Since the 1980s, India has seen a concerted move by the legislature to popularize alternative modes of dispute resolution. These attempts have been hailed as much needed antidotes to chronic problems of overflowing court dockets, and expensive and often interminable court proceedings.
For instance, the total number of civil cases pending in High Courts across India alone is 4.1 million. While these problems are not unique to India, severe deficiencies in state capacities both in terms of resources and architecture compound the problem in a large and populous country. Due to such systemic issues, accessing formal dispute resolution mechanisms is a daunting task for millions of poor and middle-income litigants.
In this background, one of the legislative measures introduced was court referred mediation, wherein parties could have their disputes amicably resolved with the assistance of independent and professional mediators accredited with courts. In many jurisdictions in India, these measures proved successful. This was aided in no small measure by the settlement agreement arrived at being made enforceable as a non-appealable decree of the court.
However, these processes could be availed only with respect to pending court proceedings. With the introduction of Pre-Institution Mediation and Settlement (PIMS) by way of rules framed under the Commercial Courts Act, 2015, institutional mediation in India has been extended to disputes even before commencement of court proceedings. These rules are called the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018.
Existing regime of Pre-Institution Mediation and Settlement (PIMS)
Under these rules, PIMS is mandatory for commercial disputes of Rs 3,00,000 or more in value where the petitioner seeks no urgent interim relief. In such cases, the petitioner is obligated to first apply for and exhaust this process before bringing a suit to claim any relief as per Section 12A of the Act. PIMS is a time bound process (must be completed within three months but extendable on mutual request) and a successful settlement of the dispute is enforceable as an arbitral award under the Arbitration and Conciliation Act, 1996.
At the commencement of mediation, the parties to the dispute are required to pay a one-time mediation fee, to be shared equally amongst them. The mediation fee depends upon the quantum of the claim and is specified in one of the schedules appended to the Rules.
The PIMS Rules envisage three possible outcomes for a mediation process. Besides a successful result, the mediation could either be a ‘non-starter’ or a ‘failure’. Under the Rules, a ‘non-starter’ situation occurs when the mediation notice remains unacknowledged, the opposite party refuses to participate, or is absent on the date fixed for appearance even after a notice has been received.
PIMS in action
The PIMS Rules were introduced in the year 2018. In the three years since, the administrative structures for implementing these Rules have been gradually set up in various states across the country. However, the institutional experience of PIMS in this short period affords a good time to pause and assess the effectiveness of PIMS and find ways to overcome any shortcomings.
It is observed that a large number of mediation processes have turned out to be non-starters. For instance, between July 2018 and March 2020, a total of 926 applications were made under Section 12A of the Act in the State of Karnataka for initiation of PIMS process. Out of these, a “non-starter” report was filed for 498, being more than fifty percent of all applications made.
Non-starter mediation outcomes are problematic. This is because parties at that stage haven’t even made an attempt to resolve their dispute through mediation. Therefore, these outcomes defeat the purpose of the Rules and the larger objective of encouraging parties to settle their disputes through mediation. One reason for such outcomes is the lack of any adverse consequence for refusing to participate or appear in the mediation process. Let alone any adverse consequence, the party refusing is not even called upon to state its reasons for doing so.
To mitigate this problem, India could borrow best practices from other jurisdictions for realizing the true potential of the PIMS process. A solution is to levy penalties on the non-participating/refusing party when a non-starter report is filed. This form of sanction was considered by the Federal Court of Australia in Superior IP International Pty Ltd v. Ahearn Fox Patent and Trade Mark Attorneys. This approach is also followed by the courts in Singapore. Imposing penalties will at least compel parties to participate and explore a mediated solution. Even if a small percentage of such cases culminate in a successful mediation, the object of the Rules would have been achieved. For this purpose, the Rules could be suitably amended.
To incentivize parties to participate in the process, the penalty for refusal/non-participation could be fixed at twice the amount of fees payable at the commencement of mediation. Imposing penalty for such refusal would make participation in mediation the preferred choice and ensure that parties participate in the process, thus avoiding non-starter outcomes. These changes only require minor amendments to the Rules, but hold great promise of popularizing the mediation process amongst litigants. In this regard, the role of the mediator and the value of face-to-face interaction in persuading otherwise reluctant parties to amicably resolve their disputes cannot be understated.
Enforceability of a successful settlement outcome
Since mediation is a non-adjudicatory proceeding, the end result of the mediation process reflects the mutually agreed settlement terms of all parties. On the other hand, in case of an adjudicatory process such as arbitration, the arbitral award is ordinarily passed on the merits of the dispute unless it is an arbitral award on agreed terms under Section 30(4) of the Arbitration Act. An arbitral award on agreed terms is passed where parties settle the matter amicably after invoking arbitration.
A settlement arrived at in the PIMS process has the status of an arbitral award on agreed terms under Section 30(4) of the Arbitration Act. Under Section 30(4), such an arbitral award has the same effect and status as any other arbitral award on the merits of the dispute. Therefore, whether parties amicably settle their dispute in a non-adjudicatory proceeding such as the PIMS process or in an adjudicatory proceeding such as arbitration, the terms of the settlement in both the cases have the status of an arbitral award.
In this context, an important issue arises. The successful outcome of a court referred mediation, as discussed earlier, has the status of a decree of the court. However, the same outcome in a PIMS process only has the status of an arbitral award. While it is important to bear in mind that an arbitral award can be enforced in the same manner as if it were a decree of the court and there is no material difference between the manner of executing a decree of the court and that of executing an arbitral award, this difference has other significant consequences. The problem arises in respect of the degree of sanctity attached to the arbitral award on the one hand and a decree of the court on the other.
In the case of a decree of the court, appeal is the only remedy available to the parties. However, as per Section 96(3) of the Code of Civil Procedure, 1908, a decree passed with the consent of the parties is made non-appealable. Therefore, parties to a court referred mediation are rest assured that the settlement they have voluntarily arrived at cannot later be challenged by the other party in another forum only to defeat what was mutually agreed earlier. There is an element of finality attached to such court referred mediation process. Unfortunately, the same is found wanting in a PIMS process.
As discussed earlier, a successful outcome of a PIMS process has the status of an arbitral award. However, an arbitral award can be challenged on any of the numerous grounds mentioned in Section 34 of the Arbitration Act. Such a possibility of challenge detracts from the finality that parties usually desire when they decide to amicably settle their disputes. Any such challenge not only commits the parties to future litigation and uncertainties, but also makes parties sceptical of the efficacy of the PIMS process. This is because if a challenge to such an arbitral award were to succeed, the whole PIMS process would be set at naught. The lawmakers, while introducing the concept of court referred mediation, had wisely made such a successful outcome a non-appealable decree of the court. However, the same benefit has not been extended to a successful outcome of the PIMS process.
It is also pertinent to note that both in court referred mediation and in mediation under PIMS process, the mediation is necessarily conducted by accredited mediators facilitating an equal measure of transparency and accountability. However, notwithstanding the fact that the substance of both these processes are identical, only the outcome of court referred mediation is conferred the status of a non-appealable decree. Unfortunately, such status is not afforded to a PIMS process, thus potentially limiting its allure for litigants.
Further, violation of a decree of the court (in a court referred mediation) may invite proceedings seeking punishment for civil contempt of court. However, such a remedy may not be available in a case where a party violates the terms of settlement recorded in an arbitral award. Therefore, conferring a settlement agreement in a PIMS process with the status of a decree of the court would provide it greater sanctity and incentivize parties to explore mediation through PIMS process as a mode of dispute resolution. Accordingly, suitable amendments to that effect in Section 12A of the Act would remedy this anomaly.
The PIMS process recently introduced by the Act has tremendous potential to facilitate inexpensive, time-bound and amicable settlement of commercial disputes between parties. Such a resolution helps parties preserve their business relationships while avoiding disruption that usually accompanies an adjudicatory proceeding in court. The efficacy of the PIMS process can be further enhanced by way of the simple amendments suggested in this piece.
A movement in that direction would also slow the addition of otherwise amicably resolvable disputes to court dockets across India. Such a positive outcome would unlock scarce judicial resources towards effectively and efficiently addressing disputes that really require conventional modes of dispute resolution.
Akshita Bohra is an Associate and Aniruddha AS is a Senior Associate in the Commercial Disputes Resolution practice at Lakshmikumaran & Sridharan Attorneys, Bengaluru.
Disclaimer: The views and opinions expressed in this article are those of the authors' and do not necessarily reflect the views of Bar & Bench.