Supreme Court on Mandatory Pre-Litigation Mediation in Commercial Court Cases

Mediation has gained significant momentum as a means of alternative dispute resolution, both within India and globally. This is particularly so in disputes involving corporate and commercial issues. In this background, an important question arose before the Supreme Court of India on whether pre-litigation mediation is mandatory under section 12A of the Commercial Courts Act, 2015. In Patil Automation Private Limited v. Raheja Engineers Private Limited (17 August 2022), the Supreme Court answered in the affirmative. To that extent, a suit cannot be filed before a Commercial Court before parties have exhausted the option of settling the dispute through the mediation process.

Text of the Commercial Courts Act

In determining the mandatory nature of the mediation process under the Commercial Courts Act, the Supreme Court placed considerable emphasis on the plain text of section 12A, which was introduced into the legislation by The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018. The relevant portion of the statutory provision states: “A suit, which does not contemplate any urgent interim relief under [the Commercial Courts Act], shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation in accordance with [applicable rules]”. After engaging in an analysis of several decisions relating statutory interpretation of mandatory (or directive) statutory provisions, the Court concluded that section 12A is mandatory, and cannot be circumvented, not least because the emphatic expression “shall” contained in the legislative provision.

The Court refused to consider section 12A as a mere procedural provision, and observed that “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”.

Aims and Objectives of the 2018 Amendment

Not satisfied with confining solely to a textual analysis, the Supreme Court also delved into the object of the legislative amendment that introduced section 12A. The idea of the 2018 amendment was to expedite dispute resolution, especially those that are of a commercial nature. This was also considered necessary for the attraction of capital into the Indian economy and the push towards the “ease of doing business”. The Court found the Commercial Courts Act (together with the amendments) to be “a unique experiment to push the pace of disposal of commercial disputes. It is in this background that the Court must approach the issue of whether section 12A has been perceived as a mandatory provision.” The Court found it necessary to engage in the exercise of clearly ascertaining the intention of Parliament. Mediation was also believed to be a useful tool to extricate overburdened courts from commercial disputes “in the era of docket explosion”. Moreover, there is an implicit recognition that the nature and process of mediation will provide a “win-win situation” to the parties that will engender a greater degree of compliance with the mediated outcome.

A Critical Analysis

At one level, it is difficult to find fault with the ruling of the Supreme Court because it was only giving effect to the legislative intention in mandating pre-litigation mediation in commercial court cases. However, the outcome of the ruling gives rise to at least two concerns.

First, the Supreme Court’s pronouncement operates on the assumption that a well-designed and well-oiled mediation machinery is in existence for commercial matters in India. However, as the Court itself notes, there is the absence of an appropriate institutional machinery to perform the role at the scale required when it is a legal mandate (as the Court has ruled) rather than optional. There is a need for a robust cadre of professional mediators, especially because the pecuniary jurisdiction of the Commercial Court is now as low as three lakh rupees (INR 300,000), which would encompass an enormous number of disputes. While there has been a move to institutionalize the mediation process, it has also attracted a great deal of controversy.

Second, over the last five years or so, the Supreme Court has relied extensively on the phenomenon of “ease of doing business” as a key rationale to validate legislative efforts. This has occurred not only in the context of mediation in the case under discussion, but it is also evident in the context of other legislative developments such as the Insolvency and Bankruptcy Code, 2016. The Supreme Court has also made specific reference to the state of India’s rankings in the World Bank’s Ease of Doing Business Index. Such a reliance might be somewhat misplaced now given the Index has since been discredited and withdrawn by the World Bank.

In all, while the Supreme Court’s ruling paves the way for mandatory pre-litigation mediation in commercial matters, the true effect will manifest only when the mediation mechanism in India achieves institutional and professional robustness. Failing this, litigants may be worse off as they may be compelled to pursue a less than optimal mediation apparatus, having been deprived of the option of invoking the litigation process straightaway.