Suits and exemption from mandatory pre-institution mediation

Posted On - 2 December, 2022 • By - Renjith Nair


Section 12A of the Commercial Courts Act, 2015 (Act) mandates pre-institution mediation in case of a commercial suit above a specified value, unless the suit contemplates urgent interim reliefs. The Supreme Court of India in M/s. Patil Automation Private Ltd. v. Rakheja Engineers Private Ltd.1 (Patil Automation Case) held that pre-institution mediation is mandatory and any suit instituted violating the same must be rejected with effect from 20 August 2022 (our views on the same can be accessed here). However, there was no guidance on how the court will determine whether a suit contemplates urgent interim reliefs. Section 12A seeks to balance the mandatory requirement of mediation between parties to a commercial dispute while protecting the right of an aggrieved party to seek urgent interim reliefs so that the suit does not become infructuous.

In this background, the Madras High Court in Mr. K. Varathan v. Mr. Prakash Babu Nakundhi Reddy 2 (Varathan v. Reddy Case) considered the parameters for seeking urgent interim reliefs in a suit, in which event pre-institution mediation would not be required to be followed mandatorily.

Facts of the case
Pursuant to an agreement, Mr. Varathan financed the purchase of audio visual equipments and Mr.Reddy was to repay the financed amount. On failure of Mr. Reddy to make the payments, Mr. Varathan filed a suit before the Madras High Court seeking payments along with interest. While the suit was filed on 12 August 2022, the court fee was paid only on 30 August 2022.

The Court noted that pre-institution mediation was not undertaken by the parties. In this respect, Mr. Varathan contended: (i) Pre-institution mediation was not mandatory in the present case as the suit was instituted before the 20 August 2022 effective date set in Patil Automation Case; and (ii) an urgent interim relief was sought in the matter, thereby exempting him from such mediation.

Ruling of the Court
Deciding the first issue, the Court observed that while the suit was filed on 12 August 2022, the payment of court-fee for proceeding with the suit was made only on 30 August 2022. The Court noted that the judgment in the Patil Automation Case made it clear that suits instituted post 20 August 2022 without adhering to Section 12A would have to undergo mandatory pre-institution mediation. The Court also noted that in Patil Automation Case, the Supreme Court had fixed 20 August 2022 as the effective date solely for the purpose of ensuring that all stakeholders i.e., litigating parties, courts, etc, become sufficiently informed. Thus, the first argument of Mr. Varathan was rejected.

The Court also looked into the meaning of the terms “urgent”, “interim” and “relief” and opined that urgent interim relief can be granted only in instances where a provisional or temporary relief is so vital that some adverse event may occur before the completion of pre-institution mediation. Court also held that there must be a “contemplation” process by the party filing the suit and this contemplation process should be profound and thoughtful. Additionally, such contemplation should lead the suing party to believe that the matter requires immediate attention and needs to be dealt with immediately, failing which, the time consumed in exhausting the remedy of pre institution mediation will lead to an injury which the suing party should not be made to suffer.

The Court also laid down the following criteria (illustrative, not exhaustive) to be looked into to see if a relief was an “urgent interim relief”:

(i) whether the prayer is a product of profound thinking by the suing party about possibility of a thing happening which necessitates such urgent interim relief;
(ii) whether the matter demands prompt action and exhausting the remedy of pre institution mediation in the meanwhile can lead to an irreversible situation;
(iii) where the urgency arises out of the suing party’s own doing. If yes, then the suing party cannot seek urgent interim reliefs;
(iv) a high standard is required to establish the need for urgency;
(v) the urgent interim relief sought should be fair;
(vi)the actual or apprehended wrong to the suing party should be so imminent that the suing party should be able to satisfy the court that it should not be made to suffer such wrong.

In this present case, the Court noted that Mr. Varathan had sent a demand notice to Mr. Reddy in March 2022 and had remained dormant for five months before filing the suit in August 2022 on a mere apprehension that Mr. Reddy was going to dispose off his assets. The Court held that it was not a fit ground for seeking urgent interim relief as contemplated under the Act since the criteria laid down in the Act was not satisfied. Accordingly, the Court rejected the plaint, while giving liberty to Mr. Varathan to approach the Court after exhausting pre-institution mediation under Section 12A of the Act.

Our thoughts
Varathan v. Reddy Case is another pro-mediation judgement from Indian courts, reiterating that parties cannot escape pre-litigation mediation, unless it is proved that urgent interim relief is necessary. Analysing the difference between urgent interim relief and interim relief and laying a very high threshold to establish the need for urgent interim relief is a welcome move and this judgment is likely to result in expeditious settlements of commercial dispute.

It is relevant to note that as per a report by the Centre for Effective Dispute Resolution, in the year 2021 there were 16,500 commercial mediations in the United Kingdom and the aggregate settlement rate stood at 93% 3. Similarly, the settlement rate in the United States of America stood at 89% in 2021 and 91% in 2022 4. It is evident that mediation, as an alternate dispute resolution process, has been gaining popularity on account of its non-adversarial, cost effective, party-centric and neutral procedure. Such pro-mediation stand of the Indian Courts would hopefully have a positive impact of substantially reducing the burden of pending commercial cases in India. In order to achieve the larger objective of promoting India as one of the major commercial hubs in the world, it is imperative to prevent institution of suits which do not satisfy the criterion for urgent interim relief under the Act as laid down by the Court in the Varathan v. Reddy Case.

Authors: Renjith Nair and Altamash Qureshi

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.

3 Page 6 and 16