The Commercial Courts, Commercial Division, Commercial Appellate Division of High Courts Act, 2015, was enacted in the year 2015 with the objective of achieving speedy adjudication of Commercial Disputes. Moreover, the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018 were also framed in line with the aforesaid act for the purpose of resolving the matters relating to commercial disputes in an efficacious and expeditious manner.
As per the said enactments, all disputes falling within the definition of “Commercial Dispute” under Section 2(1)(c) of the Commercial Courts Act, which are valued Rupees 3 Lakhs or more, shall not be instituted unless the plaintiff mandatorily exhausts the remedy of Pre-Institution Mediation, to be conducted by the Legal Services Institutions. Accordingly, the Legal Services Institutions are conducting Pre-Institution Mediation in respect of Commercial Disputes across the country.
Section 12A of the Act reads as: 12A. Pre-Institution Mediation and Settlement—
(1) A suit, which does not contemplate any urgent interim relief under this Act, shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation in accordance with such manner and procedure as may be prescribed by rules made by the Central Government.
(2) The Central Government may, by notification, authorise the Authorities constituted under the Legal Services Authorities Act, 1987 (39 of 1987), for the purposes of pre-institution mediation.
(3) Notwithstanding anything contained in the Legal Services Authorities Act, 1987 (39 of 1987), the Authority authorised by the Central Government under sub-section (2) shall complete the process of mediation within a period of three months from the date of application made by the plaintiff under sub-section (1):
Provided that the period of mediation may be extended for a further period of two months with the consent of the parties:
Provided further that, the period during which the parties remained occupied with the pre-institution mediation, such period shall not be computed for the purpose of limitation under the Limitation Act, 1963 (36 of 1963).
(4) If the parties to the commercial dispute arrive at a settlement, the same shall be reduced into writing and shall be signed by the parties to the dispute and the mediator.
(5) The settlement arrived at under this section shall have the same status and effect as if it is an arbitral award on agreed terms under sub-section (4) of section 30 of the Arbitration and Conciliation Act, 1996 (26 of 1996).
Hon’ble Supreme Court of India recently pronounced a pathbreaking judgment in the case of ‘Patil Automation Private Limited and Ors. Versus. Rakheja Engineers Private Limited, SLP (C) No. 14697 of 2021, on ‘pre-institution mediation and settlement’ as provided in Section 12-A of the Commercial Courts Act, 2015. Hon’ble Court has held that pre-institution mediation and settlement is mandatory. Suits filed violating the mandate of Section 12A of the Act of 2015 must be rejected under Order VII Rule 11of CPC.
THE SUBSTANTIAL OF QUESTION OF LAW
The seminal question which was posed before the Hon’ble Court was whether the statutory pre-litigation mediation contemplated under Section 12A of the Commercial Courts Act, 2015, as amended by the Amendment Act of 2018, is mandatory? and whether the Courts below have erred in not allowing the applications filed under Order VII Rule 11 of the Code of Civil Procedure, 1908, to reject the plaints filed by the respondents in these appeals without complying with the procedure under Section 12A of the Act.
BRIEF FACTS OF THE CASE
Trial Court
A commercial suit was filed by Rakheja Engineers before the Additional District Judge, District Court, Faridabad on 12.10.2020 under Order XXXVIII for recovery of Rs. 1,00,40,291/- along with 12% interest. In response, Patil Automation filed an application on 05.02.2021 under Order VII Rules 10 and 11 read with Sections 9 and 20 of the CPC, inter alia, contending that the requirement of Section 12A of the Act of 2015 have not been complied with. Rakheja filed its reply contending that suit is not barred for non-compliance of Section 12A.
The objections raised by the Patil Automation’s were rejected by the Trial Court with observations that:
“20. From the bare perusal of Section 12A, it is crystal clear that the procedure provided is mandatory in nature and if by applying the said principles, the suit of the plaintiff is rejected, then it would have a catastrophe effect. The court is of the view that the legislature has no such intention to frame such stringent provision the said rules. The aim and object of Section 12A is to ensure that before a commercial dispute is filed before the court, the alternative means of dissolution are adopted so that the genuine cases come before the Court. Further, it also appears to the court that the said procedure has been introduced to de-congest the regular courts. It is pertinent that the Hon’ble Bombay High Court in case Ganga Tara Vazirani (supra), held that the procedure provided under Section 12A of the Commercial Courts Act is not a penal enactment for punishment and there is no embargo in filing the suit without exhausting the remedy of mediation specially when an attempt is clear to show that the intention of the applicant has already been made and failed. The fact is clear that before filing the suit, the respondent/plaintiff has sent e-mail and legal notice and despite that the applicant/defendant failed to make the payment of the dues. Moreover, it is well settled that the procedure and law are for advancement of justice and not to thwart on technical grounds.”
Keeping the Suit in abeyance in the larger interest of justice, parties were directed to appear before the Secretary, District Legal Services Authority, Faridabad for mediation on 26.08.2021 in terms of Section 12A of the Commercial Courts Act and the Rules framed thereunder. With these directions, trial Court was pleased to dispose of the application.
High Court
Being aggrieved by the order of the trial Court, Patil Automation approached the Hon’ble High Court of Punjab and Haryana and sought revision of the said order. The High Court upheld the reasoning and finding returned by the trial Court and held that Courts are meant to deliver substantial justice. It was held by the High Court:
“the Courts are meant to deliver substantial justice. The rules of procedure are handmaid of justice and are meant to advance the ends of justice and they are not to be bogged down by the technicalities of procedure so as to lose sight of its main duty which is to dispense justice.”
“It was further found that the purpose of referring the dispute to Mediation Centre is to explore settlement. If the suit is filed without taking recourse to the procedure, it is further found, it should not entail rejection of the plaint. This could not have been the intention of the legislature. It is further observed that an enactment is to be interpreted in a manner that it does not result in delivery of ‘perverse justice”
Supreme Court
The aforestated order of the Hon’ble High Court was assailed in Civil Appeal before Hon’ble Supreme Court by Patil Automation.
Submissions of before the Supreme Court by Appellant
- the law giver has used the word ‘shall’ in Section 12A. The word ‘shall’ in the context of the object of the legislation must be construed as mandatory.
- in order that the word ‘shall’ in a statutory provision be considered as mandatory, one of the cardinal tests employed by the Courts is to ask the question whether the provision contemplated penal consequences for disobedience of the provision.
- instituting a suit without complying with the provisions of Section 12A does not affect any legal right of the defendant. It is only a procedure intended to bring about a settlement between the parties.
- a half-way house between the two extremes has been attempted by the Court in the case, which suffices, having regard to the fact also that no penal consequences are provided and no right of the defendant is imperilled.
- the plaintiff is bound to pay the whole court fee under the law in question. When the plaint gets rejected under Order VII Rule 11, the plaintiff suffers a loss of the entire court fee.
The Supreme Court allowed the appeal and made the following observations:
“The Act did not originally contain Section 12A. It is by amendment in the year 2018 that Section 12A was inserted. The Statement of Objects and Reasons are explicit that Section 12A was contemplated as compulsory. The object of the Act and the Amending Act of 2018, unerringly point to at least partly foisting compulsory mediation on a plaintiff who does not contemplate urgent interim relief. The provision has been contemplated only with reference to plaintiffs who do not contemplate urgent interim relief.
The Legislature has taken care to expressly exclude the period undergone during mediation for reckoning limitation under the Limitation Act, 1963. The object is clear. It is an undeniable reality that Courts in India are reeling under an extraordinary docket explosion. Mediation, as an Alternative Dispute Mechanism, has been identified as a workable solution in commercial matters. In other words, the cases under the Act lend themselves to be resolved through mediation. Nobody has an absolute right to file a civil suit. A civil suit can be barred absolutely or the bar may operate unless certain conditions are fulfilled. The language used in Section 12A, which includes the word ‘shall’, certainly, goes a long way to assist the Court to hold that the provision is mandatory.
The entire procedure for carrying out the mediation, has been spelt out in the Rules. The parties are free to engage Counsel during mediation. The expenses, as far as the fee payable to the Mediator, is concerned, is limited to a one-time fee, which appears to be reasonable, particularly, having regard to the fact that it is to be shared equally. A trained Mediator can work wonders. Mediation must be perceived as a new mechanism of access to justice. We have already highlighted its benefits. Any reluctance on the part of the Court to give Section 12A, a non-mandatory interpretation, would result in defeating the object and intention of the Parliament.
The fact that the mediation can become a non-starter, cannot be a reason to hold the provision not mandatory. Apparently, the value judgment of the Law-giver is to give the provision, a modicum of voluntariness for the defendant, whereas, the plaintiff, who approaches the Court, must, necessarily, resort to it. Section 12A elevates the settlement under the Act and the Rules to an award within the meaning of Section 30(4) of the Arbitration Act, giving it meaningful enforceability. The period spent in mediation is excluded for the purpose of limitation. The Act confers power to order costs based on conduct of the parties.”
Since the suit did not contemplate an urgent interim relief, the Supreme Court observed that the impugned orders must be set aside and the applications under Order VII Rule 11 be allowed.
The Court went on to clarify that this would involve the loss of the court fee paid by the plaintiffs in these cases. They would have to bring a fresh suit, no doubt after complying with Section 12A, as permitted under Order VII Rule 13. Moreover, the declaration of law by this Court would relate back to the date of the Amending Act of 2018.
In the light of the above the Court declared that Section 12A of the Act is mandatory and held that any suit instituted violating the mandate of Section 12A must be rejected under Order VII Rule 11.
The Apex Court added that this power can be exercised even suo moto by the court as explained earlier in the judgment.
This declaration has been made effective from 20.08.2022 so that concerned stakeholders become sufficiently informed
The Court also clarified the position regarding plaints which are pending or are already rejected and directed that:
In case plaints have been already rejected and no steps have been taken within the period of limitation, the matter cannot be reopened on the basis of this declaration.
If the order of rejection of the plaint has been acted upon by filing a fresh suit, the declaration of prospective effect cannot be availed of by the plaintiff.
If the plaint is filed violating Section 12A after the jurisdictional High Court has declared Section 12A mandatory also, the plaintiff will not be entitled to the relief.
As far as the present case was concerned the Supreme Court held that it is a case where Patil Automation would have succeeded and the plaint rejected, however in the interest of Justice the Court ordered that the written statement filed by Patil Automation be treated as the application for leave to defend filed within time within the meaning of Order XXXVII and the matter considered on the said basis.
The Apex Court added that it disapproves the reasoning in the impugned orders but it declined to otherwise interfere with the orders and the two appeals stood disposed of accordingly.