[This article is authored by Shauree Gaikwad, a final year law student from MNLU, Aurangabad.]
Keywords: Commercial Disputes, Pre-Institution Mediation, Arbitration, Mediation, Dispute Resolution, Commercial Courts Act 2018.
Mediation has been recognized as an alternative form of dispute settlement by Section 89 (1) (d) of the Civil Procedure Code, 1908. Recently, mediation has been gaining statutory recognition by the amendment made to The Commercial Courts Act, 2015 and with it being introduced in the Insolvency and Bankruptcy Code, 2016 and The Companies Act, 2013. Mediation first came to be legally recognized as a method of dispute resolution in the Industrial Disputes Act, 1947. Later on, the Alternative Dispute Resolution and Mediation Rules, 2003, provided for mandatory mediation.
But when it came to commercial cases, it still did not shape up to be a popular form of dispute resolution method, nor did it relieve the courts, which are burdened with a large number of cases. The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018 (“the Act”) is envisaged to bring about a change in the way commercial cases are dealt with. Unlike the 2015 amendment, the Act, for the first time, has introduced mandatory pre-institution mediation and settlement for commercial matters by adding Section 12A to the Act. The Act also lowered the minimum value of commercial disputes from one crore rupees to three lakh rupees under Section 4 of the Act, hence increasing the scope of applicability of the act to a larger number of commercial matters. The combination of both these changes implies that the Act is welcoming commercial mediation and hoping it to deliver quicker results to the parties involved and unburden the Courts at the same time.
Reasons for Businesses embracing compliance with Section 12A of the Act
(a) Mediation is a Confidential Process:
The process of mediation as a whole assures confidentiality. Therefore, any information shared between them as a way of documents, discussions, and proposals will not be public, like it would have been in a court procedure that is bound to be made public as a part of discovery and summons. In litigation, parties tend to indulge in ways and strategies which could spoil the company’s business image and goodwill. Therefore, information being made public during litigation serves as a threat to the company’s image in contrast to mediation.
(b) Mediation is a Speedier Process than Litigation:
Section 12A also puts forth a limitation period of the mediation process to be completed within three months and which can further be extended by two months. This time frame is far quicker than the time taken for matters to be heard and resolved in Courts, and hence mediation would be much more preferred in this fast-paced corporate world.
(c) Enforceability of the Award:
According to Section 12A of the Act, the settlement arrived at as a result of mediation will have the same status and effect like that of an arbitral award given under Sub-Section (4) of section 30 of the Arbitration and Conciliation Act, 1996, on the basis of agreed terms. This provision makes the parties take the mediation process seriously by reassuring the parties that the settlement they arrive at would be a final verdict.
The Vision behind making mediation mandatory
Mediation has also gained popularity in the UK and USA when it comes to commercial matters for a long time. Italy rolled out a scheme making mediation mandatory for some number of commercial and civil matters through the mandatory opt-out mediation model termed as “Required Initial Mediation Session" in September 2013. Ever since its inception, Italy has seen a huge increase in people opting for mediation as opposed to court-based litigation, thus decreasing the burden off of the Court. This well thought out step-by-step procedure resulted in the successful reformation of the Italian legal system. Italy has jumped 49 places in the Ease of Doing Business Index in recent years, and the credit can be given to the effective use of ADR in Italy. India also would have been motivated to improve its rank in ease of doing business and also improve access to justice for commercial/business houses which can reap the most benefits out of a dispute resolution process such as mediation.
Limitations of Section 12A: Addressing the Limitations of the Legal Services Authorities Act, 1987
To ensure the success of such an initiative, an effective mediation policy should be administered to ensure that parties are not burdened and unnecessarily delayed from accessing the courts. An enabling environment for mediation must be created to ensure a good percentage of mediations will result in an amicable settlement.
It is still unsure whether the Act will create a suitable environment for carrying out pre-litigation institution successfully through the modes it has contemplated to be used in the Act. The law contemplates authorizing the authorities constituted under the Legal Services Authorities Act of 1987 ("LSA") for the purposes of pre-institution mediation under section 12A (2). The LSA has been constituted to provide ‘free and competent legal services to weaker sections of society’. The authorities under the LSA, such as National Legal Services Authority, State Legal Services Authority and District Legal Services Authority, are heavily burdened with implementing the ambitious objectives of providing free legal aid to those who need it. Extending their reach to commercial mediations is hardly appropriate and suitable. Commercial disputes contemplated under the Commercial Courts Act will require a focus and skill set that is very different from those envisioned under the LSA.
Additionally, under chapter VIA section 22A, the LSA contemplates pre-litigation conciliation and settlement through Permanent Lok Adalat. The said provision is mainly meant for public utility services. Members of the permanent Adalat are one judge and 2 members with minimal commercial experience. The process of dispute resolution followed by the Permanent Lok Adalats under the LSA is vastly different from the mediation process. Permanent Lok Adalats formulate terms of the settlement after hearing the Parties, which is then given to the parties concerned for observation. If the parties do not arrive at a settlement, the Permanent Lok Adalat proceeds to decide the dispute by the majority. The process of ‘mediation’ followed by the Lok Adalats under the LSA compromises the self-determination and voluntary elements of mediation.
The authorities under the LSA are not the appropriate forum to implement pre-mediation services envisioned by this Commercial Court Act ordinance. Ensuring experienced and trained mediation professionals who can effectively manage commercial disputes is a critical element to ensure the success of this Ordinance.
Expand the scope of mediation service providers under the Ordinance
The Ministry of Law and Justice must recognize external institutions such as mediation centres run by Bar Associations, Professional Associations, Chambers of Commerce and other recognized bodies to sustain such an initiative effectively. In fact, the Ministry of Law & Justice has recognized certain private institutions for conducting mediations. For starters, this list must be included under Section 12 A (2) to expand the scope of mediation service providers under this Ordinance.
It must be noted that the Italian Law that successfully executed the mandatory “opt-out” model for a certain category of commercial cases authorized the majority of service providers, including Chambers of Commerce, as institutions where parties can access mediation services. The Italian Model has proven to be highly effective, with 50% of the mediations that were mandated under the Law resulting in a settlement. 1800,000 cases were referred to mediation in 2017 under the Opt-out Category.
Considerable obstacles need to be removed in order to implement the mandatory pre-institution mediation effectively in India. In fact, within a week of the Rules’ introduction, the Delhi High Court has issued a notice in a petition challenging the constitutional validity of the introduction of Section 12A of the Commercial Courts Act, 2015. The grievance highlighted by the Petitioner is that there is currently no effective mechanism in place for mandatory pre-institution mediation, which has left a large section of aggrieved parties remediless. Upon being directed to the Legal Service Authority (the Authorities under Section 12A), the Petitioner was informed that no mechanism had been introduced till date despite the Rules having been notified on July 3rd, 2018.
Thus, there is a lot of ground to cover for the effective implementation of mandatory pre-institution mediation in India. This must come with the understanding that mediation, though being an informal proceeding, the successful conducting of the same requires a certain degree of speciality.