The mandate of pre-institution mediation under Section 12A, the Supreme Court’s ruling in Patil Automation, the Mediation Act, 2023, and why settlement rates have remained low.
In the current age of globalization, both domestic and international trade and commerce have seen remarkable expansion. As companies increasingly engage in cross-border operations and become more interconnected, the intricacies of transactions have intensified, resulting in a rise in commercial disputes. Consequently, establishing an effective mechanism for resolving these disputes has become a crucial factor for global enterprises when selecting their business locations. In light of the substantial backlog of cases within the Indian judicial system, which often leads to prolonged delays in legal resolutions, Parliament enacted a special law aimed at expediting the resolution of commercial disputes. This legislation, the Commercial Courts Act, 2015, seeks to streamline and hasten the legal processes related to business issues. The Act introduces a time-sensitive framework for dispute resolution, ensuring that commercial matters are handled within a designated timeframe. Its objective is to foster a more efficient legal environment for businesses, thereby enhancing India’s appeal as a destination for trade and commerce by facilitating swift dispute resolution.
The Commercial Courts Act, 20151 was the result of recommendations made by two reports from the Law Commission of India. In its 188th report, the Law Commission proposed the creation of High-Tech Fast-Track Commercial Divisions within High Courts to handle commercial cases more efficiently. This led to the introduction of the Commercial Division of High Courts Bill, 2009 in Parliament. However, the bill was later referred back to the 20th Law Commission for a more thorough review of its provisions. In its 253rd report, the Law Commission recommended further reforms, including the establishment of Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within the High Courts. These measures were aimed at ensuring the timely resolution of high-value commercial disputes, streamlining the litigation process, and improving the overall efficiency of commercial justice in India.
Section 12A of The Commercial Courts Act, 2015
The Commercial Courts Act of 2015 (CCA) underwent amendments in 2018 with the addition of Section 12A. This section requires that, except in cases where urgent interim relief is needed, plaintiffs must engage in pre-litigation mediation prior to initiating a lawsuit in a commercial court.2 The Central Government has established specific rules outlining the procedures for this mediation process. Furthermore, the amendment empowers state and district legal service authorities to oversee the pre-litigation mediation. This mediation must be finalized within three months, although this period can be extended by two months if both parties consent. The primary goal of this amendment is to promote settlements and alleviate the caseload on courts by encouraging alternative dispute resolution before resorting to formal litigation.
Case Resolution Through Mediation: Three Possible Scenarios
Settled: In cases where the mediation is successful and both parties agree to a mutually acceptable resolution, the case is marked as settled. This settlement has the same legal effect as an arbitral award under Section 30(4) of the Arbitration and Conciliation Act, 1996.
Failed: If the mediation process does not result in an agreement, the case is marked as failed, and the plaintiff is free to proceed with formal litigation.
Non-starter: In cases where the defendant refuses to participate in the mediation process or fails to appear after being served, the mediation process is marked as a non-starter. In such cases, the plaintiff can approach the commercial court to file a suit.
Mediation Act, 2023: Shaping the Future of Commercial Dispute Resolution
The importance of pre-litigation mediation was further reinforced by the Mediation Act, 2023, which included a provision in Section 5 that makes pre-litigation mediation mandatory for commercial disputes of a specified value. This law emphasizes the growing importance of mediation as an effective dispute resolution mechanism for businesses and commercial entities in India.
The Mediation Act, 2023 aims to institutionalize and streamline mediation practices in India, ensuring that mediation becomes a primary method of resolving disputes, especially in the commercial domain. By making pre-litigation mediation mandatory for high-value commercial disputes, the Act seeks to reduce the time and cost of litigation, while also promoting a culture of negotiation and compromise. This move is expected to benefit the overall legal ecosystem by preventing the backlog of commercial cases in courts and facilitating the speedy resolution of business disputes.
Interpretation of “Shall” Under Section 12A of CCA
Section 12A asserts that, “A suit, which does not contemplate any urgent interim relief under this Act, shall 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.” It was a point of confusion between different High Courts about the mandatory nature of pre-litigation under this section. In the case of Deepak Raheja vs. Ganga Taro Vazirani, 2021, the Bombay High Court and in Laxmi Polyfab vs. Eden Realty, 2021, the Calcutta High Court both affirmed that parties cannot approach commercial courts before exhausting the remedy of pre-mediation. However, in the case of Shahi Exports Pvt. Ltd vs. Gold Star Line Limited, the Madras High Court gave a liberal interpretation to the word “shall” in Section 12A of the CCA, holding that the right to access justice is a fundamental right. As such, it cannot be restricted by compelling parties to undergo mediation, especially if they are unwilling or unable to reach a successful settlement.3
The Supreme Court finally settled the confusion and affirmed in the case of Patil Automation Private Limited & Ors. vs. Rakheja Engineers Private Limited, 2022 that Section 12A of the Act is mandatory and holds that any suit instituted violating the mandate of Section 12A must be visited with rejection of the plaint under Order VII Rule 11.4
What Are the Issues with Pre-Litigation Mediation in India?
1. Mandatory Nature of Pre-Litigation Mediation
Pre-litigation mediation mandates that parties appear before the mediation authority, even in cases where resolving the dispute seems unlikely. This undermines the primary objective of the Commercial Courts Act (CCA), which was enacted to ensure the fast and efficient resolution of commercial disputes. The mandatory mediation provision, especially when parties know that an amicable solution is not possible, only prolongs the process, counteracting the law’s intended purpose.5
2. Time-Consuming Proceedings
In Turkey, mediators are required to complete the mediation process within three weeks, with a one-week extension allowed only in exceptional circumstances. In contrast, in India, the mediator must conclude the process within three months from the date the plaintiff files the application, with the possibility of an extension up to five months. The primary intent behind introducing pre-litigation mediation was to expedite the resolution of commercial disputes. However, with the first step of the process itself taking three to five months, this goal of speedy resolution is undermined.
3. Non-Appearance of Parties
If the defendant fails to appear after being served, the service will be marked as a nonstarter, allowing the plaintiff to proceed with filing the suit under the Commercial Courts Act (CCA). However, countries such as Turkey and Italy have stringent laws regarding the nonappearance of defendants in the mediation process.6
In Turkey, the defendant is required to pay litigation costs even if they succeed, while in Italy, the judge has the authority to impose sanctions on the defendant. These legal provisions compel defendants to participate in mediation.
In contrast, in India, the non-appearance of the defendant does not result in any penalties nor does it mandate their participation in the mediation process. Nevertheless, the defendant’s failure to appear will not yield any favorable outcomes and will ultimately lengthen the entire process.
The authority responsible for conducting pre-litigation processes is the State/District Legal Services Authority (DLSA). The primary role of the DLSA is to provide free legal aid and organize Lok Adalats within the district.7 However, these institutions still face significant challenges in fulfilling their core objectives. In addition, they are often overburdened with additional responsibilities that have been assigned to them. Moreover, commercial suits typically involve complex transactional disputes that require specialized skills for effective resolution. Mediators engaged in pre-litigation mediation must have a deep understanding of such issues and should ideally be experts who handle such cases exclusively.
For example, Turkey has implemented a standardized training program for mediators, ensuring that all mediators are equipped with the necessary skills and knowledge to handle disputes effectively. In contrast, India’s Mediation and Conciliation Project Committee (MCPC) has issued non-binding guidelines regarding mediator qualifications. These guidelines recommend a minimum of forty hours of training for mediators; however, this training is not mandatory for lawyers or judges. This lack of compulsory training for those involved in the mediation process in India can result in mediators without sufficient expertise in complex commercial matters, which in turn can affect the effectiveness of pre-litigation mediation.8
Assessing the Low Success Rate of Pre-Litigation Mediation
The effectiveness of pre-litigation mediation can be assessed through success rate data. The Delhi State Legal Services Authority (DLSA) publishes monthly reports on pre-litigation mediation cases. According to the data for November 2024, 2,305 applications were pending as of November 1, covering both the Delhi High Court and all district courts. In that month, 1,080 new applications were received, but only 13 cases were successfully resolved, representing just 1.20% of the total. Additionally, 992 applications were marked as non-starters due to the defendant(s) failing to appear. By the end of the month, 2,358 applications remained pending, carrying over to the next month. Similar patterns have been observed in other months, further highlighting the low success rate.
| Pre-litigation mediation, Delhi (November 2024) | Applications |
|---|---|
| Pending on 1 November 2024 | 2,305 |
| New applications received | 1,080 |
| Successfully settled | 13 |
| Marked as non-starters | 992 |
| Pending at the end of November 2024 | 2,358 |
Road Ahead
The introduction of pre-litigation mediation was a significant step toward resolving commercial disputes quickly, initially enacted through an ordinance and later replaced by the 2018 Amendment Act. While the intent was to expedite the resolution of commercial disputes, the system has not seen substantial improvement since its introduction. It is now evident that certain changes are needed within the framework or the statute to achieve the desired outcomes.
Data indicates that there is only a 1-5% chance that parties will reach a settlement through pre-litigation mediation. For the remaining 95%, the process often becomes a time-consuming bottleneck, with many parties resorting to bypassing mediation by seeking urgent interim relief. While mediation can be effective when parties willingly engage, it is often more efficient to proceed directly to filing a suit in commercial courts, saving valuable time that would otherwise be lost in the pre-litigation mediation process.
There is a clear need for specialized mediation centers dedicated exclusively to commercial disputes. Currently, Legal Services Authorities focus on providing free legal aid, but pre-litigation mediation should be handled by institutions that specialize in this area, with trained mediators who have deep expertise in commercial transactions and the business ecosystem.
Mediators without a thorough understanding of commercial dynamics are less likely to achieve successful outcomes. Only when mediation is conducted by skilled professionals with a serious commitment to resolving disputes can the full potential of the Commercial Courts Act be realized.
Footnotes
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Law Commission of India, Commercial Division and Commercial Appellate Division of High Courts and Commercial Courts Bill, 2015, 253rd Report, (Issued in January 2015) ↩
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The Commercial Courts Act, 2015, § 12A(1)(a) ↩
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Sanjeev Sanyal, Apurv Kumar Mishra, Why Commercial Mediation Should be Voluntary, EAC-PM, 6-7 (2023) ↩
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Patil Automation Private Limited & Ors. vs. Rakheja Engineers Private Limited, 2022, AIROnline 2022 SC 1275 (2022) (India). ↩
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Laila Ollapally, Mandatory pre-litigation mediation: A missed opportunity in the Mediation Bill, 2023?, Bar and Bench, (15 Sep 2023, 3:25 pm), https://www.barandbench.com/columns/mandatory-pre-litigation-mediation-amissed-opportunity ↩
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Vishal Hablani & Pankaj Agarwal, Mandatory Pre-Institution Mediation in Commercial Matters: Is India Ready?, IndiaCorpLaw (June 28, 2018), https://indiacorplaw.in/2018/06/mandatory-pre-institution-mediation-commercialmatters-india-ready.html ↩
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District Legal Services Authorities (Transaction of Business and Other Provisions) Regulations, 1997, § 3 (1) (a) (b). ↩
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Vishal Hablani & Pankaj Agarwal, Mandatory Pre-Institution Mediation in Commercial Matters: Is India Ready?, IndiaCorpLaw (June 28, 2018), https://indiacorplaw.in/2018/06/mandatory-pre-institution-mediation-commercialmatters-india-ready.html ↩
