Pending Suit Dispute Could Be Referred To Arbitration Only Through Court Under 1940 Act: Supreme Court

The Supreme Court on Friday held that under the now-repealed Arbitration Act, 1940, parties to a pending civil suit could not validly refer their dispute to arbitration without jointly approaching the court where the suit was pending for a reference.

The court consequently decreed a suit for possession and mesne profits concerning a property in Gwalior and set aside a Madhya Pradesh High Court judgment that had upheld dismissal of the suit.

A bench of Justices J.K. Maheshwari and Atul S. Chandurkar allowed an appeal filed by the legal heirs of Haridas, who had purchased the disputed property in a court auction. The appeal was directed against Padam Chand and his family members, who claimed rights over portions of the property.

On the requirement of obtaining a court reference while a suit was pending, the Court observed:

“Therefore, for any valid arbitration referral between the parties during pendency of the 1982 Suit, both the parties had to agree and apply before the Court where the 1982 Suit was pending, which admittedly is not the case herein. In light of foregoing discussion, it is luculent that 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.”

The dispute concerned a three-storey commercial-cum-residential building situated at Sarafa Bazar, Lashkar, Gwalior. Haridas purchased the property in a court auction on April 7, 1964.

The auction was confirmed on August 16, 1973. A sale certificate was issued on August 30, 1973. Symbolic possession was handed over to Haridas on September 22, 1973.

Later, Haridas instituted a suit seeking possession and mesne profits after alleging that Padam Chand and his family members had forcibly occupied portions of the property and were asserting rights over it.

During the pendency of the suit, the parties referred their dispute to a private panchayat arbitration. The reference was made through letters dated February 28, 1983, March 10, 1983 and August 1, 1983.

An award dated September 15, 1983 directed Haridas to execute sale deeds in favour of Padam Chand's side upon payment of Rs 2.75 lakh. It also required pending civil and criminal proceedings between the parties to be brought to an end.

The trial court dismissed the suit on July 22, 2010. Although it found that Haridas had purchased the property through a court auction and obtained symbolic possession, the trial court held that the settlement and arbitration proceedings concluded between the parties were not illegal.

The Madhya Pradesh High Court affirmed that decision on January 30, 2025. The legal heirs of Haridas then approached the Supreme Court.

Before the Supreme Court, the appellants argued that once the suit was pending, the dispute could not have been referred to arbitration in the manner adopted by the parties. They also contended that the award could not be used to defeat their claim for possession and mesne profits.

The respondents contended that they were unaware of the pendency of the suit when the dispute was referred to arbitration. They also argued that the arbitral proceedings concerned a different subject matter.

The Supreme Court first rejected the finding of the courts below that the suit and the arbitral proceedings involved different subject matter.

After examining the description of the property in the plaint, the court auction certificate, the referral letter and the pleadings in the arbitration-related proceedings, the Court concluded that both proceedings concerned the same property.

It held, “On Question (1), we hold that the subject-matter of the 1982 Suit and the arbitral proceedings culminating in the Award dated 15.09.1983 was the same and pertained to the house situated at Sarafa Bazar, Lashkar, bearing Municipal No. 03/10 (Old). The courts below committed a manifest error in holding otherwise.”

The Court held that the applicability of the statutory scheme depended on the fact that the suit was pending, and not on whether any party was aware of that pendency.

On the respondents' argument that they were unaware of the pendency of the suit, the Court held:

“On Question (2), we hold that knowledge of pendency of the 1982 Suit is not a condition precedent for the applicability of Section 21 of the 1940 Act. The determinative factor under the statutory scheme is the fact of pendency of the suit, not the subjective awareness of any party thereof.”

The Court nevertheless noted that, even on the respondents' own case, summons in the suit had been served before the award was passed. It further noted that neither side had approached the trial court seeking a reference of the dispute.

The Court next considered whether the award could nevertheless be enforced as a compromise between the parties.

Referring to earlier precedents, the bench held that an award obtained otherwise than in accordance with the statutory framework could be taken into consideration in a pending suit only if all interested parties consented to it being treated as a compromise.

While explaining the significance of such consent, the Court observed:

“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.”, it noted.

Examining the record, the Court found that the legal heirs of Haridas had consistently opposed the award throughout the litigation. The Court found that there was not a single moment in the litigation when the plaintiffs consented, expressly or by conduct, to the award being treated as a compromise or adjustment of the suit.

Applying those principles to the present case, the Court found that the award could not be used to defeat the claim for possession and mesne profits. It observed:

“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.”, it noted.

The Supreme Court, after examining remaining findings recorded by the trial court noted that the trial court had found that Haridas purchased the property through a court auction and obtained symbolic possession.

The Court also noted that those findings were not challenged before it by the respondents in their counter affidavit or written submissions.

The Court consequently decreed the suit for possession and mesne profits.

For Appellants (Ashok and others): Senior Advocate Dama Seshadri Naidu.

For Respondents (Padam Chand and others): Senior Advocate N.K. Mody; Advocate Divyakant Lahoti.