Pre-institution mediation settlement: Roadblock or resolution?

Pre-Institution Mediation and Settlement (PIMS) was introduced in the Commercial Courts Act, 2015 through an amendment in 2018. Section 12A of the Act provides that any commercial dispute has to mandatorily undergo the process of mediation, except in cases of suits for urgent interim relief.

The introduction of PIMS was aimed at reducing litigation for commercial disputes. The aims and objects of the 2018 amending act also state that such a move was envisioned to increase Foreign Direct Investment (FDI) in India.

This article tries to assess the current position of law regarding PIMS and points out the flaws in it. It further suggests corrective measures to overcome such challenges.

The Commercial Courts Act provides for the legal services authority to handle PIMS under the statute. Initially, courts were vexed as to whether the provision is mandatory or directory in nature. The Calcutta High Court in Laxmi Polyfab v. Eden Realty held that the usage of the word ‘shall’ indicates that Section 12A of the Act is mandatory in nature. Subsequently, Supreme Court in Patil Automation v. Rakheja Engineer also held that PIMS is mandatory in nature. It held that every suit except those that don’t contemplate urgent interim relief should mandatorily undergo the process of PIMS. It also held that if PIMS is not exhausted prior to filing a suit, such plaint can be rejected under Order VII Rule 11 of the Civil Procedure Code, 1908 (CPC). 

Despite these rulings, there was still some ambiguity over the term ‘urgent interim relief’, which was resolved by the apex court in Yamini Manohar v. TKD Keerthi. The Court ruled that mere contemplation by the plaintiff is not sufficient to dispense with PIMS. The commercial court judge holistically should look into the facts and circumstances to decide whether the interim relief is ‘urgent’ in nature. Recently, adopting the view of Patil Automation, the Delhi High Court in Aditya Birla Fashion has ruled that a counter-claim can be dismissed if PIMS is not resorted to by the parties.

Persisting quandaries

The current position of law poses myriad challenges to parties adopting mediation to resolve commercial disputes. Firstly, the parties’ intent is not sought before referring the dispute to mediation. The provision mandates every party to exhaust the remedy of PIMS for potential settlements. This mandatory nature pushes parties into ‘forced mediation’. It is pertinent to note that as there is no intent to mediate, the probability of the dispute getting settled is also less. This ‘forced mediation’ is also a challenge when there are exclusive jurisdiction clauses in contracts. This shows that the parties want to litigate their disputes and not mediate them. Creating an obligation on parties to compulsorily mediate disputes not only delays the process, but also frustrates the aims and objects of the Act. If a defendant in a commercial suit has filed a counter-claim, it shows that the party clearly does not want to mediate. In such scenarios, dismissing counter-claims on the basis that PIMS is not exhausted is against the foundational principles of mediation.

Secondly, the term ‘urgent interim relief’ is also given a subjective interpretation by the Supreme Court. This creates numerous ambiguities in the minds of the commercial court judges. There is no objective test which has been laid down to test ‘urgency’. The term ‘holistic outlook of facts’ is also unclear.

Thirdly, it is important to observe the term ‘under this Act’ in Section 12A of the Act. The provision creates an exception for contemplating urgent interim relief. However, it is to be noticed that this urgent interim relief has to be contemplated under the Act. This has not been interpreted by the Supreme Court or any other High Court. Commercial court are not sure whether interim relief sought under Order XXXIX Rule 1 & 2 or Order XXXVIII Rule 5, CPC is interim relief contemplated ‘under this Act’ or under the CPC.

Fourthly, the proposition laid down in Patil Automation is flawed in the sense that a plaint cannot be rejected under Order VII Rule 11, CPC for non-exhaustion of a mandatory alternative remedy. The reasoning adopted by Patil Automation is that non-exhaustion of PIMS amounts to rejection under Order VII Rule 11(d), CPC. Mere non-exhaustion cannot be a ground for a suit to be barred by law. This puts the rights and obligations of the parties under the contract in jeopardy. When a plaint is rejected, it creates an impression that the cause of action or the rights and obligations mentioned in the plaint are ultra vires the law of the land. This leads to prejudice in the subsequent judge’s mind when a fresh plaint is presented under Order VII Rule 13, CPC.

Lastly, the procedure of PIMS needs a relook. The procedure under Rule 3(4) stipulates that PIMS will be rendered non-starter if the defendant doesn’t enter appearance with the authority. Often it is seen that PIMS is rendered non-starter. The probability of disputes getting resolved in PIMS is very less. This not only causes delay in initiating trial but also frustrates the very basis of the Act.

Corrective measures

These practical problems can be resolved if the courts adopt the principle of commercial interest in interpreting contracts and commercial statutes. Firstly, courts have to interpret the intent of the parties to opt for mediation. This should be seen from a commercial efficacy angle. Scenarios where the parties have mutually agreed to litigate should not be forced to enter the process of mediation. Pursuant to this, the mandatory nature of PIMS as held in Patil Automation has to be done away with. The proviso to Section 5(1) of the Mediation Act, 2023 should be amended or done away with. There cannot be statutory impositions to mediate disputes, as they hamper the foundational basis of mediation mechanisms. Another exception to PIMS under Section 12A of the Act can be added, where intent of parties is ascertained to refer disputes to PIMS. This not only saves time, but also increases efficiency and confidence in the trial system.

Secondly, while interpreting ‘urgent interim relief’ the courts should look into the facts from the plaintiff's standpoint. This enables a holistic approach in deciding whether the interim relief contemplated is urgent or not. The very same approach has to be adopted when looking at the counter-claim filed by the defendant. This provides for a nuanced assessment of facts, and courts will be in a better position to do justice to the exception carved out under Section 12A of the Act.

Thirdly, the term ‘under this Act’ should be clarified and should be interpreted as interim relief contemplated under the provisions of the CPC. This can be done by taking note of Section 16 of the Act, wherein CPC provisions in its entirety apply to an application made under the Act. This means that applications made under Order XXXIX Rule 1 & 2 or Order XXXVIII Rule 5, CPC also come under the purview of applications made ‘under this Act’. This will enable commercial court judges to entertain applications under CPC and parties can avoid PIMS pleading urgency.

Lastly, the view taken in Patil Automation needs reconsideration in the sense that a plaint should not be ‘rejected’ under Order VII Rule 11, CPC. Instead, the plaint can be returned under Order VII Rule 10, CPC. Non-exhaustion of a mandatory remedy cannot be made the basis for rejection, as it creates prejudice to the rights and obligations of parties to the contract.

To conclude, though PIMS has a positive intent to resolve commercial disputes amicably, the ground reality portrays a different picture. The mandatory nature, frivolous procedure etc have rendered PIMS ineffective. This has created hurdles for parties to resolve commercial disputes in India. Therefore, in order to increase FDI in its actual sense, PIMS needs a re-look and should be aligned with commercial intent and business efficacy.

Akash Hogade is a 4th Year B.A. LL.B (Hons.) of Maharashtra National Law University, Mumbai.