Pre-institution Mediation Mandatory for Counterclaim under the Commercial Courts Act 

Introduction 

Mediation, as a dispute resolution mechanism is growing at a fast pace in India. Especially with the enactment of Mediation Act, 2023 and inclusion in public procurement contracts, it seems that India is willing to become a pro-mediation jurisdiction. Further to this, the Parliament amended the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (Act) in 2018 (Amendment Act). 

Through the Amendment Act, Section 12A was introduced to the Act which mandates parties to a commercial dispute to initiate mediation before instituting a commercial suit in Courts (known as pre-institution mediation). Thereafter, in November 2022, the Supreme Court in M/s Patil Automation Pvt. Ltd. & Ors. v. Rakheja Engineers Pvt. Ltd. (Patil Automation Case) had the opportunity to consider whether such pre-institution mediation is mandatory or directory in nature. It was held that the process is mandatory under the Act and the failure to conduct the same results in rejection of the plaint (our views on the same can be accessed here).  

Recently, the Delhi High Court (DHC) in Aditya Birla Fashion and Retail Limited v. Mrs. Saroj Tandon had the opportunity to consider whether pre-institution mediation is required to be undertaken separately while filing a counterclaim in the same suit. Answering the question in affirmative, the DHC elaborated on the scope of Section 12A of the Act and the nature of counterclaims. In this article, we discuss the said judgment of the DHC. 

Facts 

Aditya Birla Fashion and Retail Limited (Aditya Birla) and Mrs. Saroj Tandon (Mrs. Tandon) entered into an agreement for lease of a property (Lease Agreement). However, eventually Aditya Birla issued a notice of termination of the Lease Agreement and requested for a refund of its security deposit from Mrs. Tandon. Upon refusal by Mrs. Tandon to refund the security deposit, Aditya Birla filed an application under Section 12A of the Act to initiate the pre-institution mediation process.  

However, as Mrs. Tandon failed participate in the mediation. Accordingly, the process was declared to be a ‘non-starter’. This led to Aditya Birla filing a commercial suit before the Trial Court seeking recovery of the sums under the Lease Agreement. During the pendency of the suit, Mrs. Tandon lodged a counterclaim seeking recovery of money. The counterclaim did contemplate any urgent interim reliefs. In response, Aditya Birla objected to the continuance of the counterclaim and filed an application for rejection of the same on the grounds that pre-institution mediation was not undertaken by Mrs. Tandon. The same was rejected by the Trial Court. Aggrieved, Aditya Birla invoked the writ jurisdiction of the DHC. 

DHC Ruling 

The primary issue before the DHC was whether a counterclaim that pertains to a commercial dispute had to mandatorily undergo the process of pre-institution mediation under Section 12A of the Act.  

In this regard, the DHC analyzed the provisions of Code of Civil Procedure, 1908 (CPC) and the nature of a counterclaim. The DHC opined that as per CPC, a counterclaim is treated as a suit. In fact, all the requirements for a suit, i.e., the opportunity to file a written statement, timelines, manner of filing and other procedural aspects are separately applicable while filing a counterclaim. Accordingly, for all purposes, all procedures and mandates applicable to a suit will apply to a counterclaim and is to be treated as a suit in its individual and distinct capacity. In this background, the DHC held that Section 12A of the Act is applicable to counterclaims as well. Accordingly, even at the time of filing a counterclaim, the applicant must mandatorily undertake pre-institution mediation provided it does not contemplate any urgent interim reliefs.  

Further, the DHC placed reliance on the Patil Automation Case wherein the Supreme Court unequivocally laid down that pre-institution mediation under Section 12A of the Act is mandatory for every commercial suit. In fact, the non-compliance of the same will lead to rejection of the plaint. However, as per Patil Automation Case such recourse to rejection of the plaint has been made prospectively with effect from 20 August 2022. Accordingly, violation of Section 12A of the Act for any plaint or counterclaim filed before the said cut-off date, the same will not be liable to be rejected under CPC. 

Our Thoughts 

While the judgment is in line with the statutory provisions prescribed under the Act and the CPC, it must be noted that the strict interpretation of the provisions may lead to an anomalous situation. There is a possibility that conducting pre-institution mediation before the filing of the suit as well as before filing a counterclaim in the same suit may be counterproductive.  

In fact, Umakanth Varotill, in his article ‘Supreme Court on Mandatory Pre-Litigation Mediation in Commercial Court Cases’ has identified that lack of well-designed machinery and adequate number of professional mediators in India may lead to substantial delay in conducting and concluding mediations. Accordingly, mandatory pre-institution mediation may not be the best idea. Further, a study published in a March 20231 revealed that amongst 98% of the disposed cases in 2020 to 2022, parties refused to participate in mediation. Only remaining 2% of cases fell within the category of ‘failed to settle’ or ‘settled’. As per the said study, pre-institution mediation does not lessen the burden of the commercial courts. In fact, it adds another docket to the already exploding dockets in courts. 

With the present decision of the DHC making it mandatory to conduct pre-institution mediation even at the time of filing of a counterclaim, the commercial courts may face even more applications in this regard.  

Be that as it may, we are in agreement with the decision of DHC in as far as prior mediation at the time of filing of the suit would not render the provision nugatory in context of any counterclaim. This is mainly due to the fact that if the counterclaim is meritorious, the party that instituted the suit in the first place might consider settlement at this stage. However, in order for expeditious pre-institution mediation, it is essential that trained professionals are appointed, and timelines are strictly adhered to, in order to avoid any dilatory tactics.  

Authors: Purvi Doctor, Richa Phulwani and Prachi Tandon 

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.