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  • Aadya Narain

Obligatory or Optional? Pre-Institution Mediation in Commercial Courts Act

[Aadya is a student at Jindal Global Law School.]

The enactment of the Commercial Courts Act (Act) in 2015 was the culmination of a nearly decade-long process to increase the efficacy of commercial dispute resolution and ease of doing business in India. It was within this context of attempting to reduce the burden on courts and thereby ensuring speedier justice dispensation, that means of alternative dispute resolution were greatly emphasised within the legislation. Section 12A of the Act states:

(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” (emphasis supplied).

The source of contestation lies in the use of the word “shall”; is pre-institution mediation mandatory or simply strongly advised?

Pre-institution mediation requires the intervention of a neutral third party to resolve the dispute, before resorting to time–consuming, costly, and thus often inefficient litigation. The Singapore Convention on Mediation, adopted in 2018, was a global recognition of the necessity to promote all forms of alternative dispute resolution within established judicial structures in countries, rather than placing the entire burden, particularly of cases requiring consensus rather than a win/loss outcome. Ratifying this treaty, the Act, among a slew of other amendments, introduced Section 12A in 2018. Before this, Section 89 of the Code of Civil Procedure 1909 was amended in 1999 to encourage alternate dispute resolution “where it appears to the court that there exist elements of a settlement”, but not mandate it, as Section 12A is believed to.

Under Section 12A, unless there is any interim urgency, for example, patent infringement, wherein time is of the essence to prevent abrogation of justice, all commercial matters shall undergo the pre-institution of mediation and settlement process. The statutory requirement is three months, potentially extended by another two under mutual consent. If a settlement is reached within the stipulated period, it shall be binding under Section 30 of the Arbitration and Conciliation Act 1996. If not, the matter will be presented before the commercial court.

Interpretation and Evolution of Case Law

Section 12A has been interpreted and applied by High Courts across the country. In Dredging and Desiltation Company v. Macintosh Burn (2019), the Calcutta High Court clarified that the objective of the 2015 Act is maximising efficiency and minimising the length of dispute resolution. Thus, it provides a sufficient period for fruitful mediation, and yet still lesser than the time required for a litigation to reach finality. This was in concurrence with Laxmi Polyfab v. Eden Realty, when the same bench held that the plaintiff’s right to approach a commercial court is not unconditional, but subject to the provisions of Section 12A, mandating an attempted mediation. The Allahabad High Court similarly affirmed the mandatory nature of the section in Awasthi Motors v. Managing Director M/s. Energy Electricals Vehicle and Another.

The Bombay High Court went a step further to clarify the nature of Section 12 and the necessary steps to ensure substantial compliance with the same. In 2021, in the case of Ganga Taro Vazirani v. Deepak Raheja, the plaintiff filed a suit in the commercial court, and some form of alternative dispute resolution was pursued only post this, despite no plea for urgent relief. A single judge held the provisions of Section 12A to be procedural, and thus this action was valid under the doctrine of substantial compliance. To this end, the learned judge held that although the provision mandates that parties attempt amicable settlement, it is not compulsory to do so before filing a suit in the commercial court, for the procedural mandate to be fulfilled. Later the same year, acting on an appeal filed by the defendant, a division bench of the same court overturned this verdict. Therefore, in Deepak Raheja v. Ganga Taro Vazirani, the division bench held that this interpretation of Section 12A, as procedural and not mandatory, defeated its purpose, which was to unencumber courts. If the suits filed before the commercial court could not automatically be assumed as either seeking urgent relief, or seeking last resort having attempted a settlement, the administrative burden on courts to ascertain these criteria, and accordingly segregate cases would substantially increase. Further, it may lead to parallel adjudications on the same issue, or a later discovery of non-compliance would lead to significant resources used incorrectly by the court.

Under this understanding, the test of substantial compliance for this section would comprise three elements; (a) an attempt to mediate the dispute; (b) failure of that attempt; and (c) such failure compelling the plaintiff to approach the court. All three of these must occur prior to filing a suit before the commercial court, to fulfil the objective of 12A. The procedure clarified by this court resembles the internationally acknowledged “opt-out” model, wherein it is compulsory for parties to attend at least single mediation session before their case is heard before the court. Therefore, parties will soon have the opportunity to resort to traditional litigation, but are encouraged to explore alternate dispute resolution. This measure is particularly crucial in India, where mistrust of out of court settlements have led to an overburdening of courts, with cases often unsuited to an adversarial adjudication.

The Madras High Court seems to be the only court to have a bench that diverges from the fundamental understanding of Section 12A as making pre-institutional mediation compulsory. In Shahi Exports Private Limited v. Goldstar Line Limited and Others, it observed that the right to access justice, which is a constitutional right, cannot be denied, deprived, or contingent on not resorting to alternative means of dispute resolution. It further stated the court is not a substitute for alternative dispute resolution mechanisms – rather, the opposite is true. Therefore, it held that Section 12A cannot and must not be read as mandatory or close the doors of the courts to litigants.

The Way Forward

Due to the differences in the interpretation of various appellate courts in India, the question of whether pre-institutional mediation is compulsory or not under Section 12A, remains to be settled by the apex court, as and when it arises. However, resolving commercial disputes in India takes nearly four years (1420 days) (as of 2015), delayed by the high pendency of cases, complex litigation procedures, and a host of similar reasons. If the Indian justice dispensation system is to remain up to the challenge of tackling rapidly proliferating, complex commercial disputes promptly, it must continue to take steps in the direction of alternate dispute resolution as a viable and widely recognised option. Ranging from Eurasian countries such as Italy, Turkey, and Azerbaijan, which have settled on the “opt-out model” to East Asian countries such as Singapore and Hong Kong, which have created arbitration and mediation ecosystems settling and decide multi-billion, international disputes, the experience of alternate dispute resolution globally has been positive and encouraging.

Although India requires sophisticated infrastructure to administer the influx of cases that a compulsory mediation requirement would bring, this would develop swiftly and naturally when there is a considerable lacuna of qualified professionals in a prestigious field. The benefits would be manifold. This alternative infrastructure would provide massive amounts of employment, increase the efficiency and speed of dispute resolution, reduce the burden on courts, save parties the future costs of litigation and potential losses, and increase the ease of doing business in India, the purpose for which the Act was created. Therefore, rather than debate the nature of Section 12A, the consensus and emphasis of courts in India must be on creating systems that make the mandatory fulfilment of this section worthwhile for all parties.

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