The Supreme Court has held that an arbitral award obtained without following the mandatory procedure under Section 21 of the Arbitration Act, 1940 cannot be used to defeat a plaintiff’s claim in a pending suit. 

The bench of Justice J.K. Maheshwari restored the rights of the plaintiffs over a disputed property in Gwalior and ruled that the award could not be treated as binding in the absence of post-award consent from all parties. 

The case arose out of a decades-long property dispute concerning a three-storey commercial-cum-residential building situated in Sarafa Bazar, Lashkar, Gwalior. The litigation had its origins in a court auction sale conducted in 1964, through which the original plaintiff acquired the property after a mortgage decree was executed against the previous owner. Symbolic possession was later delivered in 1973. 

According to the plaintiffs, portions of the property were subsequently occupied by the defendants, leading to a suit for possession and mesne profits filed in 1982. During the pendency of this suit, the parties referred their dispute to a private arbitration process, culminating in an award dated 15 September 1983. The award contemplated transfer of the disputed property in favour of the defendants upon payment of ₹2.75 lakh to the plaintiff and directed withdrawal of pending civil and criminal proceedings. 

The defendants later sought to enforce the award through separate proceedings and succeeded in having it made a rule of the court. Relying heavily on the existence of this award, both the Trial Court and the Madhya Pradesh High Court ultimately dismissed the plaintiff’s suit for possession, holding that the arbitration award had attained finality. 

Before the Supreme Court, the plaintiffs argued that the arbitration proceedings were fundamentally defective because the dispute had been referred to arbitration while a civil suit involving the same property was already pending. They contended that under Section 21 of the Arbitration Act, 1940, parties could refer a matter in a pending suit to arbitration only through an order of the court. Since no such court order was ever obtained, the arbitration award could not legally affect the pending suit. 

The Supreme Court undertook an extensive examination of the scheme of the Arbitration Act, 1940 and observed that the Act contemplated three distinct categories of arbitration: arbitration without court intervention, arbitration with court intervention where no suit was pending, and arbitration in suits. The Court emphasised that these categories were mutually exclusive and that once a suit concerning the dispute was pending, parties could proceed only under Chapter IV of the Act through Section 21. 

Rejecting the findings of the courts below, the Supreme Court held that the subject matter of the 1982 suit and the arbitration proceedings was substantially the same. After examining the property descriptions contained in the plaint, auction certificate, referral documents and arbitration proceedings, the Court concluded that both proceedings concerned the same property bearing Municipal No. 03/10 (Old) situated at Sarafa Bazar, Lashkar. The contrary conclusion reached by the lower courts was described as a manifest error. 

The Bench further clarified that the applicability of Section 21 does not depend upon whether parties had knowledge of the pending suit. The decisive factor is the existence of the pending suit itself. Nevertheless, the Court noted that even on facts, the defendants had knowledge of the pending suit before the arbitration proceedings concluded because summons had already been served upon them before the award was pronounced. Despite this, neither side approached the court for an order of reference as mandated by Section 21. 

The Court held that once the parties became aware of the pending litigation, continuation of arbitration without obtaining leave of the court was impermissible. Any award rendered in such circumstances could not be regarded as one made in compliance with the Arbitration Act, 1940. 

A central issue before the Court was whether the award could nevertheless be enforced under the proviso to Section 47 of the 1940 Act. Analysing earlier precedents including Naraindas v. Vallabhdas and other authorities, the Court held that an award obtained outside the statutory framework may be recognised only as a compromise in a pending suit and only if all interested parties give post-award consent to treat it as such. The requirement is not merely consent to arbitration but consent to the award itself after it has been rendered. 

Applying this principle, the Court found that the plaintiffs had consistently opposed the award throughout the litigation and had never consented to treat it as a compromise or adjustment of the pending suit. Therefore, the mandatory condition prescribed under the proviso to Section 47 was absent. As a result, the award could not be used as a defence against the plaintiffs’ claim for possession and mesne profits. 

The Supreme Court observed that both the Trial Court and the High Court had wrongly proceeded on the assumption that the award had attained finality against the plaintiffs. In reality, the High Court itself had earlier granted liberty to the plaintiffs to challenge the legal effect of the award under Section 47 in the pending suit. The lower courts failed to properly examine this issue and erroneously treated the award as conclusive. 

Importantly, the Trial Court had independently recorded findings that the plaintiff had lawfully purchased the property through a court auction and had obtained symbolic possession. These findings had not been challenged by the defendants. The Supreme Court therefore held that once the impermissible reliance on the arbitration award was removed, the plaintiffs’ claim deserved to succeed. 

Allowing the appeal, the Supreme Court held that the arbitral award dated 15 September 1983 could not operate against the plaintiffs and could not be treated as settling their rights in the disputed property. The Court concluded that the suit for possession and mesne profits deserved to be decreed in favour of the plaintiffs and answered all substantial questions of law in their favour.

Case Details

Case Title: Ashok And Ors. Versus Padam Chand And Ors.

Citation: JURISHOUR-1472-SC-2026

Case No.:  SLP (Civil) No. 18146 OF 2025

Date: 29/05/2026

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