The Supreme Court has held that an arbitral award passed under the 1940 Arbitration Act during a pending civil suit, without the court’s leave under section 21, cannot be used to defeat that suit. The award could not bind the plaintiffs in the absence of their post-award consent under the proviso to section 47.
AN arbitral award passed during the pendency of a civil suit, where the arbitration was set in motion without the leave of the court under section 21 of the Arbitration Act, 1940, cannot be relied upon to settle or defeat that suit. The Supreme Court has so held while setting aside concurrent findings that had non-suited a property owner on the strength of such an award.
The case is decided by a Bench of Justice J.K. Maheshwari and Justice Atul S. Chandurkar, with the judgment authored by Justice Maheshwari. The dispute concerns a three-storey commercial-cum-residential property at Sarafa Bazar, Lashkar, in Gwalior, Madhya Pradesh.
The original plaintiff, Haridas, had bought the property in a court auction in 1964 that arose out of execution proceedings against a previous owner. The auction was confirmed in 1973, a sale certificate was issued in his favour, and symbolic possession was handed over. According to the plaintiffs, the defendants later forcibly occupied a portion of the property.
That occupation led Haridas to institute a suit in 1982 seeking recovery of physical possession and mesne profits. While the suit was pending, the parties referred their dispute to a private arbitration, which resulted in an award dated September 15, 1983.
The award contemplated transfer of the disputed property to the defendants on payment of ₹2.75 lakh to the plaintiff and directed withdrawal of the pending civil and criminal proceedings. The defendants later had the award made a rule of the court and relied on it to argue that the dispute stood settled.
Over the next four decades the matter moved between the trial court, the Madhya Pradesh High Court and the Supreme Court, with the plaintiffs throughout challenging the award’s enforceability.
The trial court dismissed the possession suit in 2010 on the view that the award had attained finality, and the High Court affirmed that view in January 2025, which is what brought the matter to the Supreme Court.
The central question was whether an award passed during a pending suit could be used to defeat that suit when the arbitration had been initiated without an order under section 21 of the 1940 Act. Before the Court, the plaintiffs argued that a dispute already before a civil court can be sent to arbitration only through a court order under Section 21, and that no such order was ever obtained here.
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The defendants countered that their lack of knowledge of the pending suit would not invalidate the operation of the award. The Court examined the scheme of the 1940 Act, which contemplates three distinct and mutually exclusive categories of arbitration, that is, arbitration without court intervention, arbitration with court intervention where no suit is pending, and arbitration in suits, the last of which is governed by Chapter IV through section 21.
On that scheme, the Court held that once a suit concerning the dispute is pending, the parties can proceed only under section 21. It said that the arbitral proceedings could not have been initiated or continued without complying with section 21 of the 1940 Act once the parties to the suit had knowledge of the pendency of the Suit.
The Court also said, “any arbitral award passed without the leave of the Trial Court when a suit is already pending cannot be said to be made in compliance of the provisions of the 1940 Act.”
The Court also rejected the defendants’ reliance on their supposed want of knowledge. It observed that, “the legislature has not treated ‘knowledge’ of pendency as a relevant or determinative consideration.
Rather, the statutory scheme makes the ‘institution’ or ‘pendency’ of the suit a determinative factor”, adding that even on facts the defendants had been served with summons before the award was pronounced.
A further question was whether the award could still be saved under the proviso to section 47 of the 1940 Act, which allows an award otherwise obtained to be taken into consideration as a compromise or adjustment of a pending suit, but only with the consent of all interested parties.
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Drawing on precedents including Naraindas v. Vallabhdas, the Court clarified that what is required is consent to treat the award itself as a compromise after it has been rendered, not merely consent to arbitration.
Applying that test, the Court found that the plaintiffs had opposed the award throughout and had never given post-award consent. It said the award, “could not have been treated as settling or adjusted the Plaintiffs’ rights with respect to the suit property, in the absence of the Plaintiffs’ post-award consent to treat it as a compromise under the proviso to section 47 of the 1940 Act”, and that the trial court and the High Court had committed a manifest error of law in treating the award as final against the plaintiffs.
Once the impermissible reliance on the award was removed, the trial court’s own unchallenged findings, that the plaintiff had lawfully bought the property at a court auction and obtained symbolic possession, stood good. On that footing the Court allowed the appeal and held that the suit for possession and mesne profits deserved to be decreed in the plaintiffs’ favour.
Cause Title: Ashok and Ors. v. Padam Chand and Ors. 2026 INSC 591
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