SECTION 12-A OF COMMERCIAL COURTS ACT 2018- WHETHER PRE-LITIGATION MEDIATION- MANDATORY?

 

SECTION 12-A OF COMMERCIAL COURTS ACT 2018- WHETHER PRE-LITIGATION mediation- mandatory?

 

The hon’ble Supreme court in a matter reported as M/S. PATIL AUTOMATION PRIVATE LIMITED AND ORS. versus RAKHEJA ENGINEERS PRIVATE LIMITED 2022 LiveLaw (SC) 678 had to deal with a seminal question -whether the statutory pre-litigation mediation contemplated under Section 12A of the Commercial Courts Act, 2015  as amended by the Amendment Act of 2018 is mandatory? In other words whether before instituting a suit of commercial nature, whether prior mediation shall be necessary. The issue has generated much deliberation in legal circuit in view of conflicting views of various high courts in past. It may therefore be apt to discern the tenets of The Commercial Courts Act that was enacted in the year 2015 and more particularly, the Amendment Act of 2018, since, by virtue of the said amendment only , section 12 A is brought in the statute book. In 2015, when the Act was enacted for the first time, the monetary limit for a suit liable to be tried by the Commercial Court was fixed at Rs.1 Crore only. In the course of three years, it was felt that certain changes are necessary and hence, Parliament had decided to amend the Act. Consequently, in the year 2018, the Act came to be amended by the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018. The provisions are as under:

The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act 2018 inter alia, provides for, the following, namely :

(i) to reduce the specified value of commercial disputes from the existing one Crore rupees to Three Lakh Rupees, and to enable the parties to approach the lowest level of subordinate courts for speedy resolution of commercial disputes;

(ii) to enable the State Governments, with respect to the High Courts having ordinary original civil jurisdiction, to constitute Commercial Courts at District Judge level and to specify such pecuniary value of commercial disputes which shall not be less than Three Lakh rupees and not more than the pecuniary jurisdiction of the district courts;

(iii) to enable the State Governments, except the territories over which the High Courts have ordinary original civil jurisdiction, to designate such number of Commercial Appellate Courts at district judge level to exercise the appellate jurisdiction over the commercial courts below the district judge level;     

(iv) to enable the State Governments to specify such pecuniary value of a commercial dispute which shall not be less than Three Lakh rupees or such higher value, for the whole or part of the State; and

(v) to provide for compulsory mediation before institution of a suit, where no urgent interim relief is contemplated and for this purpose, to introduce the Pre-Institution 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.

By virtue of the Amending Act , Section 12A came to be inserted and published in the Gazette and thereby came into force on 03.07.2018. Rule 3 reads as follows:

“3. Initiation of mediation process. –

 

(1) A party to a commercial dispute may make an application to the Authority as per Form-1 specified in Schedule-I, either online or by post or by hand, for initiation of mediation process under the Act along with a fee of one thousand rupees payable to the Authority either by way of demand draft or through online;

(2) The Authority shall, having regard to the territorial and pecuniary jurisdiction and the nature of commercial dispute, issue a notice, as per Form-2 specified in Schedule-I through a registered or speed post and electronic means including e-mail and the like to the opposite party to appear and give consent to participate in the mediation process on such date not beyond a period of ten days from the date of issue of the said notice.

(3) Where no response is received from the opposite party either by post or by e-mail, the Authority shall issue a final notice to it in the manner as specified in sub-rule (2).

(4) Where the notice issued under sub-rule (3) remains unacknowledged or where the opposite party refuses to participate in the mediation process, the Authority shall treat the mediation process to be a non-starter and make a report as per Form 3 specified in the Schedule-I and endorse the same to the applicant and the opposite party.

(5) Where the opposite party, after receiving the notice under sub-rule (2) or (3) seeks further time for his appearance, the Authority may, if it thinks fit, fix an alternate date not later than ten days from the date of receipt of such request from the opposite party.

(6) Where the opposite party fails to appear on the date fixed under sub-rule (5), the Authority shall treat the mediation process to be a non-starter and make a report in this behalf as per Form 3 specified in Schedule-I and endorse the same to the applicant and the opposite party.

(7) Where both the parties to the commercial dispute appear before the Authority and give consent to participate in the mediation process, the Authority shall assign the commercial dispute to a Mediator and fix a date for their appearance before the said Mediator.

(8) The Authority shall ensure that the mediation process is completed within a period of three months from the date of receipt of application for pre-institution mediation unless the period is extended for further two months with the consent of the applicant and the opposite party.”

What is significant in the context is that Section 12A contemplated only for a class of suits not requiring urgent relief- suits which contemplate urgent interim relief, the Law-giver has carefully prescribed immediate access to justice as contemplated ordinarily through the courts. The carving out of a class of suits and selecting them for compulsory mediation is in sync the object of the law. The underlying intent is to alleviate the dockets of judges so as to enable the overburdened judiciary to concentrate on matters craving for urgent relief or interim relief. The legislature was guided by a definite object of enhancing the ease of doing business in India and de-clogging of Commercial Courts so as to focus on important task of quickly disposing of commercial matters.

                          SCRUTINY OF SECTION 12 A

In this perspective, it may be worthwhile to examine the provisions contained in Section 12 A of Amendment Act.

Section 12A of the Act reads as follows:

12 A. Pre-Institution Mediation and Settlement—

(1) 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.

(2) The Central Government may, by notification, authorise the Authorities constituted under the Legal Services Authorities Act, 1987 (39 of 1987), for the purposes of pre-institution mediation.

(3) Notwithstanding anything contained in the Legal Services Authorities Act, 1987 (39 of 1987), the Authority authorised by the Central Government under sub-section (2) shall complete the process of mediation within a period of three months from the date of application made by the plaintiff under sub-section (1):

Provided that the period of mediation may be extended for a further period of two months with the consent of the parties:

Provided further that, the period during which the parties remained occupied with the pre-institution mediation, such period shall not be computed for the purpose of limitation under the Limitation Act, 1963 (36 of 1963).

(4) If the parties to the commercial dispute arrive at a settlement, the same shall be reduced into writing and shall be signed by the parties to the dispute and the mediator.

(5)The settlement arrived at under this section shall have the same status and effect as if it is an arbitral award on agreed terms under sub-section (4) of section 30 of the Arbitration and Conciliation Act, 1996 (26 of 1996).”

The Conflict

The High Court of Punjab and Haryana in M/S. PATIL AUTOMATION PRIVATE LIMITED (which is set aside by the hon’ble Supreme Court) has held that the Courts are meant to deliver substantial justice. The rules of procedure are handmaid of justice and are meant to advance the ends of justice and they are not to be bogged down by the technicalities of procedure so as to lose sight of its main duty which is to dispense justice. The purpose of referring the dispute to mediation centre is to explore settlement. If the suit is filed without taking recourse to the procedure it should not entail rejection of the plaint. This could not have been the intention of the legislature. It is further observed that an enactment is to be interpreted in a manner that it does not result in delivery of ‘perverse justice’. It was noted that the trial Court had directed that the civil suit be kept in abeyance and the parties were to appear before the Secretary of the District Legal Services Authority for the purpose of mediation.

The Hon’ble Bombay High Court in case Ganga Tara Vazirani Deepak Raheja 2021 SCC OnLine Bom 195 has held that the procedure provided under Section 12A of the Commercial Courts Act is not a penal enactment for punishment and there is no embargo in filing the suit without exhausting the remedy of mediation specially when an attempt is clear to show that the intention of the applicant has already been made and failed. The fact is clear that before filing the suit, the respondent/plaintiff has sent e-mail and legal notice and despite that the applicant/defendant failed to make the payment of the dues. Moreover, it is well settled that the procedure and law are for advancement of justice and not to thwart on technical grounds. Thus, in the larger interest of justice, the court deems it appropriate that the civil suit can be kept in abeyance and both the parties are directed to appear before the Secretary, District Legal Services Authority, Faridabad for the purpose of mediation as per the provisions of Section 12A of the Commercial Courts Act and the Rules framed thereunder.

It is however necessary to point out that Ganga Taro (supra) has been reversed by the Division Bench in Deepak Raheja v. Ganga Taro Vazirani 2021 SCC OnLine Bom 3124. The different high courts have expressed different views. Pertinently, mere reference to Statement of Objects and Reasons and the plain language used coupled with the intention of the Law giver makes it clear that Section 12A is mandatory.

The Calcutta High Court in a judgment reported in Dredging and Desiltation Company Pvt. Ltd. v. Mackintosh Burn and Northern Consortium and Others 2021 SCC Online Calcutta 1458  took the view that there is a distinction between filing of a Suit and institution of a Suit under the Code of Civil Procedure. It was further found that the bar under Section 12A is absolute w.e.f. 12.12.2020, being the date immediately subsequent to the date after the standard operating procedure for undertaking pre-litigation procedure under Section 12A was made. This is after finding that the standard operating procedure had been made and Rules were published on 11.12.2020. In the judgment reported in Laxmi Polyfab Pvt. Ltd. v. Eden Realty Ventures Pvt. Ltd. and Another AIR 2021 Calcutta 190 , elaborately considered the question as to whether Section 12A is mandatory. It is held so.

The Division Bench of the High Court of Madhya Pradesh, in Curewin Pharmaceuticals Pvt. Ltd. v. Curewin Hylico Pharma Pvt. Ltd AIR 2021 MP 154, followed the judgment of the learned Single Judge of High Court of Bombay, in Ganga Taro (supra), and held that if a suit does not contemplate an urgent interim relief, the same cannot be instituted, unless, pre litigation mediation is exhausted. A learned Single Judge of the Allahabad High Court in the decision reported in Awasthi Motors v. Managing Director M/s. Energy Electricals Vehicle and Another AIR 2021 Allahabad 143, has observed that there is a clear purpose provided for pre-institution mediation. The Statement of Objects and Reasons were referred to and it was concluded that the provision is mandatory.

Section 2(c) defines ‘commercial dispute’ as encompassing various specified transactions, which are 21 in number. There is a residuary provision in Section 2(c)(xxii). The said provision empowers the Central Government to notify other commercial disputes as a commercial dispute. The explanation amplifies/clarifies the scope of commercial dispute. Section 2(i) defines the words ‘specified value’ as follows:

“2(i) “Specified Value”, in relation to a commercial dispute, shall mean the value of the subject-matter in respect of a suit as determined in accordance with section 12 which shall not be less than three lakh rupees or such higher value, as may be notified by the Central Government.”

[The amount was Rs 1 crore when the Act was enacted in 2015 and it was reduced by the Amendment in 2018.]

The cursory perusal of the Amendment Act of 2018 shall throw some light as regards the details. Under Chapter II, the legislature has contemplated, Commercial Courts at the District Level, a Commercial Appellate Court at the District Judge Level. Similarly,  a Commercial Division in the High Court for all High Courts having Ordinary Original Civil Jurisdiction (Section 4) and a Commercial Appellate Division in the High Court. What is noteworthy in the context is that revision petition arising out of commercial suits against an interlocutory order are barred as per Section 8. Then, Section 12 deals with the determination of the Specified Value, whereas, Section 14 contemplates that the Commercial Appellate Court and the Commercial Appellate Division shall endeavour to dispose of appeals before them, within six months from the date of filing of such appeals. It is also provided under Section 15(2) that all suits and applications, including under the Arbitration and Conciliation Act, relating to a commercial dispute of a specified value, pending in any Civil Court, is to be transferred to the Commercial Court, where such Court has been constituted. Under Section 16, the provisions of the CPC, in respect of its application to any suit in respect of a commercial dispute of a specified value, is to stand amended as provided in the Schedule.

The legislature has also emphasized that the State shall provide the necessary infrastructure to facilitate working of the Commercial Court or Commercial Division of a High Court. The aforesaid provisions are contained in Section 19 of the Act.

 

Since, Section 12A of the Act has also contemplated the making of Rules to give effect to the scheme of pre-litigation mediation. The Rules were promptly made and published on 03.07.2018. Rule 3 elaborately provides for the manner in which the mediation process is initiated. It contemplates that a party, to a commercial dispute, may make an application to the Authority. This Rule speaks about a party. Section 12A declares that the plaintiff must exhaust the remedy of pre-litigation mediation. What, apparently is required is that the Suit cannot be filed except after the remedy of pre-litigation mediation, contemplated under the Act and the Rules, is attempted and exhausted. What Rule 3(1) provides is the form in which the application is to be made, viz., Form-I, as specified in Schedule-I. The making of the Form can be by online transmission or by post or by hand. The view expressed by the High Court of Madras that the use of the word ‘may’, detracts from the mandatory flavour of Section 12A has not found muster from the apex court. Section 12A is part of the parent enactment. The Supreme Court has held that Rule 3, being a subordinate legislation, must be interpreted harmoniously, in the first place, with the parent enactment. That apart, on a proper understanding of Rule 3, there is really no conflict between Section 12A and Rule 3. Rule 3 only gives a discretion to the applicant, in regard to the mode of making the application.

So understood, it is clear that, if Section 12A is otherwise mandatory, Rule 3(1) can only be understood as providing three different modes for making the application, contemplated in Section 12A(1). Whether the application must be made, must depend upon, among other things, upon the peremptory nature of the language employed in section 12 A(1). Rule 3 further contemplates that the Authority, which again, has been clearly defined as the Authority notified by the Central Government under Section 12A (2), has to issue a notice to the opposite party to appear and to give his consent to participate within the time as provided in Rule 3(2). Should there be no response, a final notice is to be given again in the manner articulated in Rule 3(2). Should there be again no response by the notice remaining unacknowledged or upon there being refusal to participate, the mediation process becomes what is described, a non-starter. The Authority then makes a report in Form-III, which is called a Non-Starter Report. The copy of the Report is served on the applicant and the respondent. There is a provision for accommodating the request of the opposite party appearing and seeking time, subject to the date being not later than ten days from the date of request of the parties. If, in such a case, there is failure to appear by the opposite party, again a non-starter report in Form-III has to be made. If, on the other hand, where both parties appear, gives consent, the Authority is to assign the matter to a Mediator and also to assign a date. The period of mediation being three months and the possibility of an extension by two months, with the consent of both sides, is the subject matter of Rule 3. The role of the Mediator is carved out in Rule 5 to be one to facilitate the voluntary resolution of the dispute and assist the parties in reaching a settlement. Rule 6 provides for authority with the party to either appear personally or through his duly authorised representative or counsel. The significance of being represented by counsel in pre-litigation mediation cannot be overstated. Apart from the fact that the Legislature must be treated as aware, that, both, public interest, as also the interest of the parties, lies in an expeditious disposal of, what is described as, commercial litigation, with a sublime goal of fostering the highest economic interests of the nation, allowing the Counsel to appear before the Mediator is intended to facilitate in arriving at a settlement, which is legally valid and otherwise just. It is also generally noticed that a settlement arrived at in pre litigation mediation under Section 12A, is to be treated as an award under Section 30(4) of the Arbitration and Conciliation Act. Section 30(4) of the Arbitration and Conciliation Act, 1996, reads as follows:

“30(4) An arbitral award on agreed terms shall have the same status and effect as any other arbitral award on the substance of the dispute.”

 

A mediation settlement arrived at under Section 89 of the CPC must be scrutinised by the court and only on its imprimatur being given it is effective [see paragraph 40 of Afcons Infrastructure Limited and Another v. Cherian Varkey Construction Company Private Limited and Others (2010) 8 SCC 24]. Since a settlement under Section 12A of the Act is accorded the status of an award under the Arbitration & Conciliation Act, it unerringly points to the object of the legislature to make pre-litigation mediation compulsory. According to Supreme Court the lawyers have vital role to play and they must discharge that role in arriving at a just and valid settlement translating into an effective award and therefore, a decree.

                      

                            SUPREME COURT            

According to the Supreme Court the argument that Section 12A does not provide for any penalty and, therefore, the provision is not mandatory cannot be accepted. A corollary to that is drawn by Supreme Court that non- compliance of Section 80 of the Code of Civil Procedure and Section 69 of the Partnership Act, also do not provide for any penalty for a suit brought in contravention of their terms, but still it is mandatory in effect.

The absence of mandatory registration contemplated under Section 69 of the Indian Partnership Act does not therefore mean that registration is not necessary. Similarly, to contend that contravention of mandate of Section 12A does not affect any legal right of the defendant and therefore, the suit filed without resorting to compulsory mediation must be countenanced cannot be treated as correct.

 The Supreme Court has held in M/S. PATIL AUTOMATION PRIVATE LIMITED AND ORS (supra) para 61 :

 

“61.     We may proceed on the basis that if the suit is brought without complying with Section 12A, where no urgent interim relief is sought, may not in one sense, affect the legal right of the defendant. But this argument overlooks the larger picture which is the real object of the law. This object is not to be viewed narrowly with reference to the impact on the parties alone. This is apart from also remembering that if the parties were to exhaust mediation under Section 12A, the opposite side may be, if mediation is successful, saved from the ordeal of a proceeding in court, which, undoubtedly, would entail costs, whereas, the mediation costs, as we have noticed, is minimal, and what is more, a one-time affair, and still further, to be shared equally between the parties. Each time the plaintiff is compelled to go in for mediation under Section 12A there is a ray of hope that the matter may get settled. The chief advantage and highlight of mediation is that it is a win-win for all sides, if the mediation is successful. Therefore, it cannot, in one sense, be argued that no legal right of the defendant is infracted. Further, on the same logic, Section 80(1) of the CPC and Section 69 of the Indian Partnership Act would not be mandatory. This is however not the case”.

What is therefore culled about from above is that Section 12A of the Act providing mediation is included in the statute book as per the Amending Act (Act 28 of 2018) and it came into force w.e.f. 03.05.2018. Section 12A is inserted by the said amendment and is a part of Chapter IIIA. The broad contour of Section 12 A clearly stipulates that if a Suit under the Act does not ‘contemplate’ any urgent interim relief, then, it cannot be instituted unless the plaintiff seeks pre-litigation mediation. The pre institution mediation is to be done in the manner, procedure, which is to be prescribed by the Central Government. The pre-litigation mediation is to be completed within a period of three months from the date of the application made by the plaintiff under Sub Section (1) [See Section 12A sub-Section (3)]. The period of three months can, however, be extended for a period of two months provided there is consent to the same by the parties [the first proviso to Section 12A sub-Section (3)].

Quite, significantly, the second proviso contains the provision that the period, during which the parties remained occupied with the pre-litigation mediation, is not to be reckoned for the purpose of computing the period of limitation under the Limitation Act, 1963. In case, the parties arrive at the settlement that may be reduced into writing and signed by the parties to the dispute and the Mediator. Parliament has accorded the settlement, the same status and effect as if it is an Arbitral Award, on agreed terms under sub-Section (4) of Section 30 of the Arbitration and Conciliation Act, 1996. Therefore, section 12A cannot be perceived as merely intended to reach quicker justice, but the consent of parties are of paramount importance. The Statement of Objects and Reasons for enacting the Act also cannot be lost sight of. The ease of doing business shall have the propelling effect for foreign investment and thus show casing of a vibrant, dynamic and quicker justice delivery system of commercial disputes shall be of immense value.

CONCLUSION

 

The aforesaid discussion leaves no window of doubt that the Section 12 A of Commercial Courts (Amendment) Act 2018 as regards pre-litigation mediation in a commercial disputes shall be a sine qua non and only exception carved out in this regard is to the effect that if any urgent relief is prayed for, as, in that event the process of mediation may defeat the very purpose of urgent relief. In all other cases, pre-litigation mediation shall be necessary. The ambiguity stands settled and conflicting views of various high courts are put to rest. To conclude, the para no. 84 of Patil Automobile (Supra) as rendered by hon’ble Supreme Court is self contained and self explanatory:

“We declare that Section 12 A of the Act is mandatory and hold that any suit instituted violating the mandate of Section 12A must be visited with rejection of the plaint under Order VII Rule 11. This power can be exercised even suo moto by the court as explained earlier in the judgment. We, however, make this declaration effective from 20.08.2022 so that concerned stakeholders become sufficiently informed. Still further, we however direct that in case plaints have been already rejected and no steps have been taken within the period of limitation, the matter cannot be reopened on the basis of this declaration. Still further, if the order of rejection of the plaint has been acted upon by filing a fresh suit, the declaration of prospective effect will not avail the plaintiff. Finally, if the plaint is filed violating Section 12A after the jurisdictional High Court has declared Section 12A mandatory also, the plaintiff will not be entitled to the relief”.

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Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com