1940 Arbitration Act | Award In Arbitration Invoked During Pending Civil Suit Without Court's Leave Not Enforceable : Supreme Court

The Supreme Court has observed that during the pendency of the civil suit, an arbitral award secured by some parties under the 1940 Arbitration Act cannot be used to close the civil proceedings if the arbitration was initiated without the leave of the Court.

A bench of Justice J.K. Maheshwari and Justice Atul S. Chandurkar heard the case where, during the pendency of a civil suit filed by the Appellant, an arbitral award under the 1940 Act was passed which effectively compromised the litigation between the parties and, based on this award, the Appellant's suit was dismissed, as the trial court deemed the dispute to be settled.

The central issue before the Court was whether an arbitration award passed during the pendency of a civil suit could be relied upon to settle or defeat the suit when the arbitration proceedings had been initiated without obtaining a court order under Section 21 of the Arbitration Act, 1940.

Background

The dispute concerned a three-storey commercial-cum-residential property situated in Gwalior, Madhya Pradesh.

The original plaintiff, Haridas, had purchased the property in a court auction in 1964 arising out of execution proceedings. The auction was confirmed in 1973 and a sale certificate was issued in his favour. Symbolic possession was subsequently handed over.

According to the plaintiffs, they later discovered that the defendants had forcibly occupied a portion of the property. Consequently, Haridas instituted a civil suit in 1982 seeking recovery of physical possession and mesne profits.

While the suit was pending, certain arbitration proceedings were initiated and culminated in an arbitral award dated September 15, 1983. The defendants later sought to have the award made a rule of the court.

Over the next four decades, multiple proceedings travelled between the trial court, the Madhya Pradesh High Court and the Supreme Court, with the plaintiffs consistently challenging the enforceability of the award.

The trial court ultimately dismissed the possession suit in 2010, holding that the arbitration award had attained finality. The High Court affirmed that view in January 2025, leading to the present appeal.

Decision

Setting aside the concurrent findings of the High Court and Trial Court, the judgment authored by Justice Maheshwari observed that the Respondent, having a knowledge of the pendency of the civil suit, would not have invoked the arbitration proceedings without obtaining a leave of the court as per Section 21 of the 1940 Act. Therefore, there arises no question of the suit being dismissed based on the compromise between the parties based on the award not rendered in accordance with law or being non-est in the eyes of law.

“…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 pending cannot be said to be made in compliance of the provisions of the 1940 Act.”, the court observed.

Moreover, the Court observed that the requirements of Section 47 of the Arbitration Act, 1940 were not satisfied. Under this provision, an arbitration award can be treated as a compromise or settlement in a pending civil suit only if all parties agree to accept the award. In the present case, no such consent was given by the plaintiffs.

“It 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. Hence, the Trial Court, as well as the High Court, committed a manifest error of law in proceeding as though the Award had attained a finality qua the Plaintiffs and that it was enough for non-suiting the Plaintiffs.”, the court observed.

The Court also rejected the Respondent's contention that their lack of knowledge about the pendency of the suit would not invalidate the operation of an award. Instead, the Court said 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”, and once the suit remained pending, obtaining an award without the court's leave would render it unenforceable.

In view of the aforesaid, the appeal was allowed.

Cause Title: ASHOK AND ORS. VERSUS PADAM CHAND AND ORS.

Citation : 2026 LiveLaw (SC) 570

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Appearance:

For Petitioner(s) : Mr. Dama Seshadri Naidu, Sr. Adv. Mr. Prashant Shukla, Adv. Mrs. Anushree Shukla, Adv. Mr. Kartik Kumar, Adv. Ms. Ojasvi, Adv. M/S. Prashant Shukla Law Chambers, AOR

For Respondent(s) : Mr. Divyakant Lahoti, AOR Ms. Vindhya Mehra, Adv. Ms. Samridhi Bhatt, Adv. Mr. N.K. Mody, Sr. Adv. Ms. Ishita M Puranik, Adv. Ms. Jigisha Agarwal, Adv. Ms. Aniya, Adv. Mr. Praveen Swarup, AOR