Pre-institution mediation in commercial cases is no more a choice!

Introduction

In what is hailed as a landmark ruling, the Hon’ble Supreme Court of India in Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd. [2022 SCC OnLine SC 1028], has recently held that pre-institution mediation under Section 12A of the Commercial Courts Act, 2015 (hereinafter referred to as “the Act“) is mandatory in nature and plaints not adhering to it would be rejected under Order VII, Rule 11 of the Code of Civil Procedure, 1908.

The court, by adopting a mediation-friendly approach, has finally settled the debate around whether pre-institution mediation for commercial disputes under Section 12A of the Act is a mere procedural provision or is mandatory in nature.

Now, parties would have to mandatorily undergo mediation before they can approach the court unless there is need for urgent interim relief. This ruling would help expedite the delivery of justice in commercial disputes and decongest already over-burdened courts, which was the primary objective behind the introduction of this Act.

Litigation creates a schism between the parties. A legal dispute is almost never a win-win situation. Contrastingly, mediation diffuses tension and creates an environment where parties can come to an amicable agreement while also saving money by avoiding the expense of a protracted legal dispute.

This makes mediation a preferred choice for dispute resolution in the corporate world, given the country’s massive backlog of cases and India’s efforts to improve its ranking in the Ease of Doing Business index.

The need for the law

The Commercial Courts, Commercial Division, and Commercial Appellate Division of the High Courts Act, 2015 (the “Act”) was introduced by the Government of India to encourage investment and economic activity in the country with the twin objectives of achieving the goals laid out in the “Make in India” program and to boost its rank in the “Ease of Doing Business” index.

The government wanted to make commercial litigation less cumbersome for parties as it would improve the perception of investors towards India as an investment destination.

With the said objectives, the act was amended in 2018 as the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018 (Act 28 of 2018), which introduced Section 12A, making mediation compulsory in all cases except in suits or applications in which urgent interim relief is sought.

Further, the specified value of a commercial dispute was lowered to 3 lakhs from the previous value of 1 crore. However, confusion arose as to the nature and interpretation of this section, with some High Courts’ ruling it as a directory provision.

The discordant judicial trend among high courts

For instance, a Single Judge bench of the High Court of Bombay in Ganga Taro Vazirani v. Deepak Raheja [2021 SCC OnLine Bom 195], took the view that Section 12A is a procedural provision. He further held that when urgent relief is applied for, the procedure under Section 12A need not be undergone.

However, a Division Bench of the High Court of Bombay, in an appeal, found that the Single Judge had erred in his view that Section 12A is not mandatory. The Division Bench proclaimed that Section 12A of the Act is mandatory.

Similarly, a learned Single Judge of the High Court of Calcutta, in Dhanbad Fuels Ltd. v. Union of India and Others [2021 SCC Online Calcutta 429], took the view that mediation in India is still at a nascent stage and requires more awareness and held that the party cannot be denied the right to participate in the justice dispensation system, thereby reducing Section 12A to a directory provision.

Another learned single judge of the High Court of Calcutta, in Dredging and Desiltation Company Pvt. Ltd. v. Mackintosh Burn and Northern Consortium and Others [2021 SCC Online Calcutta 1458], took the view that the bar under Section 12A is absolute w.e.f. 12.12.2020 and held that it is mandatory.

The Division Bench of the High Court of Madhya Pradesh, in Curewin Pharmaceuticals Pvt. Ltd. v. Curewin Hylico Pharma Pvt. Ltd [AIR 2021 MP 154], held that a suit which does not contemplate urgent interim relief, cannot be instituted unless pre-litigation mediation is exhausted.

A learned Single Judge of the Allahabad High Court in the decision reported in Awasthi Motors v. Managing Director M/s. Energy, Electrical Vehicles and Another [AIR 2021 Allahabad 143], found that there is a clear purpose provided for pre-institution mediation. He referred to the Statement of Objects and Reasons and held that the provision is mandatory.

In the present case, the Trial Court rejected Patil Automation’s contention that the suit was filed without adhering to Section 12A of the Act by holding that giving mandatory effect to the said provision would have a catastrophic effect as it was not what the legislature intended.

In an appeal before the Punjab and Haryana High Court, the court held similar views and observed that “The purpose of referring the dispute to the Mediation Centre is to explore settlement. If the suit is filed without taking recourse to the procedure, it should not entail rejection of the plaint. This could not have been the intention of the legislature. It is further observed that an enactment is to be interpreted in a manner that it does not result in the delivery of “perverse justice.”

Analysis by the Supreme Court: a mediation-friendly approach

The seminal question which thus arose for consideration before the Apex Court was whether the statutory pre-litigation mediation contemplated under Section 12A of the Commercial Courts Act, 2015, as amended by the Amendment Act of 2018, is mandatory and whether the Courts below erred in not allowing the applications filed under Order VII Rule 11 of the Code of Civil Procedure, 1908 to reject the plaints filed by the respondents in these appeals without complying with the procedure under Section 12A of the Act.

Although a literal and strict interpretation of the word “shall” was in itself sufficient to establish the mandatory nature of the provision, the court decided to delve into the design, scope, and objective of the Act to reinforce its opinion on the usage of the term as the court has held to be necessary in a catena of cases.

The Statement of Objects and Reasons makes it clear that Section 12A was intended to be mandatory. The purpose of the Act and the Amending Act of 2018 unmistakably points to imposing mandatory mediation on a plaintiff who does not seek urgent interim relief. The provision has only been considered in relation to plaintiffs who do not seek urgent interim relief.

The court rightly observed that the whole objective of this act was to extinguish commercial disputes with the highest level of the expedition and to decongest trial courts, which bear the brunt of the explosion of cases. Such an atmosphere would prepare the ground for the country to become a destination attracting capital by enhancing the ease of doing business, as there exists a direct relationship between the ease of doing business and the early and expeditious termination of disputes that may arise in commercial matters.

The pace at which commercial cases are disposed in a country faced with the problem of docket explosion can be viewed as a decisive element of the ease of doing business, the court highlighted. The court also drew reference from Sharif-ud-Din v. Abdul Gani Lone [(1980) 1 SCC 403], to hold that treating Section 12A as a mere procedural provision would defeat the goal and intention of the legislature for which the act was enacted.

The court further noted that the Legislature, while bringing down the specified value of commercial suits from one crore to three lakhs, has taken care to expressly exclude the time spent in mediation from the computation of limitation under the Limitation Act of 1963. With all these considerations, the court declared the provision to be mandatory in suits which do not contemplate urgent interim relief.

The court in its order also addressed the contention that giving mandatory effect to the provision would take away the fundamental right of the parties to file a civil suit. The apex court clarified that the jurisdiction of a civil court can be ousted and that a civil suit can be barred by a law, either expressly or by necessary implication.

The very presence of Order VII Rule 11(d) under CPC, which mandates rejection of a plaint, where a suit is barred, is a reminder of the principle that there exists no absolute right to file a civil suit, the court pointed. As a result, not every plaint results in a suit being filed and therefore, there exists no constitutional right to file a civil suit.

The court asserted that mediation is not opposed to the fundamental principle of access to justice as, unlike traditional notions of a person’s right to have a dispute resolved by an impartial and trained judge, mediation assigns a greater role to the parties themselves to resolve their dispute.

This results in a win-win situation for both parties as they are saved from the long-drawn-out proceedings, procedural wrangles, mounting and crippling costs, and delays caused by formal courtrooms.

Further, the nominal one-time fee payable to the mediator and the elevation of the settlement under the Act and the Rules to an award within the meaning of Section 30(4) of the Arbitration Act makes mediation an attractive solution to work out commercial disputes. Thus, mediation comes out as the only logical and imperative choice in an age where the court is faced with a docket explosion of cases and suffers from a skewed judge-population ratio.

Challenges ahead and potential concern

It is clear that Section 12A deals with two distinct categories of commercial suits. The first being suits where no urgent interim relief is sought and the second being suits where urgent interim relief is sought. The position with regard to the former is finally settled by this ruling, and parties now need to exhaust pre-litigation mediation before instituting a commercial suit.

However, with regards to the latter category, the law remains silent as to what shall constitute “urgent” interim relief for the purpose of bypassing the said provision. The court in its order didn’t define or delineate such cases or instances where parties can forego this mandatory provision. This would lead to exploitation of the law as the parties would indiscriminately file their suit seeking “urgent” interim relief to avoid pre-litigation mediation.

This would defeat the very purpose and objective of the law. Thus, until further clarification is made, the courts should remain vigilant and should acutely scrutinise the authenticity of each case where “urgent” interim relief is sought. A penalty should be imposed on litigating parties who attempt to circumvent the said provision for malicious purposes.

Confusion also prevails as to what would be the consequences when a plaint gets rejected for non-compliance of Section12A. The availability of adequate infrastructural facilities for dealing with the explosion of cases which will now be referred for mediation and the availability of skilled and qualified mediators are a few other challenges that the court highlighted in its judgment.

With the introduction of the Draft Mediation Bill, 2021, which mandates compulsory pre-litigation mediation before the institution of any formal adjudicatory proceedings before any court or tribunal, it is clear that India is heading towards a pro-mediation regime. The present judgement is one of a series that upholds this spirit. This judgment, if enforced strictly, will greatly de-clog the courts from the heavy burden of commercial cases and will foster a regime where litigants will be able to resolve their disputes in a time-efficient and amicable manner at minimal cost. The future is mediation!

This article has been authored by Shubham Sharma, a student at Chanakya National Law University.