The Commercial Courts Act, 2015 (“Act”) was amended in 2018 to provide for the mandate to exhaust the remedy of pre-institution mediation under Section 12A of the Act before filing any commercial suit not contemplating any urgent relief. The provision was introduced to aid in the speedy and effective disposal of commercial disputes and encourage amicable settlement to reduce the burden on courts. Resultantly, an emerging pro-mediation environment could positively impact India on the Ease of Doing Business Index and streamline dispute resolution.
The Supreme Court in Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd. (2022) 10 SCC 1, held that pre-institution mediation under Section 12A of the Act is mandatory before filing a commercial suit. Further, non-compliance with the same shall result in rejection of suit under Order VII Rule 11 of the Civil Procedure Code, 1908 (“CPC”).
While it is a settled position of law that pre-institution mediation under Section 12A of the Act is mandatory for commercial suits, a pertinent question arises: Should mandatory pre-institution mediation under Section 12A of the Act be extended to counter-claims filed in commercial suits, especially when the main suit has already undergone the mediation process?
The Single Judge Bench of Delhi High Court on September 2, 2024, in a landmark case of Aditya Birla Fashion and Retail Ltd. v. Saroj Tandon, 2024 SCC Online Del 6099, has held that pre-institution mediation is mandatory for every suit involving a commercial suit and no distinction can be drawn when it comes to counter-claim involving a commercial dispute and not contemplating any urgent relief. It was observed that merely because the defendant (counter-claimant) in the earlier round did not show any interest in settling the matter, it would not ipso facto mean that such defendant (counter-claimant) is relieved from the mandate of pre-institution mediation. The Hon’ble Court held that counter-claims are distinct suits under Order VIII Rule 6A of CPC and the same must adhere to the same procedural requirements as the original suit. Hence, the counter-claim filed without exhausting mandatory pre-institution mediation under Section 12A of the Act is liable to be rejected under Order VII Rule 11 of CPC. The said decision of the Single Judge Bench of the Delhi High Court was challenged in Special Civil Leave to Appeal before the Hon’ble Supreme Court in Aditya Birla Fashion and Retail Limited v. Saroj Tandon in SLP(C) No. 25893 of 2024 which was dismissed by the Supreme Court in limine vide a non-speaking order dated November 11, 2024 without recording any reason.
Conversely, subsequent to the said judgment passed by Single Judge Bench of the Delhi High Court and dismissal of SLP by the Hon’ble Supreme Court, the Division Judge Bench of the Delhi High Court in its decision dated December 24, 2024 in Sanjana Agarwal v. Namoshivai Apparels Private Limited [2024 SCC Online Del 9272] has held that when the plaint and counter-claim emanate from the same series of transaction, a second round of mediation for counter-claim would be contrary to the objects of the Act and delay the adjudication of commercial disputes between the parties. Thus, mediation under Section 12A of the Act is not mandatory for counter-claims. The Judgment of the Division Bench of the Delhi High Court was also relied upon by a Single Judge Bench of the Calcutta High Court in Ogo USA INC. vs. Krishna Tissue Pvt. Ltd., [CO 3441 of 2024], delivered on January 9, 2025, which held that there is no requirement in law for proceeding with pre-institution mediation prior to filing of a counter-claim. Further, the Hon’ble Single Judge Bench of the Calcutta High Court opined that it disagreed with the findings in Aditya Birla Fashions (supra) for similar reasons as recorded by the Division Bench of the Delhi High Court in Sanjana Agarwal (supra).
It is pertinent to note here that the appeal challenging the Single Judge Bench decision of the Delhi High Court was dismissed in limine by the Hon’ble Supreme Court in SLP without recording any reasons. Thus, the decision of the Supreme Court would neither attract the doctrine of merger nor lay down any law under Article 141 in respect of mandatory pre-litigation mediation in counter-claims. Hence, the decision of the Single Judge Bench of the Delhi High Court does not stand substituted by the order of the Supreme Court. Therefore, in terms of the well-established principles in law, the subsequent judgment of the Division Bench of the Delhi High Court dated December 24, 2024 in Sanjana Agarwal (supra) would prevail over the prior judgment of the Single Judge Bench dated September 2, 2024 of the same High Court in Aditya Birla Fashions (supra).
However, the divergence in judicial interpretations by the Delhi High Court underscores the ongoing debate about the mandatory nature of pre-institution mediation under Section 12A for counter-claims. While some courts enforce the provision strictly and reject counter-claims due to failure of the party to exhaust the remedy of mediation under Section 12A, other courts hold it not to be mandatory for counter-claims.
The Working Paper No. EAC-PM/WP/25/2023 issued in November 2023 by the Economic Advisory Council to the PM (“Working Paper”) on “Why Commercial Mediation should be voluntary” shows a very grim picture of the effectiveness of mandatory pre-institution mediation. The paper shows evidence from two District courts in Mumbai suggesting that between 2020 and 2023, around 98% of applications for pre-institution mediation were non-starters because the parties failed to participate in the proceedings. Further, out of the remaining 2% of applications that attempted pre-litigation mediation, approximately 1% failed and only 1% led to a settlement. This low success rate suggests that mandatory mediation may not be yielding the desired outcomes and could only be contributing to delays and increased costs in the litigation process.
Mediation is inherently a voluntary process where parties to the dispute collaborate with a neutral third party to resolve their disputes. This autonomy allows for creative solutions tailored to the specific needs of the parties involved. However, when mediation is mandated, especially without the genuine consent of all parties, it risks becoming a mere procedural hurdle rather than a meaningful avenue for dispute resolution. It is also to be noted that given the time-consuming and expensive nature of the litigation process in India, filing a commercial suit is always a measure of last resort once all scope for an amicable settlement has been exhausted. In most business transactions, the parties usually attempt to amicably settle their disputes through informal and formal consultations before sending legal notices and initiating litigation. Therefore, forcing unwilling parties to sit through a long-drawn-out mediation process makes it simply a redundant process and an additional layer of litigation, since parties decide to open the doors of litigation only as a last resort. Hence, allowing parties the discretion to choose mediation respects their autonomy and can lead to more sincere and effective resolutions.
The mandatory pre-institution mediation requirement under Section 12A of the Commercial Courts Act serves a vital role in promoting settlement and reducing court congestion. However, its application to counterclaims should be assessed on a case-by-case basis. In instances where the main suit has already undergone mediation, compelling a defendant (counter-claimant) to initiate a separate mediation process for a counterclaim may not align with the legislative intent of the Act to expedite dispute resolution. The same could lead to unnecessary delays and expenses, contradicting the very purpose of expediting dispute resolution under the Act. In this regard, it may be noted that Section 89 of CPC already gives power to the court to refer disputes for settlement outside of the court. Therefore, in cases where it appears to the court that there exist elements of settlement between the parties to the counter-claim, the court may refer the parties to explore mediation for the counter-claim. Such a discretionary approach under specific circumstances would balance the objectives of the Act with the principles of judicial efficiency and equity. Hence, the Legislature should clarify the position of law that while the pre-litigation mediation under Section 12A is mandatory for commercial suits, the same is not mandatory for counter-claims filed in the same suit, which has already explored the possibility of mediation under Section 12A at the time of filing main commercial suits.
About the authors: Yogendra Aldak is a Partner, Bhavya Shukla is a Principal Associate and Tamanna Sharma is a Senior Associate at Lakshmikumaran and Sridharan attorneys.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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