government under Section 184 of the Finance Act, 2017.⁸ If legislations could not be tested for violation of the basic structure doctrine, how could you then test the rule? Either propriety or consistency, something is lacking.

But to this, the Supreme Court’s answer can be as observed by Kurian Joseph J., (in his reference to the Chief Justice Khehar’s oft-made observation⁹, the fate of the case is sealed; there is no need for any further deal, big or small.”]), “What is the big deal about it?..….once the fate of the case is sealed; there is no need for any further deal, big or small”.

All views expressed are personal.