Award Passed During Pending Suit Without Court's Leave Cannot Bar Plaintiff's Possession Claim, Supreme Court Holds

A bench of Justices J.K. Maheshwari and Atul S. Chandurkar holds that a 1983 arbitral award, rendered without compliance with Section 21 of the Arbitration Act 1940, could not non-suit plaintiffs who never consented to it.

The Supreme Court has decreed a possession suit that had been pending since 1982, setting aside concurrent findings of the Trial Court and the Madhya Pradesh High Court that had treated a 1983 panchayat arbitration award as a bar to the plaintiffs' claim. The Court held that once a civil suit is pending between parties over the same property, any reference to arbitration must follow the mandatory route of Section 21 of the Arbitration Act, 1940 — requiring all interested parties to apply jointly before the court where the suit is pending. An award rendered without that leave is legally ineffective against the plaintiffs in the suit, and can be given effect only as a compromise under the proviso to Section 47 of the 1940 Act, which itself requires the post-award consent of all parties. Since the plaintiffs had consistently opposed the award throughout four decades of litigation, that consent was wholly absent.

A Three-Storey Building, a Court Auction, and a Panchayat Award

The suit property is a three-storey commercial-cum-residential building at Sarafa Bazar, Lashkar, Gwalior, bearing Municipal No. 03/10 (Old). The original plaintiff, Haridas, purchased it through a court auction on 7 April 1963 in Execution Case No. 29/56-1963 before the Second Additional District Judge, Gwalior. The auction was confirmed on 16 August 1973 and a sale certificate was issued on 30 August 1973. Symbolic possession was handed over to Haridas on 22 September 1973.

The building was occupied by various tenants. During eviction proceedings against one such tenant, it emerged that Defendant No. 1 had forcibly occupied two rooms, two halls and a courtyard on the ground floor. The defendants also began asserting ownership over the upper floors. A complaint was filed against the defendants on 15 July 1981 under Sections 147, 148, 149 and 323 read with Section 34 of the Indian Penal Code. Haridas then filed Civil Suit No. 13A/1982 (the “1982 Suit”) before the Xth Additional District Judge, Gwalior, seeking recovery of physical possession and mesne profits.

While the 1982 Suit was pending and before the defendants had been served, the parties referred their dispute to a panchayat arbitration through referral letters dated 28 February 1983, 10 March 1983 and 1 August 1983. The arbitration culminated in an award dated 15 September 1983, directing Haridas to execute a registered sale deed in favour of Padam Chand upon payment of Rs. 2,75,000. No application was ever made before the Trial Court under Section 21 of the 1940 Act, and no order of reference was ever passed by the court.

The defendants filed Case No. 43A of 1984 (the “1984 Proceedings”) seeking to make the award a rule of the court. The Trial Court, by its judgment dated 2 August 2000, decreed the 1984 Proceedings and made the award a rule of the court. The Madhya Pradesh High Court dismissed the plaintiffs' appeal against that order on 5 April 2006, and a division bench of the Supreme Court dismissed the special leave petition on 14 August 2006.

The 1982 Suit itself was eventually dismissed by the Trial Court on 22 July 2010, primarily on the ground that the arbitration award had attained finality. The High Court affirmed that dismissal on 30 January 2025. The plaintiffs then approached the Supreme Court.

Three Chapters, One Mandatory Route

The Court began its analysis by mapping the three distinct modes of arbitration under the 1940 Act. Chapter II governs arbitration without court intervention, presupposing a pre-existing written arbitration agreement. Chapter III, containing only Section 20, governs arbitration with court intervention where no suit is pending, again requiring a pre-existing agreement. Chapter IV, comprising Sections 21 to 25, governs arbitration in suits — the only chapter applicable where a suit is already pending between the parties.

The Court held that these three chapters are mutually exclusive. A reference to arbitration must fall within one and only one of them, and the procedural requirements of the applicable chapter cannot be bypassed. Since the 1982 Suit was pending when the referral letters were exchanged in 1983, only Chapter IV could have governed the reference. Section 21 mandates that all interested parties agree and apply in writing to the court where the suit is pending for an order of reference. No such application was made, and no order of reference was passed.

The defendants argued that they were unaware of the pendency of the 1982 Suit at the time of the reference, and therefore had no occasion to seek the court's permission. The Court rejected this argument on two grounds. First, knowledge of pendency is not a condition precedent under Section 21. The statute makes the fact of pendency — not any party's subjective awareness of it — the determinative factor. A comparison with Section 20, which expressly uses the phrase “before the institution of any suit,” shows that the legislature treated institution and pendency as the operative triggers, not knowledge.

Second, even accepting the defendants' factual claim, the arbitral proceedings had not concluded by 6 August 1983, the date on which summons in the 1982 Suit were served on the defendants as per their own counter-affidavit. The award was passed on 15 September 1983. Having come into knowledge of the pending suit before the award was made, the defendants had the opportunity to approach the Trial Court under Section 21, which they failed to avail.

Same Property, Same Dispute

The courts below had accepted the defendants' contention that the subject-matter of the 1982 Suit and the arbitral proceedings was different, and had used this as a further ground to hold Section 21 inapplicable. The Supreme Court disagreed.

The Court compared the description of the suit property in the court auction certificate dated 30 August 1973 (Municipal No. 03/10, Sarafa Bazar, Lashkar) with the description in the referral letter dated 28 February 1983 and the plaint of the 1984 Proceedings. All three documents, read together, pointed to the same house. The Court also noted that the Trial Court itself, by its order dated 8 March 1990, had stayed the 1982 Suit during the pendency of the 1984 Proceedings precisely on the ground that the subject-matter of both proceedings was one and the same. That earlier finding by the very same court could not be ignored.

The Proviso to Section 47: Post-Award Consent as the Only Saving Route

Having held the award to be rendered without compliance with Section 21, the Court turned to whether it could nonetheless be given effect through the proviso to Section 47 of the 1940 Act. The proviso permits an award “otherwise obtained” — that is, obtained outside the framework of the Act — to be taken into consideration as a compromise or adjustment of a pending suit, but only “with the consent of all the parties interested.”

The Court, relying on its earlier decision in Naraindas v. Vallabhdas & Ors., (1971) 3 SCC 642, and a Full Bench decision of the Madras High Court in Abdul Rahman Sahib v. Muhammad Siddick, held that the consent required under the proviso is post-award consent — something beyond the initial consent to refer the dispute. The award serves merely as the instrument around which a compromise takes shape; it can be recorded by the court under Order 23 Rule 3 of the Code of Civil Procedure only if all parties agree, after the award is made, to accept it.

The Court added its own reasoning to supplement these authorities. The framework of the 1940 Act contains safeguards — valid arbitration agreements, court superintendence, mechanisms for filing and challenging awards under Sections 14 to 17 and 30 to 33 — that give an award rendered within the framework its presumption of procedural regularity. An award outside this framework is deprived of those protections. The proviso to Section 47 addresses precisely this situation, and the requirement of post-award consent is what gives the otherwise unenforceable award its only basis for legal effect. Even then, it operates not as an award but as a compromise.

On the facts, the plaintiffs had consistently opposed the award throughout the litigation. The Court found not a single instance in the record where the plaintiffs consented, expressly or by conduct, to the award being treated as a compromise or adjustment of the 1982 Suit. The sine qua non of post-award consent was wholly absent.

The High Court's Own Liberty Could Not Be Shut Out

The defendants argued that the plaintiffs had failed to avail themselves of the liberty expressly reserved by the High Court in its orders dated 24 February 1992 and 5 April 2006 to press their objections under the proviso to Section 47 in the 1982 Suit. The Trial Court had accepted this argument, finding that no application under the proviso had been filed.

The Supreme Court rejected this reading. The High Court's order dated 24 February 1992 had directed that should the plaintiffs fail in their objection under Section 30(c) of the 1940 Act in the 1984 Proceedings, it would be open to them to press the Section 47 proviso objection afresh in the 1982 Suit. The order dated 5 April 2006 reiterated this position. The liberty was to press the objection afresh — not to file a fresh application. No new application was therefore required. Having itself carved out this liberty on two occasions, the High Court could not subsequently shut out those very objections by treating the award as final and binding upon the plaintiffs.

Unchallenged Findings on Ownership Seal the Decree

The Trial Court, even while dismissing the 1982 Suit on the basis of the award, had returned findings in favour of the plaintiffs: that Haridas had validly purchased the suit property through court auction and obtained symbolic possession on 22 September 1973, and that the defendants had failed to prove possession for the last 40 years or any agreement for transfer of the property in their favour. The defendants had not challenged these findings in the First Appeal before the High Court, nor before the Supreme Court.

The Court applied the principle, drawn from S. Nazeer Ahmed v. State Bank of Mysore, (2007) 11 SCC 75, and Saurav Jain v. A.B.P. Design, (2022) 18 SCC 633, that a respondent need not file a memorandum of cross-objection merely to contest adverse findings of the trial court so long as the ultimate decree is in their favour. A cross-objection is necessary only where the respondent seeks to overturn part of the decree or claim additional relief. Since the defendants had not challenged the ownership findings even to support the decree, those findings stood unchallenged.

Once the effect of the award against the plaintiffs was removed, the Court held, there was no basis to deny the decree. The 1982 Suit deserved to be decreed.

The Court also addressed a sale deed dated 3 November 2009 executed by the plaintiffs in favour of the defendants pursuant to execution proceedings. The recitals in that deed expressly made it subject to the final outcome of the 1982 Suit. With the suit now decreed in favour of the plaintiffs, the Court held that the sale deed falls flat on its own terms.

Outcome

The Supreme Court allowed the civil appeal in the following terms:

The High Court's judgment and order dated 30 January 2025 in First Appeal No. 252 of 2010 is set aside. The Trial Court's judgment and decree dated 22 July 2010 in Civil Suit No. 34-A of 2010 (originally Civil Suit No. 3-A of 1982) is set aside to the extent it dismisses the plaintiffs' suit. The Trial Court's findings in paragraphs 11, 12 and 32 of that judgment — that the plaintiffs proved ownership of the suit property — are affirmed.

The arbitration award dated 15 September 1983 is held unenforceable in law against the plaintiffs for non-compliance with Section 21 of the Arbitration Act, 1940 and for being in the teeth of the proviso to Section 47 of that Act. The sale deed dated 3 November 2009 is held not binding on the plaintiffs.

A decree for recovery of possession of the suit property is passed in favour of the plaintiffs and against the defendants in terms of paragraph 1 of the plaint and the site map annexed thereto. The defendants are directed to deliver vacant and peaceful possession within two months from the date of the judgment.

The matter is remitted to the Trial Court for an enquiry into mesne profits, to be concluded within nine months of receipt of the judgment. The defendants are directed to deposit costs of Rs. 1,00,000 with the registry of the Supreme Court within four weeks, to be remitted thereafter to the plaintiffs' bank account.