The Supreme Court has allowed an appeal arising from a decades-old property dispute in Gwalior, holding that an arbitration award passed during the pendency of a civil suit could not be used to defeat the plaintiffs’ claim for possession and mesne profits. The Court set aside the judgments of the Madhya Pradesh High Court and the Trial Court, which had dismissed the suit on the ground that an earlier arbitral award relating to the same property had attained finality.

A Bench of Justice J.K. Maheshwari and Justice Atul S Chandurkar held that the courts below had committed a manifest error in treating the arbitral award as conclusive against the plaintiffs without examining whether it was legally enforceable in the context of a pending civil suit.

The dispute concerned a commercial-cum-residential property in Gwalior purchased by the plaintiffs through a court auction. During the pendency of a suit for possession and mesne profits filed in 1982, the parties referred their dispute to a private arbitration, culminating in an award dated September 15, 1983. The defendants later relied upon that award to contend that the plaintiffs’ claims stood settled.

The Supreme Court undertook an extensive examination of the scheme of the Arbitration Act, 1940 and observed that the statute contemplated distinct forms of arbitration. Where a suit was already pending, the matter could be referred to arbitration only in accordance with Section 21 of the 1940 Act, which required all interested parties to apply to the court for an order of reference.

Rejecting the defendants’ contention that they were unaware of the pending suit, the Court held that knowledge of pendency was not the determining factor under Section 21. The decisive factor was the existence of a pending suit itself. The Bench further found that the defendants had been served in the suit before the arbitral award was rendered and therefore had an opportunity to seek a proper reference through the court but failed to do so.

The Court held that once a civil suit concerning the same subject matter was pending, the arbitration could not validly proceed outside the framework of Section 21. Any arbitral award rendered without obtaining leave of the court in such circumstances could not be treated as having been made in compliance with the 1940 Act.

The Bench further explained that an award obtained otherwise than in accordance with the Act could be given effect only under the proviso to Section 47 of the 1940 Act, which required post-award consent of all interested parties before such an award could be treated as a compromise or adjustment of the pending suit.

Examining the facts of the case, the Court found that the plaintiffs had consistently opposed the award throughout the litigation and had never consented, either expressly or by conduct, to its being treated as a compromise. Consequently, the essential requirement for giving legal effect to the award under Section 47 was absent.

The Court held that the award could not have been set up as a defence against the plaintiffs’ suit and that both the Trial Court and the High Court had erred in proceeding on the assumption that the award had attained finality against the plaintiffs.

Significantly, the Bench noted that the Trial Court itself had recorded findings in favour of the plaintiffs, including that they had acquired title to the property through a court auction and had obtained symbolic possession. Since those findings were never challenged by the defendants, the Supreme Court held that once the erroneous reliance on the arbitral award was removed, the suit deserved to be decreed.

Answering all the issues in favour of the plaintiffs, the Court concluded that the subject matter of the suit and the arbitration proceedings was the same, that the arbitration could not have proceeded without compliance with Section 21 of the 1940 Act, and that the award lacked legal efficacy against the plaintiffs in the absence of post-award consent.

The appeal was accordingly allowed and the plaintiffs’ suit for possession and mesne profits stood restored and decreed.