This article, examines the shortcomings of amended S.12-A of the Commercial Courts Act 2015. It suggests that the substantial compliance test as propounded in the Ganga Taro case of S.12-A(1) of the Commercial Courts Act 2015, increases the number of pre litigation mediation proceedings.
With the ever growing number of cases before the Indian courts, the author argues that it is in fact necessary to introduce compulsory pre litigation mediation procedures so as to reduce the burden on our courts and ensure quick resolution of disputes. To that extent the author argues that the Gango Taro case is a step in the right direction.
The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act 2018 inserted Section (‘S’) 12-A into the Commercial Courts Act 2015 (‘Act’) to provide for pre institutional mediation and settlement of commercial disputes so as to facilitate a faster resolution of disputes and in turn improve the ease of doing business in India. In this context, the state and district authorities (together, the ‘Authorities’) formed under the Legal Services Authorities Act 1987 (‘LSA’) are authorized institutions that are responsible for pre litigation mediation proceedings as provided for, by way of S.12-A(2) of the Act.
S. 12-A(1) of the Act, stipulates that a suit ‘shall not be instituted’ before a commercial court unless; (a) urgent interim relief is sought under the Act or; (b) the plaintiff exhausts the remedy of pre institutional mediation in accordance with the procedure laid down by the central Government. The Act does well to incorporate a version of the opt-out model of mediation. By way of background, in a traditional opt-out model, the parties are required to attend one mandatory session of mediation with their counsel before proceeding with litigation. Thereafter, parties can either mutually agree to continue the mediation or any party can choose to discontinue (hence, the term ‘opt-out’) the proceedings. However, there are two major flaws with the text of S.12-A. Firstly, S.12-A(2) of the Act, only allows Authorities (that are already overburdened with the task of providing legal aid under the LSA) to hold mediation proceedings. This prevents parties from approaching independent mediators or appointing less burdened external mediation centers as their preferred mediators. Secondly, the number of empaneled mediators with the Authorities is often highly inadequate to meet the demands of the Act and many of the mediators chosen by the Authorities do not possess the relevant expertise to enable them to effectively resolve commercial disputes.
In a country which already lacks confidence in mediation, these factors further reduce the incentive for the opposing party to consent to institutional mediation. Thus parties often are left with not just mediators who they firstly did not choose but also with mediators who may be unqualified to resolve their commercial dispute, due to lack of subject area specialization. Thus, opposite parties in accordance with Rules 3(4) and 3(6) of the Commercial Courts (Pre- Institution Mediation and Settlement) Rules 2018 (‘Mediation Rules’) usually disregard the mediation notice served to them, after which the authorities prepare a ‘non-starter report’ in accordance with the Mediation Rules. This subsequently burdens the Indian courts with additional matters that could not make it through mediation proceedings and in this way the objective of the Act to provide for a faster resolution of disputes is defeated. For instance, from July 2018 to March 2021, of the 2,827 applications received by the Karnataka State Legal Services Authority, 2,302 were disposed-off as the Authorities had filed non-starter reports. In the third and fourth quarters of 2020, the Delhi State Legal Services Authority disposed of 1,302 of 1,594 applications and 2,663 of 2,841 applications because the Authorities had filed non-starter reports in these cases after the opposite parties disregarded the mediation notices served upon them. Furthermore, data from the first and second quarter of 2021 showed that the Maharashtra State Legal Services Authority disposed of 928 of 1,239 applications and 456 of 799 applications for similar reasons. As can be seen, the number of settled cases from the data furnished above is paltry compared to the applications that had to be disposed-off because of non-starter reports filed by the Authorities.
It is in this context that the decision of the Bombay High Court in Ganga Taro Vazirani vs Deepak Raheja (‘Ganga Taro’) assumes importance. This case emphasizes on the concept of ‘substantial compliance’ with the second precondition of S.12-A(1) of the Act, in contrast to cases such as Laxmi Polyfab vs Eden Realty, Dredging Company Pvt Ltd vs Mackintosh Burn and Awasthi Motors v Managing Director which held all prerequisites of S.12-A of the Act had to be satisfied and cannot be derogated from. Thus, the Ganga Taro case offers a greater potential to improve the prospect of mandatory pre litigation mediation proceedings in India by allowing for substantial (and not insisting on complete) compliance with S.12-A(1) of the Act.
On 1 January 2011, the plaintiff (Ganga Taro) disbursed a loan of Rs. 5 crores to the defendant (Deepak Raheja) at 19% interest per annum, which was later reduced to 12% per annum. Raheja issued two postdated cheques, one dated 1 January 2018 for Rs. 5 crores towards the principal amount and another dated 31 December 2017 for Rs. 54 lakhs towards interest. On 27 March 2018, the cheques were dishonored and on 6 July 2019, Ganga Taro filed a commercial summary suit without attempting prior mediation. Raheja argued that the suit was barred, inter alia, on the ground that pre institutional mediation requisites under S.12-A of the Act had not been complied with.
The court rejected this argument on two grounds, namely that:(a) the objection of non- compliance with S.12-A of the Act had to be raised at the earliest possible opportunity; and (b) the parties had ‘substantially complied’ with S.12-A of the Act.
As the defendant had failed to object to non-compliance at the earliest possible opportunity, the court stated that the defendant would be deemed to have waived the requirement of compulsory pre-institution mediation. Instead the court would presume that the defendant never wished to attempt mediation in the first place. The court reasoned that were the defendant allowed to plead otherwise, it would defeat the purpose of speedy dispute resolution. Placing reliance on the decisions of Chandrashekhar Rathi v State of Maharashtra and State of AP v Pioneer Builders the court held that a mandatory provision could be waived if it did not concern public interest and instead was only in the interest of the party that was deemed to have waived the mandatory requirement.
As regards to substantial compliance of S.12-A of the Act the court noted that the purpose of S.12-A was for parties to try and resolve their disputes before coming to the court. The court observed that “when parties have tried to resolve their disputes unsuccessfully, it would be futile to still drive the parties to pre institution mediation.” Doing so, would only prolong the trial and defeat the objective of a speedy dispute resolution process. Thus, the court held that Section 12-A of the Act was a procedural provision and if ‘substantial compliance’ was shown, the plaintiff could not be non-suited.
As per the single-judge bench of BP Colabawalla J, the test of, ‘substantial compliance’ would be to show, “that an attempt has been made to resolve the disputes amicably which has failed, and therefore, the plaintiff is constrained to approach the court for redressal of his grievances”. Thus, while the test does not mandate that parties approach the Authorities to begin the mediation process, it still requires the parties to, ‘compulsorily attempt mediation in some manner’, before filing a suit.
All that is required is an ‘attempt’ at mediation, thus if the opposing party rejects the plaintiff’s invitation to mediate, the plaintiff may directly proceed to file a suit before the commercial court. It could be argued that construing an attempt to mediate in such broad terms allows the opposing party far too much discretion vis-a-vis a model where the opposing party must mandatorily attend the first session of mediation and then decide to opt out of the process.
However, a party which does not wish to mediate at all is likely to opt out after the first session. Forcing such a party to compulsory attend the first mediation session further prolongs the time taken to resolve a dispute. This is also perhaps why the Mediation Rules do not mandate the same.
However, the court incorrectly applied the test of substantial compliance herein. The test of substantial compliance comprises three elements; (a) an attempt to mediate the dispute; (b) failure of that attempt; and (c) such failure compels the plaintiff to approach the court. The court observed that as the parties had attempted mediation at some point in time between November 2020 and December 2020 ‘after’ filing the suit, S.12-A of the Act was substantially complied with. This completely goes against the spirit of S.12-A which does not in any way contemplate mediation ‘post’ filing of the suit.
Notwithstanding its incorrect application in the present case, the substantial compliance test largely overcomes the limitations of S.12-A of the Act and should be adopted widely. Besides, the disputing parties would now, have greater autonomy in appointing their desired mediators and genuinely try to resolve the dispute through mediation at the first instance. It may also increase the supply of qualified mediators in resolving commercial disputes as they may be in a position to command higher fees than they would have been when associated with the Authorities. Lastly, it can increase the demand for specialized commercial mediation centers in different Indian states which has been sorely lacking.
(The author, Keshab Roy Choudhury is a third year student at Jindal Global Law School, Sonipat)