Arbitration During a Pending Suit Needs Court Reference; Award Cannot Defeat the Suit Without Parties’ Post-Award Consent: Supreme Court

Held: The Supreme Court held that under the Arbitration Act, 1940, where a suit is already pending between the parties concerning the same subject matter, the dispute can be referred to arbitration only by following Chapter IV and Section 21 of the Act, i.e., by an application before the court where the suit is pending and by an order of reference from that court. The Court held that the three modes of arbitration under the 1940 Act are mutually exclusive, and parties cannot bypass Section 21 by treating the reference as arbitration without court intervention. The Court further held that an award obtained without complying with the 1940 Act may be used in a pending suit only as a compromise or adjustment under the proviso to Section 47, and only with post-award consent of all interested parties. Consent to refer the dispute to arbitration is not enough; there must be consent after the award to treat it as a compromise.

Summary: The dispute concerned a three-storey commercial-cum-residential property at Sarafa Bazar, Lashkar, Gwalior. The plaintiffs claimed title through a court auction, confirmation of sale and symbolic possession, and filed a 1982 suit for possession and mesne profits against the defendants. During the pendency of that suit, the parties referred the dispute to arbitration, resulting in an award dated September 15, 1983. The defendants then sought to make the award the rule of the court and relied on it to defeat the plaintiffs’ possession suit. The Trial Court dismissed the 1982 suit, and the High Court affirmed dismissal, mainly on the footing that the award had attained finality. The Supreme Court held that the courts below erred in treating the subject matter of the suit and arbitration as different. On examining the plaint, court auction certificate, referral letter and arbitration proceedings, the Court found that both proceedings concerned the same property. Since no application under Section 21 was made before the court where the suit was pending and no order of reference was passed, the award could not operate as a valid defence to the plaintiffs’ suit.

Decision: The Supreme Court allowed the appeal, set aside the High Court judgment dated January 30, 2025 and the Trial Court decree dated July 22, 2010 to the extent it dismissed the plaintiffs’ suit. It affirmed the Trial Court’s finding that the plaintiffs had proved ownership of the disputed property. The award dated September 15, 1983 was held unenforceable against the plaintiffs for non-compliance with Section 21 and because it could not be treated as a compromise under the proviso to Section 47 without the plaintiffs’ post-award consent. The sale deed dated November 3, 2009, having been expressly made subject to the final outcome of the 1982 suit, was held not binding on the plaintiffs. A decree for recovery of possession was passed in favour of the plaintiffs, and the defendants were directed to deliver vacant and peaceful possession of the suit property within two months. Mesne profits were directed to be determined in separate proceedings under Order XX Rule 12 CPC, and pending applications were disposed of.