Green light for litigation despite stalled mediation

By Sonam Gupta and Shiva Pande, Bharucha & Partners

Section 12A of the Commercial Courts Act, 2015 (act), requires that mediation takes place before a suit can be filed unless urgent interim relief is sought. In the recent case of Kapil Goel v Ram Dulare Yadav, the Delhi High Court held that this requirement is satisfied even if the mediation is a non-starter due to the lack of participation of the defendant. However, the court also held that a later suit is liable to be rejected under order VII rule 11(d) of the Code of Civil Procedure, 1908 (code), if the plaintiff initiates mediation proceedings, but refuses to move forward with the process.

The plaintiff had applied to the Delhi Legal Services Authority (DLSA) under rule 3(1), Commercial Courts (Pre-Mediation and Settlement) Rules, 2018 (rules), to begin mandatory mediation proceedings before starting a suit. The DLSA issued a mandatory pre-mediation notice to the defendant. However, the DLSA eventually issued a non-starter report as “both parties are not interested in the pre-institution mediation”. Thereafter, the plaintiff filed a suit for recovery of money under the act. The district judge rejected the suit under order vii rule 11(d) of the code holding that the plaintiff had not acted in good faith by refusing to participate in the mediation. The plaintiff appealed to the high court.

Sonam Gupta, Bharucha & Partners
Sonam Gupta
Bharucha & Partners

The high court set aside the district judge’s order, holding that the plaintiff’s consent to mediation is irrelevant if the defendant refused to participate in the mediation process. Rule 3(1) of the rules and section 12A of the act require the plaintiff to submit a form seeking initiation of pre-institution mediation to the concerned legal service authority. Thereafter, under rule 3(2) the authority must send a notice to the defendant to consent to and appear in the mediation process on a particular date. The authority will send a final notice if the defendant fails to respond to the first notice. Where the defendant fails to acknowledge, or refuses to participate in, the mediation process, the authority must issue a non-starter report to the parties. The DLSA issued the non-starter report without issuing a final notice.

Although the court followed the Supreme Court’s decision in Patil Automation Private Limited v Rakheja Engineers Private Limited, in effect it read down the provisions of the act to hold that the mere initiation of pre–institution mediation suffices, unless the plaintiff refuses to participate in mediation proceedings despite the defendant being willing to mediate. Unscrupulous litigants may rely on the judgment to defeat the intended spirit of section 12A of the act. Litigants may now have an incentive to ensure that pre-institution mediation fails so that they may go ahead with a suit.

Given that section 12A of the act was aimed at reducing the burden of the commercial courts, compliance with the pre-institution mediation requirement should involve good faith participation to achieve a final resolution rather than the mere invocation of mediation. While defendants cannot be compelled to participate in pre–institution mediation, plaintiffs should not be absolved of their responsibility to pursue mediation after having begun the process. Excusing plaintiffs may therefore negate section 12A of the act.

The judgment of the Delhi High Court forms part of a continuing series of decisions that seeks to clarify the extent of compliance required under section 12A of the act and carves out an exception to the mandatory nature of pre-institution mediation as laid down in Patil Automation. That said, while the Kapil Goel judgment diluted the mandatory nature of pre-institution mediation under the act, it also recognised real world practicalities. The court acknowledged that parties cannot be forced to mediate but, at the same time, plaintiffs cannot be denied the right to pursue legal remedies.

The judgment may also render academic the requirement for pre-institution mediation under the act. This is because the court also held that the legal service authority may issue a non-starter report without issuing a final notice to the defendant if the defendant does not respond to the first notice and the plaintiff then elects not to pursue the mediation process. As a result, the requirement for the plaintiff to exhaust the remedy of pre-institution mediation is reduced to a mere formality.

Sonam Gupta is a partner and Shiva Pande is an associate at Bharucha & Partners.

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