Mediation Under Section 12 (A) of the Commercial Courts Act, 2015 is Mandatory

The Bombay High Court has finally put to rest the question as to whether the Mediation as contemplated under Section 12 (A) of the Commercial Courts Act, 2015 is mandatory or directory in nature in a recent Judgement dated 01.10.2021 in Commercial Appeal (L) No. 11950 of 2021.

This is an important Judgement in light of the draft Mediation Bill, 2021 dated 29.10.2021 that is supposed to be tabled in the 2021 Winter Session of the Parliament.

The above-referred Judgement was delivered by a bench of the Hon'ble Justice Nitin Jamdar and the Hon'ble Justice C.V. Bhadang. It is such a beautifully written Judgement that covers all aspects of Mediation with respect to the Commercial Courts Act, 2015, that it shall be enough to only reproduce the relevant extracts from the Judgement to convey the ratio of the Judgement across properly.

In this Judgement, the Hon’ble Court has held that mediation under Section 12-A of the Commercial Courts Act, 2015 is a mandatory provision and not directory. This judgement was delivered an appeal from the judgement of a Single Judge of the Hon’ble Bombay High Court dated 16 February 2021. In this judgement dated 16 February 2021, the learned Single Judge observed that Section 12-A of the Commercial Courts Act, 2015 is not mandatory and is procedural and the substantial compliance of the same is enough. The learned Single Judge opined that Section 12 A is a procedural provision, and there is no absolute embargo on instituting the suit unless the Plaintiff exhausts the remedy of mediation. The learned Judge Opined That it is clear from Section 12 A (1) that where there is urgent interim relief, a party is not required to exhaust the remedy of mediation, which itself shows that the provision is not mandatory. The learned Single Judge further observed that it would be futile to drive the parties to pre-institution mediation when they are unsuccessful in resolving the dispute. The learned Single Judge observed that if Section 12 A is held mandatory, it will negate the purpose of the Act of 2015 of ensuring speedy disposal of commercial causes. The learned Single Judge held that the doctrine of substantial compliance would have to be invoked, and it is open to the Defendant to waive the option to go for mediation. The learned Single Judge also held that the objection must be taken at the earliest. Then the learned Single Judge considered the position under Section 80 of the Code of Civil Procedure with Section 12 A and found them to be pari materia to invoke the concept of waiver. The learned Single Judge held that on parity of reasoning in the facts and circumstances, the Defendant had waived the privilege of asking the Plaintiff to invoke the remedy of pre-institution mediation. After having interpreted the provisions, the learned Single Judge found in the facts of the case that since the Appellant had not raised any objection earlier, the provision under Section 12 A is deemed to have been waived.

The Hon’ble Bombay High Court has elaborated on the scheme of Section 12A of the Commercial Courts Act, 2015 in the following manner. A commercial suit of the specified value that does not contemplate any urgent interim relief shall not be instituted unless the party exhausts the remedy of pre-institution mediation in accordance with such manner and procedure as may be prescribed by Rules. The Central Government will authorise the authorities constituted under the Legal Services Authorities Act, 1987 for the purposes of pre- institution mediation. The mediation process is to be completed within a period of three months from the date of application. The period may be extended for a further period of two months with the consent of the parties. The period of pre-institution mediation shall not be computed for the purpose of limitation under the Limitation Act, 1963, and Section 12 A (3) excludes the period taken for mediation from the limitation period for filing the suit. Under this Section, the settlement arrived at shall have the same status and effect as if it is an arbitral award under Arbitration and Conciliation Act, 1996.

While referring to the Judgement of the Hon’ble Supreme Court of India in Ambalal Sarabhai Enterprises Ltd. v. K.S. Infraspace LLP. & Anr., (2020) 15 SCC 585, the Bombay High Court said that the Supreme Court laid down that the provisions of the Act of 2015 are required to be strictly construed to aid the speedy disposal of commercial cases, and a liberal interpretation thereof, which will lead to needless clogging of the Court docket has to be avoided.

And referring to the language of Section 12 A, the Bombay High Court held that it is no doubt correct that if the plain meaning of the words of a statute leads to anomaly and absurdity, then the court can look into the purpose for which the statute is enacted and try to reconcile the interpretation with the purpose of the statute. However, If the words of the statute are plain and obvious and do not result in any anomaly, then the court must give effect to the words as used in the statute. The use of the word "shall" in a statute generally raises a presumption that the provision is mandatory. This presumption can be rebutted by looking at the object and scope of the statute and the consequences flowing from the construction. To displace the presumption, the intention of the legislature is to be considered.

In its discussion, the Bombay High Court looked at the fact that Section 12A was introduced by way of Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018. The Statement of Objects of the (Amendment) Act, 2018 generally stated that the global economic environment has since become increasingly competitive and to attract business at the international level, India needs to further improve its ranking in the World Bank’s 'Doing Business Report, which, inter alia, considers the dispute resolution environment in the country as one of the parameters for doing business. It referred to the economic development, which has prompted initiating legislative measures for speedy settlement of commercial disputes. Early resolution of commercial disputes even of lesser value will create a positive image amongst the investors about the Indian legal system. The object was also to reduce the specified value of commercial disputes and constitute commercial courts at the district level. As regards the introduction of Section 12A, the Statement of Objects and reasons are specifically stated as follows.

(v) to provide for compulsory mediation before institution of a suit, which no urgent interim relief is contemplated and for this purpose, to introduce the PreInstitution Mediation and Settlement Mechanism and to enable the Central Government to authorise the authorities constituted under the Legal Services Authorities Act, 1987 for this purpose. (Emphasis supplied)

The use of the word ‘compulsory’ has to be noted.

Around the same time, with the object of improving the ease of doing business in India, the Parliament amended various other laws. By Specific Relief (Amendment) Act, 2018, Sections 6, 10, 11, 14, 15, 16, 19, 20, 21, 25 and 41 of the Specific Relief Act, 1963 were amended and inserted. The Statement of Objects and Reasons of this amending act shows that economic development has brought in enormous commercial activities in India, which have prompted extensive reforms in the related laws to facilitate enforcement of contracts, settlement of disputes in a speedy manner. Negotiable Instruments (Amendment) Act, 2018 inserted Sections 143A and 148 of the Negotiable Instruments Act, 1881 with a similar object. Companies (Amendment) Act, 2019, changed various provisions of the Companies Act, 2013, extending greater ease of doing business to law-abiding corporates.

On 3 July 2018, the Central Government notified the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018. On 20 August 2018, the Parliament passed the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018.

By Notification S.O.No.332(E) dated 3 July 2018, the Ministry of Law and Justice in the exercise of Section 12A of the Act of 2015 authorizing the State Authority and District Authority constituted under the Legal Services Authorities Act, 1987 for the purpose of pre-institution mediation and settlement under Chapter III-A of the Act of 2015. The Main Mediation Monitoring Committee of Bombay High Court issued a Mediation Scheme on 15 February 2019. The Scheme laid down guidelines for effective implementation of Alternate Dispute Resolution mechanism with reference to Section 12A of the Act of 2015.

Section 12A does not come into play if the suit contemplates an urgent relief. If a commercial suit (of specified value) contemplates urgent relief, it can be instituted in the court straightaway. Therefore, two classes of commercial disputes are contemplated under Section 12A. One in which an urgent interim relief is not contemplated and second where urgent interim relief is contemplated. Section 12A provides different schemes for these two classes of disputes. Where there is no urgent interim relief to first exhaust the remedy of pre-institution mediation. Where there is an urgent interim relief contemplated to approach the court directly. The emphasis is that for a particular type of dispute particular kind of remedy is more appropriate. Section 12A segregates commercial disputes depending on their urgency. Making segregation at the inception of a commercial dispute is a considered legislative instrument to speed up the disposal of commercial disputes.

Court adjudication is not the only type of dispute resolution mechanism. Negotiations and mediation also resolve the dispute by finding a mutually acceptable solution. The parties can negotiate themselves or through a private person or machinery provided under the statute. Once the authority conducts the mediation under Section 12A, the mutually acceptable outcome can be enforced like an arbitral award. For some disputes with urgent interim reliefs, adjudication in courts can be a suitable remedy, while for some disputes, resolution through mediation can be more appropriate. Section 12A is recognition of this fact by the legislature. A clear legislative intent emerges from the plain reading of Section 12A that a commercial dispute which contemplates an urgent interim relief, dispute resolution by Courts is primary, but when there is no such interim relief contemplated, pre-institution mediation for mutual resolution of disputes to be attempted first should be appropriate.

Delving further into the provisions of the Commercial Courts Act, 2015 and referring to various Judgement of the Supreme Court of India, the Bombay High Court has held that the Act of 2015 provides a fast-track methodology for commercial disputes and section 12A now forms an integral part of the same.

The incentive to delay the court proceedings and not mediate partly arises from the delay in disposal of the matter. The Act of 2015 has also brought in a new regime of costs by amending the Code of Civil Procedure. The costs imposed can be significant to be a deterrent. The court considers various factors, such as the parties' conduct, to discourage dishonest defences. It is envisaged that when the commercial suits will get disposed of faster with imposing substantial costs for frivolous defences, there would be fewer incentives for the defendants to delay the commercial causes. Generally, the commercial suits that do not contemplate urgent interim relief are simplicitor money recovery suits. It is common knowledge that the majority of such commercial disputes revolve around the rate of interest. Once the segregation under Section 12A takes place, and the disposal of commercial causes speeds up, the incentive will be reduced, and there could be more incentive for resolution of disputes through mediation. Keeping this long-term perspective, the legislature has enacted Section 12A as an intervention to boost speedy disposal of the commercial causes. Therefore, it cannot be said that Section 12A impedes the speedy resolution of commercial disputes.

Pre-institution mediation achieves a larger purpose of speedy resolution of commercial disputes. Section 12A is not a facility but a mandate by the legislature. If no interim relief is being sought, before rushing to clog the court docket, mediation must be explored. In the case of Ambalal Sarabhai Enterprises, the Supreme Court observed that the suits that are not actually relating to a commercial dispute but being filed merely because of the high value and merely intending to seek early disposal would only clog the system and block the way for the genuine commercial disputes. Therefore, speedy disposal of only those cases is to be considered which are specifically stated. Section 12A is intended also to prevent clogging of dockets by non-urgent matters, and for those mediation could be a more appropriate remedy. Therefore, the pre-institution mediation under Section 12A is not a privilege or an option to a party.

It may be true that in some cases, a party may not want to participate in pre-institution mediation, but then the expedited procedure and the resultant substantial costs would follow if the defence is unmeritorious. Even if the other party does not participate in pre-institution mediation, the claimant is not prejudiced as the limitation period is the same, and if any urgent interim relief is contemplated, the party can directly approach the Court. If the pre-institution mediation is successful, it results in an award that can be enforced without the parties incurring any litigation cost. Section 12A does not take away the right to institute the proceedings or the right of access to justice. It merely directs the parties to resort to another remedy before approaching the court. If mediation is successful, the relief can be by way of an award. If the mediation is unsuccessful, the party can always approach the court. It can approach the court even when urgent interim relief is contemplated. Therefore, the Respondent’s argument that Section 12A bars access to justice, is without any merit.

The Bombay High Court held that the contention that the analogy of Section 80 of the Code of Civil Procedure is entirely inapplicable for interpreting Section 12A. First, interpretation by analogy or referring to another provision would be resorted to, if there was any doubt regarding the plain meaning of the provision under consideration, which in the case at hand, there is none. Section 80 of the Code of Civil Procedure is also held to be mandatory by the Supreme Court in Bihari Chowdhary v. State of Bihar, (1984) 2 SCC 627; Amar Nath Dogra v. Union of India, AIR 1963 SC 424; State of Andhra Pradesh v. Gundugola Venkata Suryananrayana Garu, AIR 1965 SC 11; and State of A.P. v. Pioneer Builders, (2006) 12 SCC 119; the Supreme Court has consistently held that Section 80 of CPC, to be mandatory. On the aspect of the notice under Section 80 being waived, it has to be noted that Section 80 only speaks of a notice, while Section 12A provides a self-contained methodology of dispute resolution. Therefore, Section 80 of the Code cannot be considered as pari materia to Section 12A of the Act of 2015 in this aspect.

On the purpose and object of Section 12A, a useful reference can be made to the debates in Lok Sabha and Rajya Sabha when the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Ordinance, 2018 was moved in the Lok Sabha. These have been placed on record by the Appellant. The Hon'ble Minister of Law and Justice while introducing the Bill dwelled at length on the aspect of pre-institution mediation under Section 12A and stated that “pre-mediation is the most important commercial law initiative perhaps in the entire world where the pre-mediation initiative has been given a very important focus.” It was emphasized that the amendment stipulates that except for any case of urgent interim relief, every commercial dispute must go to mediation first. The Hon’ble Minister referred to pre-institution mediation as an important milestone. The Hon'ble Minister also stated that no new mechanism of mediation is being brought in as under the National Legal Services Authority there are already a considerable number of trained mediators available whose services can be utilized. The Hon’ble Minister emphasized that the enormous focus on the use of alternative dispute mechanism forums is a very important component of the Bill. One of the hon'ble members opined that compulsory mediation before the institution of commercial suit is a positive outcome of the Bill and a welcome step. One member stated that when the specified value is brought down to three lakh, more people will access pre institutional mediation, which can end half of litigation. These debates in the Parliament support the view that Section 12A is mandatory and enacted in the larger public interest. The debates also indicate that Section 12A is an innovative legislative tool enacted to expedite commercial disputes resolution in the economic interest.

The learned Single Judge of Calcutta High Court in Laxmi Polyfab v. Eden Realty21 and Dredging and Desiltation Company Pvt. Ltd. v. Mackintosh Burn and Northern Consortium and Ors.22 has referred to the object of Section 12A and has held it to be mandatory and the object being to have expedited disposal of the suit.

The Bombay High Court has finally held that section 12A of the Act of 2015 is mandatory, and a commercial suit of specified value which does not contemplate any urgent interim relief under the Act of 2015, can not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation in accordance with such manner and procedure as may be prescribed by rules made by the Central Government. Considering the object and purpose of Section 12A of being rooted in the public interest, there is no question of it being waived by a party.

It is important to note that the Bombay High Court has referred to the efficacy of a Mediator’s role in dispute resolution. A trained mediator's guidance can break the impasse in the negotiations. It has been the experience in several cases where seemingly difficult disputes have been resolved through skilful handling by the mediators. The proposition advanced by the Respondent that since the parties have attempted negotiations by themselves and failed, it will be futile to send the parties for mediation, also overlooks the distinction between the parties' negotiations and the resolution through the help of a skilled mediator. Also, the approach of the parties is mediation in different disputes is different. For example, the mindset of the parties in a mediation in a matrimonial matter will be different than in a commercial matter. Therefore, the Hon’ble Court did not agree that mediation will be futile because the parties have failed to resolve the issue by themselves.

This is a landmark Judgement to the benefit of achieving the objective of the Commercial Courts Act, 2015 in the true nature and spirit of reducing the pendency of litigation and forwarding the cause of Mediation overall.