Supreme Court on mandatory mediation in the era of docket explosion

Posted On - 4 November, 2022 • By - Renjith Nair

Commercial and contractual disputes in India have arisen multifold with the steady increase in commerce and investment. Given the complex nature of commercial disputes involving multi-layered transactions, the 253rd Law Commission Report (Law Commission Report) recommended passing a separate legislation for speedy disposal of commercial disputes. In such a background, the parliament enacted the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (Act). Further to this, the Parliament with an aim to make India investment friendly, amended the Act in 2018 (Amendment Act) and provided for speedy resolution and contract enforcement mechanism. 

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. However, the question came up before the Supreme Court whether this provision is mandatory or directory in nature? And what is the effect of non-compliance? In this article, we discuss the decision of the Supreme Court and similar issues arising under pre-arbitration mediation (Med-Arb) clauses.  

Decision of the Supreme Court 

In M/s Patil Automation Pvt. Ltd. & Ors. v. Rakheja Engineers Pvt. Ltd.1, M/s Patil Automation Pvt. Ltd. (PAPL) filed an application for return of plaint filed by Rakheja Engineers Pvt. Ltd. (Rakheja Engineers) in a commercial suit before the district court. It was contended by PAPL that on account of non-initiation of mediation before instituting a commercial suit, the plaint filed by Rakheja Engineers was pre-mature and ought to be rejected. The district court, while directing the matter to mediation, rejected PAPL’s contentions. The district court opined that mediation provided under Section 12A is not a precursor to instituting a commercial suit.  

Being aggrieved, PAPL approached the High Court. The High Court upheld the decision and observed that the purpose of referring the dispute to mediation center is to explore settlement. If a suit is filed without taking recourse to mediation, it should not entail rejection of the plaint. The High Court, noting that the legislature could not have intended rejection of claim due to mere technicalities observed that procedural rules are meant to advance the ends of justice and not cause hinderance. It was further observed that rejecting a plaint merely because settlement was not explored would be a perverse interpretation and hence cannot be adopted. Being aggrieved, PAPL approached the Supreme Court by way of a special leave petition. Similarly, two other petitions raising the same question of law came to be heard before the Supreme Court under the same matter. 

The Supreme Court, placing reliance on the intention of the legislature, held that the mandatory nature of Section 12A appears harmonious with the object of the Act i.e., expeditious disposal of commercial litigation. Moreover, if settlement is arrived at during the stage of pre-litigation mediation under Section 12A of the Act, it is treated as an award on agreed terms as per the Arbitration & Conciliation Act, 1996 and hence, a decree. The Supreme Court further observed that the recognition of fruitful pre-litigation mediation as a decree itself points towards its compulsory nature. 

Our thoughts  

It is clear from the Law Commission Report that there is grave concern about the time taken in disposal of commercial matters. Given this background, the legislature could not have intended for parties to merely “explore settlement” at its discretion. The language of the provision along with the procedure laid points out that the same is mandatory in nature. Moreover, while Section 12A makes mediation compulsory for all commercial suits, it carves out an exception for matters requiring urgent relief. The legislature, being mindful of delivering substantial justice to parties has provided a solution for urgent reliefs as well. Thus, it is further substantiated that Section 12A is compulsory and does not prejudice the rights of a party to access justice, when urgent. 

It is now clear that mediation must necessarily be explored before instituting a commercial suit. A similar provision for Med-Arb clauses is a common feature under arbitration agreements in India. While pre-institution mediation arises as a statutory obligation under the Act, Med-Arb clause is a contractual obligation i.e., it is inserted only if the parties to the contract agree to do so. It is generally advisable to incorporate such clauses to explore amicable settlement before invoking arbitration and avoid exorbitant costs and time consumption that are inevitable during arbitrations. Similar to the controversy that persisted prior to the decision of Supreme Court in PAPL v. Rakheja Engineers i.e., there is some confusion on whether mediation is mandatory where Med-Arb clauses are provided.  

In 2014, the Supreme Court2 held that invoking arbitration without conducting mutual discussions and/ or mediation is not pre-mature. Therefore, mediation is not compulsory for invoking arbitration. Around the same time, Delhi High Court3 observed that Med-Arb clauses are only directory and not mandatory in nature. A similar view was taken by the Bombay High Court4 in 2017. However, in 2020 the Bombay High Court5 took a contrasting view and acknowledged the mandatory nature of Med-Arb clauses. 

With the decision of the Supreme Court in PAPL v. Rakheja Engineers mandating pre-institution mediation, it appears that there is a paradigm shift towards mediation. The decision pushes parties to enter into mediation talks with the opposite party before taking recourse to a suit; this would if judiciously used, help litigants save exorbitant costs and time spent in a suit. There is a likelihood that Courts may now take a similar approach for Med-Arb clauses as well. It is advisable for parties entering into contracts to resort to Med-Arb clauses especially because mediation appears to be more pocket-friendly, time bound and flexible than arbitration. In commercial matters involving urgent reliefs, foreign investors, high-stake investors, it becomes essential that the controversy be resolved in a time-bound manner to keep the value of the deal intact. Moreover, in matters involving smaller claim amounts, it is not feasible for parties to spend more on arbitration than the claim amount itself. In such situations as well, exploring mediation before invoking arbitration would be fruitful and beneficial for parties. 

Authors: Renjith Nair and Richa Phulwani 

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. 

Keywords: Arbitration and ADR, litigation, Supreme Court of India, mediation, arbitration, pre-institution mediation, med-arb clauses, section 12A, Commercial Courts Act, commercial courts, Delhi High Court, Bombay High Court, mandatory mediation, interpretation