The Supreme Court has observed that an arbitral award obtained without seeking the leave of the court before which a civil suit is pending, in respect of the same subject-matter, cannot be set up as a defence against the plaintiff's claims in that suit. The Court affirmed that the three chapters governing arbitration under the Arbitration Act, 1940, Chapters II, III, and IV are mutually exclusive, and once a suit is pending between the parties on the same subject-matter, only Chapter IV read with Section 21 provides the permissible route to arbitration.

The Court further held that an award falling outside this mandatory framework can be given effect in a pending suit only if all parties interested provide post-award consent to treat it as a compromise or adjustment under the proviso to Section 47 of the 1940 Act. Consistent opposition by a party throughout litigation negates such consent entirely, and no court may non-suit a plaintiff on the basis of such an award in the absence of that consent.

A Division Bench comprising Justice J.K. Maheshwari and Justice Atul S. Chandurkar observed, “At the outset, it must be noted that knowledge of pendency is not a sine qua non for the applicability of Section 21 of the 1940 Act. The provision requires only two conditions to be satisfied: (i) a suit must be pending, and (ii) the parties interested must agree to refer the dispute, or any part thereof, to arbitration. This position is reinforced by a comparison with Section 20 of the 1940 Act, which governs arbitration with court intervention in cases where no suit is pending. The language employed therein ‘where any persons have entered into an arbitration agreement before the institution of any suit…’ makes the fact of institution of the suit the determinative factor”.

“Upshot of the above discussion is that arbitral proceedings could not have been initiated or continued without complying Section 21 of the 1940 Act once the parties to the suit had knowledge of the pendency of the Suit. In this view of the matter, any arbitral award passed without the leave of the Trial Court when a suit is already 38 pending cannot be said to be made in compliance of the provisions of the 1940 Act”, it noted further.

Senior Advocate Dama Seshadri Naidu appeared for the appellants and Senior Advocate N.K. Mody appeared for the respondents.

For the facts, the appellant-plaintiffs traced title to a three-storey commercial-cum-residential property at Sarafa Bazar, Lashkar, Gwalior through a court auction conducted in 1964, with symbolic possession delivered in 1973.

Upon the defendant-respondents forcibly occupying a portion of the property, the original plaintiff instituted a civil suit seeking recovery of possession and mesne profits. During pendency of that suit, the parties entered into referral letters dated February and March 1983, culminating in a panchayat arbitration award dated September 15, 1983, directing the plaintiff to execute a registered sale deed in favour of the defendants for a consideration of ₹ 2,75,000.

The defendants filed proceedings in 1984 seeking to make the award a rule of court, which the Trial Court decreed in 2000. The plaintiffs' challenge before the High Court was dismissed in 2006, and a Special Leave Petition before the Supreme Court was similarly dismissed.

The Trial Court, thereafter, dismissed the 1982 suit on July 22, 2010, treating the award as having attained finality. The High Court affirmed this dismissal on January 30, 2025, prompting the present appeal.

Now, considering the factual matrix, the Court held, first, that the subject-matter of the 1982 suit and the arbitral proceedings was identical, both pertaining to Municipal No. 03/10, Sarafa Bazar, a conclusion reinforced by the Trial Court's own 1990 order staying the suit on that precise ground.

Second, knowledge of pendency is not a condition precedent to Section 21's applicability; the statute makes the fact of pendency, not subjective awareness, the determinative criterion.

Third, since service on the defendants was completed on August 6, 1983, and the award was passed on September 15, 1983, the defendants had opportunity to approach the Trial Court under Section 21 before the award, which they did not avail.

Fourth, the three-chapter scheme is mutually exclusive, and Chapter IV alone could have governed this reference.

Fifth, the plaintiffs never consented, expressly or by conduct, to the award being treated as a compromise, rendering the proviso to Section 47 wholly inapplicable.

Sixth, the High Court contradicted its own orders of 1992 and 2006, which had expressly reserved the plaintiffs' liberty to press their Section 47 proviso objections in the 1982 suit, by thereafter treating the award as final and binding.

“…once a suit was pending between the parties, only option available for referring the matter to arbitration was by way of application under Section 21 of the 1940 Act. Any other route either under Chapter II or Chapter III of the 1940 Act would be improper…an arbitral award obtained otherwise than in consonance with the provisions of the 1940 Act can be taken on record by the Trial Court as a compromise or adjustment of the suit only if the parties mutually consent to such an award. Hence, a post-award consent is contemplated”, it noted.

“…It is precisely to address this situation that the proviso to Section 47 has been introduced, and it provides some degree of safeguard by the requirement of post-award consent of all the parties interested. It is this post-award consent that gives the otherwise unenforceable award its only basis for enforceability in the eyes of law. Then also, it is only given effect not as an award but as a compromise. The award serves merely as the instrument around which the said compromise takes shape and can be recorded by the court under Order 23 Rule 3 of the CPC”, it further said.

Accordingly, the Court set aside the High Court's judgment dated January 30, 2025, and the Trial Court's decree dated July 22, 2010 to the extent it dismissed the suit. The award dated September 15, 1983 was declared unenforceable against the plaintiffs.

The sale deed dated November 3, 2009, executed during execution proceedings subject expressly to the suit's outcome, was held not binding on the plaintiffs. A decree for recovery of possession was passed in favour of the plaintiffs, with the defendants directed to deliver vacant possession within two months.

The matter was remitted to the Trial Court for mesne profits enquiry to be concluded within nine months. Costs of Rs. 1,00,000 were imposed on the defendants.

Cause Title: Ashok And Ors. Padam Chand And Ors. (Neutral Citation: 2026 INSC 591)

Appearances:

Appellant: Dama Seshadri Naidu, Senior Advocate.

Respondent: N.K. Mody, Senior Advocate, Divyakant Lahoti, Advocate.

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