The Supreme Court’s decision in Patil Automation (P) Ltd. v. Rakheja Engineers (P) Ltd. [1] (Patil Automation), has once again brought to the forefront the debate on the effectiveness of mandatory statutory requirement of pre-institution mediation.

Mediation is a process by which the parties attempt to resolve their disputes through discussions and negotiations, which are presided over by a third party, namely, a mediator. A mediator does not act as a Judge or adjudicating authority as in the case of courts or arbitrators, who hear the parties and decide whether the parties are entitled to the reliefs sought. Instead, a mediator facilitates and guides the parties to streamline their discussions and mutually arrive at a solution which is beneficial to both parties. Fundamentally, mediation, if successful, actually achieves a complete and final resolution of the dispute rather than a mere adjudication of the rights and obligations of parties.

In the last 20 years there has been an increasing legislative interest to promote mediation as an alternative to litigation, in order to reduce the burden of Courts in India and make India an attractive business destination. To this end, amendments were introduced in the Code of Civil Procedure, 1908 [2] in 2002.  The Arbitration and Conciliation Act, 1996 [3] and the Companies Act, 2013 [4] also allow parties to refer their disputes to mediation. India was one of the first signatories to the United Nations Convention on International Settlement Agreements resulting from Mediation in August 2019, pursuant to which the Government has tabled the Mediation Bill before Parliament for consideration.

Mandatory pre-institution reference to mediation under the Act

 The Commercial Courts Act [5] (Act) was enacted in 2015 to facilitate expeditious disposal of commercial disputes [6] by establishing specialised Commercial Courts, Commercial Division and Commercial Appellate Division in the High Courts to adjudicate such disputes.

In 2018, the Commercial Courts (Amendment) Act, 2018 (the Amending Act) was passed. The Amending Act brought in two critical developments:

a. It reduced the pecuniary jurisdiction of Commercial Courts from INR 1,00,00,000/- (Rupees One Crore only to INR 3,00,000/- (Rupees Three Lakhs only) to cover a substantially larger number of cases under the ambit of the Act with the intention to improve the ease of doing business in India and attract foreign investors.

b. Importantly, through the same Amending Act, Section 12A was introduced making it mandatory for a party filing a suit under the Act to exhaust the remedy of mediation prior to instituting the suit.

Section 12-A mandates as under:

12-A. Pre-institution mediation and settlement. — (1) A suit, which does not contemplate any urgent interim relief under this Act, shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation in accordance with such manner and procedure as may be prescribed by rules made by the Central Government.

(2) The Central Government may, by notification, authorise the authorities constituted under the Legal Services Authorities Act, 19879, for the purposes of pre-institution mediation.

Mediation under Section 12-A is a time-bound process to be conducted by the respective State Legal Services Authorities, constituted under the Legal Services Authorities Act, 1987. For instance, when a suit under the Act is filed before the District Courts in Delhi, the parties are referred to the Delhi Legal Services Authority in terms of Section 12-A for mediation. Therefore, guardrails have been put in place to ensure that the proposed mediation is not reduced to a mere dilatory tactic by the parties and is conducted in a streamlined manner. The only exception contemplated under Section 12-A is if a party is seeking any urgent interim reliefs. The Act, however, does not define what would be considered as an “urgent interim relief” and the same is left to the discretion of the Court.

After Section 12-A was introduced, there was a difference of opinion amongst the courts as to whether plaints instituted without recourse to mandatory pre-institution mediation ought to be rejected upon an application being filed under Order 7 Rule 11 of the Code of Civil Procedure, 1908. While some considered the statutory requirement under Section 12-A to be mandatory, others considered it to be merely directory.

With the decision in Patil Automation, the Supreme Court has finally put this controversy to rest. The Court has held that the requirement of exhausting pre-institution mediation under Section 12-A of the Act is mandatory and that any suit instituted “violating the mandate of Section 12-A must be visited with rejection of the plaint under Order 7 Rule 11”.[7]

The Supreme Court’s decision has brought about the much-needed clarity that the parties need to necessarily exhaust the requirement of pre-institution mediation prior to instituting a suit under the Act.

Benefits of mediation which Section 12-A of the Act aims to take advantage of

Commercially sophisticated parties, being business oriented, are driven by their mutual desire to earn profits. The main concerns of such parties are to ensure that their business is not disrupted as a consequence of protracted legal proceedings. Moreover, they are keen to minimize any expenditure of time, resources, and costs in relation to such legal proceedings. This makes them the ideal candidates for mediation which is a relatively cheaper and faster alternate dispute resolution mechanism. Indeed, successful mediation resolves disputes and not merely results in an adjudication.

Additionally, mediation being a voluntary process driven by party autonomy assists in curtailing animosity in business relations. The mediator, who is an expert, helps the parties streamline their discussions and creates a facilitative environment wherein the parties are freely able to voice their concerns as opposed to a courtroom.

Moreover, mediation allows the parties to come out of the dispute with a solution which is mutually beneficial and arrived at through the consensus of both the parties, thus creating a win-win situation. In contrast, in any adversarial litigation, there will always be winners and losers. Mediation avoids a contest and allows parties to arrive at a final resolution of the dispute.

Amicable resolution of ongoing disputes also gives the parties the option to collaborate in the future, in stark contrast to a Court driven process which becomes a breeding ground of further hostility and conflict between the parties.

In addition to the above, if parties are able to resolve their disputes through mediation it helps de-clog the docket and reduce the burden of the Courts, which would then only consider the limited disputes in which the parties are unable to resolve their dispute through mediation. In this regard, it may be pertinent to highlight that just in the last financial year about 52,968 cases have been settled in India through mediation.[8]

The Act seeks to take advantage of the above benefits and makes mediation a time-bound alternative before proceeding with the suit. Additionally, to incentivise parties to take benefit of pre-institution mediation, the Act grants the settlement arrived at by the parties the same status and effect as an arbitral award under Section 30(4) of the Arbitration and Conciliation Act, 1996.

Is pre-institution mediation as mandated by Section 12-A an effective solution to achieve speedy dispute resolution and reduce burden of Courts?

While mandatory pre-institution mediation was introduced with good intention, it suffers from certain shortcomings. Traditionally, mediation is a consent-based process in which parties voluntarily opt to resolve their disputes under the guidance of a mediator. Forcing the parties to mandatorily undergo mediation would be against the very essence of mediation which is based on voluntary participation. Moreover, in terms of Section 12-A it is only mandatory for the party instituting the suit to participate in the mediation by approaching the authority while the defendant may altogether abstain from responding to the mediation request. This makes it only a one-sided obligation which the parties treat as merely a technical step to overcome in order to institute the suit.

Moreover, Section 12-A fails to take into consideration the crucial fact that in most business transactions, the parties usually attempt to amicably settle their disputes by issuing notices calling upon the other party to enter into discussions prior to filing suits. It is only when such attempts fail that the parties are constrained to approach the courts. This issue was in fact recently considered by the High Court of Delhi in Bolt Technology OU v. Ujoy Technology (P) Ltd. [9], wherein an objection was raised seeking rejection of the plaint on account of non-compliance with Section 12-A. In support of its objection, the defendant relied upon the decision of the Supreme Court in Patil Automation.

The High Court, however, gave due consideration to the fact that prior to approaching the Court the plaintiff had offered to amicably resolve the dispute, but the defendant had refused its offer.

While rejecting the objection raised by the defendant the Court held that:

25.  A perusal of the correspondence, extracted hereinabove, leaves no doubt in the mind of the court that the defendants were in no way interested in an amicable resolution of the dispute. Instead, the hand of mediation which was lent by the plaintiff was met with a tight slap. The defendant’s conduct clearly is not in the spirit of any amicable resolution — let alone mediation. Hence, the requirement of Section 12-A of the Consumer Courts Act duly stands satisfied on both counts, in the following manner:

(i) firstly, the plaintiff had attempted an amicable resolution which was clearly refuted, rejected, and condemned by the defendants;

(ii) secondly, the plaintiff has also sought urgent interim relief before this Court and is entitled to maintain the present suit.[10]

In addition to the above, Section 12-A forces parties to give mediation a try at a stage when they are raring for a fight, having recently failed to amicably resolve their disputes. For a party running a business, litigation is usually the last option which is opted for after all efforts to resolve disputes through discussions have failed. At this stage, disputes mostly turn into an ego battle with the parties not trusting each other and not willing to settle for a climbdown. Moreover, the parties up to this stage have not tested their claim before a court and believe that their stand is correct, with no shortcomings. Parties at this stage may lose sight of commercial consideration and may not be in the correct frame of mind to explore options to amicably resolve their disputes. This is not the ideal setting for mediating a dispute which is based on parties freely discussing their concerns, sharing information, and arriving at a mutually beneficial solution with the help of a mediator.

In contrast, the Companies Act, 2013 for instance, allows parties the freedom to refer their disputes to mediation at any stage while proceedings are pending before the Tribunal. This allows the parties to have a cool-off period and enables them to approach the mediator even after they have instituted proceedings and have preliminarily tested their case before the Tribunal at the interim stage. At this stage, the parties have a better sense of the strengths/weaknesses of their case and may be willing to explore alternative means of dispute resolution which is more time effective and mutually beneficial. This is particularly beneficial in shareholder disputes, especially between family members, wherein the disputes are mostly a result of an ego clash.

The above issue of premature mandatory reference to mediation is further compounded by the fact that the parties are not allowed to pick a mediator of their choice and are subjected to a mediation conducted by a mediator allotted by the authorities constituted under the Legal Services Authorities Act, 1987. Ideally, the parties would pick a mediator who is a domain expert and has knowledge of the field in which the parties operate. This would enable the mediator to appreciate the complexities of the parties’ dispute and streamline their discussions to arrive at a solution. Taking away this choice adversely impacts the mediation process since the parties may not have faith in the mediator’s ability to help them arrive at a mutually beneficial solution. As such, the mediation kicks off on a wrong footing.

Last and most importantly, mandatory pre-institution mediation may be easily side-stepped by a party contending that it is seeking urgent interim reliefs. Since the Act does not set out any parameters for what would be considered as “urgent interim reliefs”, the determination thereof is fairly subjective, left to the discretion of the court to be decided on a case-to-case basis. For instance, the Delhi High Court in Upgrad Education (P) Ltd. v. Intellipaat Software Solutions (P) Ltd. [11] has held that in suits filed before the Intellectual Property Division, where applications for interim injunction are filed and urgent interim relief is sought, the leave to directly institute the suit would be presumed in view of the language of Section 12-A and a separate application would not be required. The Court further clarified that even if urgent interim relief is sought by the plaintiff, the Court is of the opinion that the parties ought to be relegated to mediation, an order referring the matter to mediation can always be passed.

The above factors take away from the effectiveness of pre-institution mediation mandated by Section 12-A of the Act.

Alternative approach for making mediation an effective tool for speedy dispute resolution

While the mandate of pre-institution mediation contained in Section 12-A may be premature, the concept of making mediation mandatory in commercial disputes has its merits. Such mandatory mediation may however be more effective if the mandatory reference to mediation is provided for after the interim stage. In the event no interim reliefs are sought, the reference may be made after filing of the written statement.

At this stage, both parties have placed their respective claims/defence before the Court and are aware of each party’s strengths and weaknesses. Moreover, they have gained a preliminary understanding of the manner in which the court is viewing the matter as well as firsthand experienced the frustration of protracted timelines while pursuing a remedy in court. At the same time, parties would not have gone through the trial on the merits of the case before resorting to attempts at mediating the dispute.

As such, at this stage the parties may be more receptive to the mediation process and, having understood the lay of the land regarding the merits and demerits of their respective case, adopt a pragmatic and reasonable stance to achieve a speedy resolution of their on-going disputes instead of treating the mediation as a perfunctory step in the litigation.

Additionally, the parties should have the option of choosing their own mediator instead of forcing the parties to submit to mediation being conducted by the Authority. As discussed above, mediation is a voluntary process. The parties should be able to trust the mediator and have confidence in the mediator’s abilities to understand the complexities of their disputes as well as his/ her skills to help them achieve an amicable resolution. Only in such cases, will the parties freely confide in the mediator and have productive mediation sessions. On the contrary, if the parties do not trust the mediator, it would render the entire exercise futile. As such, parties should have the freedom to choose their own mediator instead of the Authority imposing a mediator upon the parties. Of course, if parties want the Authority to conduct the mediation, they can always approach it.

Last, the option of restricting the category of matters which are mandatorily referred for mediation may be explored to reduce the load on the Authority. Since the pecuniary jurisdiction has been reduced to INR 3,00,000/- (Rupees Three Lakhs only), the number of cases being filed under the Act has significantly increased. With the Supreme Court clarifying that pre-institution mediation is mandatory, there will be a surge of references to the authority for mediation. Presently, the authority neither has the requisite infrastructure nor adequate number of skilled mediators to handle so many cases. The Supreme Court in Patil Automation also acknowledged these concerns. In fact, the Supreme Court categorically observed that:

82. . … It is all well to pass a law with sublime objects as in this case. However, the goal will not be realised unless the State Governments and all other relevant authorities bestow their attention in the matter of providing adequate facilities.

As regards the mediators, the Supreme Court observed that:

82.  … Knowledge of the laws, which are the subject-matter of the suits under the Act, is indispensable for a mediator to effectively discharge his duties…. There must be training by experts, including at the State judicial academies. This must be undertaken on a regular and urgent basis, particularly keeping in mind when there is a dearth of trained mediators.

Blindly forcing all parties to first go for mediation will only result in mediation references accumulating before the authority and the mediators not having the requisite time to conduct productive mediation sessions. As such, in an effort to de-clog the Commercial Courts and reduce their burden, a new problem would be created. Instead, till such a time that the authority creates the necessary capacity building, the category of cases which have to be mandatorily referred for mediation may be restricted. For instance, since the objective of the amendments made in the Act in 2018 was to make India an attractive destination for foreign investors, for the time being only commercial disputes involving foreign parties may be referred for mediation or the pecuniary limit of matters to be referred for mediation may be increased. This will help reduce the initial burden of the mediators in the authority, allow the authority to simultaneously work towards improving its existing infrastructure as well as achieve the legislative objective behind introducing mandatory pre-institution mediation.

Conclusion

It will be difficult to find fault with the Supreme Court’s approach in Patil Automation in interpretating and implementing Section 12-A, as per the legislative intent and objective. Unfortunately, the legislative policy underlying Section 12-A fails to follow a solution-oriented approach. Indeed, the Supreme Court acknowledged the practical concerns in the implementation of the mandate of Section 12-A.

With the passing of the judgment in Patil Automation, parties will be forced to flock to already overburdened mediation centers and may not truly be able to reap the benefits which mediation, as an alternative dispute resolution mechanism, has to offer. As such, there is an urgent need to not only bolster the current mediation infrastructure throughout the country but also to revisit the stage and manner in which the parties are being mandatorily directed to mediate their disputes. This will allow parties to truly gain from mandatory mediation and make mediation an attractive and primary mode of dispute resolution in the coming years.

Footnotes:

[1] 2022 SCC OnLine SC 1028.

[2] Civil Procedure Code, 1908, S. 89.

[3]  Arbitration and Conciliation Act, 1996, S. 30.

[4] Companies Act, 2013, S. 442.

[5] Commercial Courts Act, 2015.

[6] S. 2(1)(c) defines a “commercial dispute” as any dispute arising out of—

(i) ordinary transactions of merchants, bankers, financiers and traders such as those relating to mercantile documents, including enforcement and interpretation of such documents;

(ii) export or import of merchandise or services;

(iii) issues relating to admiralty and maritime law;

(iv) transactions relating to aircraft, aircraft engines, aircraft equipment and helicopters, including sales, leasing and financing of the same;

(v) carriage of goods;

(vi) construction and infrastructure contracts, including tenders;

(vii) agreements relating to immovable property used exclusively in trade or commerce;

(viii) franchising agreements;

(ix) distribution and licensing agreements;

(x) management and consultancy agreements;

(xi) joint venture agreements;

(xii) shareholders agreements;

(xiii) subscription and investment agreements pertaining to the services industry including outsourcing services and financial services;

(xiv) mercantile agency and mercantile usage;

(xv) partnership agreements;

(xvi) technology development agreements;

(xvii) intellectual property rights relating to registered and unregistered trade marks, copyright, patent, design, domain names, geographical indications and semiconductor integrated circuits;

(xviii) agreements for sale of goods or provision of services;

(xix) exploitation of oil and gas reserves or other natural resources including electromagnetic spectrum;

(xx) insurance and reinsurance;

(xxi) contracts of agency relating to any of the above; and

(xxii) such other commercial disputes as may be notified by the Central Government.

Explanation— A commercial dispute shall not cease to be a commercial dispute merely because—

(a) it also involves action for recovery of immovable property or for realisation of monies out of immovable property given as security or involves any other relief pertaining to immovable property; and

(b) one of the contracting parties is the State or any of its agencies or instrumentalities, or a private body carrying out public functions.

[7] Para 92.

[8] ADR and Mediation Statistical Information, during the period from April 2021 to March 2022, National Legal Services Authority, <https://nalsa.gov.in/statistics/settlement-through-mediation-report-april-2021-to-march-2022>

[9] 2022 SCC OnLine Del 2639.

[10] Bolt Technology OU v. Ujoy Technology (P) Ltd., 2022 SCC OnLine Del 2639

[11] 2022 SCC OnLine Del 644.