The pre-institution mediator is now the only option for commercial disputes!

The following is a brief introduction to the topic

The Supreme Court of India has handed down a historic ruling in the case of Patil Automation Pvt. Rakheja Engineers Pvt. Ltd. [2022 SC OnLine SC 1028] recently held that the pre-institution mediator under Section 12A of Commercial Courts Act 2015 (from now on called “the Act”) is mandatory, and any plants which do not adhere to it will be rejected according to Order VII, Rule 11 of Code of Civil Procedure (1908).

By adopting a more mediation-friendly approach, the court has settled the debate on whether Section 12A’s pre-institution Mediation for Commercial Disputes is just a procedural provision or if it is a mandatory requirement.

Parties will now be required to undergo mandatory mediation before they can approach the court unless an urgent interim remedy is needed. This decision would speed up the resolution of commercial disputes and relieve the already overburdened court system.

Litigation can create a rift between the parties. Legal disputes are rarely win-win situations. Conversely, mediation diffuses tensions and creates a conducive environment for parties to reach an agreement amicably while saving money because a long-running legal dispute is avoided.

Due to the massive backlog of cases in India and the efforts of the country to improve its ranking on the Ease of Doing Business Index, mediation is a preferred method of dispute resolution for the corporate world.

Need for a law

The Commercial Courts, Commercial Division, Commercial Appellate Division of High Courts Act, 2015. (the “Act”) has been introduced by the Government of India to encourage economic activity and investment in India with the dual objectives of achieving goals set out in “Make in India,” and to improve its ranking in the “Ease of Doing Business.”

The government wished to reduce the burden of commercial litigation for parties, as this would improve investors’ perceptions towards India as a destination for investment.

To achieve these objectives, in 2018, the act was amended as the Commercial Courts, Commercial Division, and Commercial Appellate Division of High Courts Amendment Act, 2018 (Act 28 of 2018.), introducing Section 12A, which made mediation mandatory in all cases, except for suits or applications where urgent interim relief is requested.

The specified value for a commercial dispute has also been reduced from 1 crore to 3 lakhs. There needed to be more clarity as to its nature and interpretation, with some High Courts ruling that it is a directory provision.

High courts are discordant in their judicial trends.

In Ganga Taro Vazirani [2021 SCC Online Bom 195], a single-judge bench of the High Court of Bombay took the position that Section 12A was a procedural clause. He also held that the Section 12A procedure is unnecessary when an urgent relief application is made.

In an appeal, a Division Bench of the High Court of Bombay found that the Single Judge was wrong in his opinion that Section 12A was not mandatory. The Division Bench declared that Section 12A is compulsory.

In a similar case, a single judge of the High Court of Calcutta in Dhanbad Fuels Ltd. V. Union of India and Others (2021 SCC Online Calcutta 429) held that mediation is still in its infancy in India and that it requires greater awareness. He also held that the party could not be denied their right to participate in justice dispensation, thus reducing section 12A to an advisory provision.

In Dredging and Desiltation Company Private Limited, another learned single judge of the High Court of Calcutta took the view that Section 12A is absolute w.e.f. Ltd. v. Mackintosh Burn and Northern Consortium and Others (2021 SCC Online Calcutta 1458), the learned single judge of the High Court of Calcutta held that the bar under section 12A was absolute as from 12.12.2020. It was held to be mandatory on 12.12.2020.

The Division Bench of Madhya Pradesh High Court, in Curewin Pharmaceuticals Pvt. Ltd. v. Curewin Hylico Pharma Pvt. Ltd [AIR 2020 MP 154] held that a lawsuit that does not contemplate an urgent interim remedy can only be initiated if pre-litigation mediators have been exhausted.

In the case of Awasthi Motors V. Managing director M/s. Energy, Electrical Vehicles, and Another (AIR 2021 Allahabad 143) found that pre-institution mediators have a clearly defined purpose. He referred back to the Statement of Objects and Reasons and ruled that the provision was mandatory.

The Trial Court in the present case rejected Patil Automation’s argument that the suit had been filed without adhering to Section 12A by holding that giving compulsory effect to said provision would cause a catastrophe as this was not what was intended by the legislature.

In a similar appeal, the Punjab and Haryana High Court held the same views. The court stated that the purpose of referring a dispute to the Mediation Centre was to explore settlement. The plant should be accepted if the suit is filed before the procedure has been followed. The legislature could not have intended this. Further, it is noted that an act must be interpreted so as to avoid delivering “perverse justice.”

Supreme Court Analysis: A mediation-friendly approach

The Apex Court had to decide whether or not the pre-litigation statutory mediation envisaged by Section 12A of Commercial Courts Act 2015, as amended in 2018 by the Amendment Act of 2018, is mandatory and whether or not the Courts below made an error in refusing the applications under Order VII Rule 11 of Code of Civil Procedure 1908, which would have allowed the plants of the respondents in the appeals to be rejected without following the procedure stipulated in Section 12A of Act.

The court decided that a strict and literal interpretation of “shall” would be sufficient to establish its mandatory nature. However, it also looked at the Act’s scope, design, and purpose to strengthen its opinion. This was because the court had held this necessary in many cases.

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