Mediation in India. Does it Apply to the Commercial Sector?

The Author, Niharika Kalra, is a 2nd-year, B.Com.LLB student at University Institute of Legal Studies, Panjab University. She is currently interning with LatestLaws.com.

Mediation is a dynamically structured voluntary dispute resolution process where a neutral third party helps the disputing parties in resolving a conflict between them by using specialized communication and negotiation techniques. These techniques are in turn designed in a manner that facilitate the process of mediation and dispute resolution. The concept of mediation evolved in the latter half of the 20th century, however, the roots of mediation can be traced way back to the ancient Indian legal systems, for example, the systems known as the “Gram Panchayats” and “Nyaya Panchayats” were popular and widely prevalent in ancient rural India.

 It is low cost, keeping the matters, especially family matters secret among three parties, two parties and the mediator. Moreover, the solution is not imposed on any party, it is a solution that both the parties agreed to. It, thus, gives an effective solution in a peaceful manner. Alternate Dispute Resolution method of resolving the disputes is relatively new trend in India. The mediation process in India is not a newly invented procedure for dispute redressal. The courts are being a bit less burdened with cases, and the parties are getting their issue resolved quickly with less hassles and in a smoother way. Thus, there has been made an important position for mediation in Indian Law.

In India, there are two principal legislations that deal with Mediation- the Code of Civil Procedure, 1908 and Arbitration and Conciliation Act, 1996. Mediation in India can be either court-mandated or private. The increasing popularity of commercial mediation is India can also be further attributed to judicial efforts in this regard. In Salem Advocates Bar Association, Tamil Nadu v. Union of India[1], the Supreme Court held that a reference to mediation and conciliation is mandatory for court matters. Since then, Mediation has found favour in various statutes and rules of various High Courts. One such recent legislation is the Commercial Courts Act 2015, whereby it is mandatory for parties to exhaust the remedy of pre-institution mediation under the Act before instituting a suit. The Commercial Courts (Pre-Institution Mediation and Settlement) Rules 2018 (the PIMS Rules) have also been framed by the government under the Act to further provide guidelines on the process.

Advantages and Modes of Mediation

Before moving on to the current scenario of Commercial Mediation in India, let’s have a brief overview of the five reasons why mediation is generally preferred:

1. Voluntary: It is a voluntary process for both parties. Pre-litigation mediation in some issues has been made mandatory in recent years, but the process remains voluntary i.e. although the parties may be directed by the courts to attempt resolution of the disputes through Mediation, no one can force any of the party to mediate or settle the matter to one's disadvantage. It is imperative that opposing parties agree to the resolve the dispute without the influence of the mediator. Mediators can only help the parties in dispute to arrive at the right and just settlement that is beneficial for both. Since it is voluntary, any of the parties can leave and withdraw from the mediation at any time without any cost sanctions at any stage.
2. Communication: The relative informal nature of this process allows parties and/or their representatives to communicate their issues in their preferred method of communication. This could also potentially involve both sides attempting to mediate by way of electronic written submission to a mediator. Communication is usually kept informal, as it is particularly useful for mediators to break deadlocks.
3. Negotiation: Unlike court litigation and arbitration, parties are free to negotiate the extent of damage, mitigation, ultimate pay out sums and determine their obligations moving forward. In more formal procedures in courts and arbitration, only the rights and liabilities of the parties are determined and acknowledged and an award or a judgment is delivered whereas in Mediation parties can write their own settlement and make the settlement binding by way of contract.
4. Confidentiality: Confidentiality is paramount. Discussions that transpire in the course of Mediation are not recorded and protected from the court process. Any offer made in the negotiation during Mediation has no bearing on the future record or conduct of both parties. Likewise, the Mediator has no right to disclose the same or appear as witness in future or current court proceedings.
5. Economic: Mediation is the most economic alternate mode of settlement of disputes. There is no statutory stamp duty that must be paid either on the claim or on the counter claim and also no exorbitant fee to be paid to the mediator, unlike arbitration and counsel costs. That is the reason the mediation has become an alternate dispute resolution forum and is fiercely competing with Arbitration.
6. Binding: A successful Mediation results into a 'Settlement'. Section 73 of the ACA provides for the drawing up and signing of a written settlement agreement. When the parties sign the settlement agreement, it shall be final and binding on the parties claiming under them respectively. The mediator is required to authenticate the settlement agreement and furnish a copy of the same to each of the parties. In the case of a settlement arrived at in a court-annexed mediation or judicial settlement, the same should be reduced to writing and presented to the court, which will pass an order or decree on the terms thereof. A mediation settlement has the same status as an arbitral award and hence can be challenged on the same grounds as an arbitral award. The vitiating factors are in the nature of fraud, coercion, corruption, incapacity of a party or the settlement being contrary to public policy or a fundamental policy of Indian law. For enforcement, a 'Settlement Agreement' like an arbitral award is enforceable as a decree of court as per section 36 of the Arbitration and Conciliation Act of 1996. In cases of settlements in court-annexed mediations, the settlement is enforced through the courts as the court passes an order or decree in terms of the written settlement.

Current scenario of Mediation under Statutory provisions

1. Conciliators appointed under Section 4 the Industrial Disputes Act, 1947 are assigned with the duty to mediate and promote settlement of industrial disputes with detailed prescribed procedures for conciliation proceedings. If used appropriately, it’s a cheap and quick process. However, only a few cases have been resolved and the very intent of having such provision has been frustrated. Unfortunately, large numbers of matters which ought to have been resolved by this provision are still pending in courts and new matters are filed every day.
2. In 2002, an amendment to the Code of Civil Procedure, 1908 (CPC) was brought in. Section 89 read with Order X Rule 1A provided for reference of cases pending in the courts to ADR. In addition, Order XXXIIA of the CPC recommends mediation for familial/personal relationships, as the ordinary judicial procedure is not ideally suited to the sensitive area of personal relationships. Though many courts in India now have mediation centers, there is no accurate data available to show that this provision has been utilized successfully.
3. Even Section 442 of the Companies Act, 2013, read with the Companies (Mediation and Conciliation) Rules, 2016, provides for referral of disputes to mediation by the National Company Law Tribunal and Appellate Tribunal.
4. The Micro, Small and Medium Enterprises (MSME) Development Act, 2006 mandates conciliation when disputes arise on payments to MSMEs.
5. More particularly, family and personal laws including the Hindu Marriage Act, 1955 and the Special Marriages Act, 1954 require the court in the first instance to attempt mediation between parties.
6. Section 32(g) of the Real Estate (Regulation and Development) Act, 2016 provides for amicable conciliation of disputes between the promoters and allottees through dispute settlement forum, set up by consumer or promoter associations.

Success of the mediation-conciliation mechanism prescribed under several laws

Despite having the above stated statutory recognition, mediation has not been able to achieve great success in India. The Supreme Court established the Mediation and Conciliation Project Committee (MCPC) in April 2005 to oversee the effective implementation of mediation. The endeavor of the MCPC was to give a boost to court-annexed mediation and to help mediation in growing not as an ‘alternative resolution mechanism’, but as ‘another effective mode of dispute resolution’.

From the websites of several High Courts, it can be ascertained that most High Courts have their separate set of rules governing Mediation and Conciliation. Barring for a few High Courts, there is no data available to show the status of mediation cases referred, successes/failure of matters, and number of settlements arrived at and effectively implemented.

If the object of the MCPC was to reduce backlog, more attention is required towards framing of a national policy with an appropriate legal framework. The success and popularity of mediation is restricted and there is a need for urgent measures to promote and support its effective implementation.

The following are the important developments of in the field of mediation

1. The 129^th Law Commission of India Report recommends courts to refer disputes for mediation compulsorily.
2. In the landmark case of Afcons Infrastructure Ltd v. Cherian Varkey Construction Co. (P) Ltd, the Supreme Court observed that that all cases relating to trade, commerce, contracts, consumer disputes and even tortious liability could normally be mediated.
3. The 2018 amendment to the Commercial Courts Act 2015 (Section 12A), made it mandatory for parties to exhaust the remedy of pre-institution mediation under the Act before instituting a suit. The government has framed the Commercial Courts (Pre-Institution Mediation and Settlement) Rules 2018 (the PIMS Rules). Settlements arrived at in this process are enforceable by law. The period of mediation would not be computed for the purposes of limitation under India’s Limitation Act. Effective implementation of this provision can be major boost for economic growth.
4. In the matter of MR Krishna Murthi v. New India Assurance Co. Ltd., the Supreme Court, asked the government to consider the feasibility of enacting an Indian Mediation Act to take care of various aspects of mediation in general. The Court further directed the government to examine the feasibility of setting up a Motor Accidents Mediation Authority (MAMA) by making necessary amendments in the Motor Vehicles Act. In the interregnum, NALSA was directed to set up Motor Accident Mediation Cells, which can function independently under the aegis of NALSA or can be handed over to MCPC.
5. The new Consumer Protection Act, 2019, under Section 37-38 and Chapter V, provide for disputes to be first referred to mediation and the procedure to be followed as per Section 74(3) of the Act read with Section 101(2)(zf) and Section 102(2)(p) of the Act. The Central government and the state government, respectively, have been empowered to make rules for providing for the persons in the consumer mediation cell.

6. As regards international disputes, India is a signatory to the United Nations Convention on Mediation (the Singapore Convention), which gives mediation settlements the the force of law.

History of Commercial Mediation

Commercial mediation in India was given life in 1996 when the Indian parliament amended the Civil Procedure Code (CPC) and introduced section 89, which empowered courts to direct settlement of disputes by mediation amongst other means. This provision governs mediation in the court system in India. The year 1996 also saw the introduction of the Arbitration and Conciliation Act (ACA). The provisions of the ACA govern private mediation (conciliation) in India.

The primary mediation style is evaluative. Disputants seem to prefer having an authority figure as the mediator, and are more comfortable being led in the mediation rather than the mediator being more hands-off. This is a cultural trait quite common in Asia. The parties expect the mediator to give them his or her view of the weakness of their case, and to actively participate in finding solutions; indeed, they would be disappointed if they felt that the mediator was not fully engaged with them in resolving the dispute. Interests, as well as rights, are focused on. Some mediators prefer to be facilitative. Transformative mediation is rare.

However, it needs also to be said that most mediators will start off being facilitative, encouraging movement to come from the parties, and become evaluative later in the process when the interventionist skills become necessary to break an impasse and come up with solutions.

Mandatory Pre-Institution of Mediation in Commercial Sector

The Indian parliament passed the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Bill, 2018 (“Bill”) on 10 August, 2018. In a potentially significant development, Section 12A of the Bill stipulates mandatory pre-institution mediation i.e. the plaintiff is mandatorily required to exhaust the remedy of mediation prior to filing a suit in accordance with the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018 (“Rules”), unless the suit contemplates any urgent interim relief under the parent Commercial Courts Act, 2015 (“Act”).

Why is this Bill potentially significant? 

Mediation has long been considered the poorer cousin to litigation and arbitration in India. In particular, commercial disputes constitute only a fraction of mediations conducted by existing institutions, which largely mediate family, matrimonial and property disputes. Given that commercial disputes constitute a significant proportion of disputes involving Indian parties, urgent legislative, institutional and attitudinal reforms are required to promote commercial mediation. In light of this, the introduction of mandatory pre-institution mediation could provide much-needed impetus to promote commercial mediation, enhance the acceptance of mediation as a viable and preferred dispute resolution mechanism in India and further larger objectives of improving India’s Ease of Doing Business ranking (currently 100) and facilitating quicker resolution of commercial disputes.

Key features

The Bill envisages the opt-out model of mediation, which has enjoyed considerable success in countries like Italy and Turkey in the recent past. In this model, parties are required to attend an initial information session with a mediator. The session provides them an opportunity to learn more about mediation and make an informed decision about whether to attempt it or initiate litigation. Voluntariness of the process is protected as parties are not obligated to participate in an actual mediation session. Any mediated settlement assumes the status of a deemed arbitral award under Section 30(4) of the Arbitration and Conciliation Act, 1996 and can accordingly be enforced as an arbitral award.

The Rules appear to prescribe the facilitative model of mediation as they expressly refer to the principles of self-determination and voluntariness. Further, confidentiality of the mediation as well as the principal ethics to be abided by the mediator are also prescribed. The mediation is required to be completed within three months from the date of the plaintiff’s application to initiate mediation, which can be extended by two months upon both parties’ consent.

Premature step?

Although a step in the right direction, there is no denying that the implementation and success of the envisaged mechanism remain highly questionable. Perhaps the biggest hindrance could prove to be the authorisation of the State Authorities and District Authorities (constituted under the Legal Services Authorities Act, 1987) as the relevant authorities to conduct the pre-institution mediation.

The object of the Legal Services Authorities Act is to “provide free and competent legal services to the weaker sections of the society to ensure that opportunities for securing justice are not denied to any citizen by reason of economic or other disabilities”. To this end, State Authorities and District Authorities (“LSA Authorities”) provide legal services to eligible persons and periodically conduct Lok Adalats (“people’s courts”), among other functions and services.

While an analysis of the Legal Services Authorities Act is beyond the scope of this article, it suffices to state that the LSA Authorities are already immensely overburdened. This problem only amplifies when you consider:

(1) the fact that the Bill lowers the required pecuniary threshold of a suit from one crore Indian rupees (approximately USD 142,000) to three lakh Indian rupees (approximately USD 4,285); and

(2) the broad definition of “commercial dispute” under section 2(1)(c) of the Act.

While a lower pecuniary threshold is an arguably well-intentioned amendment to allow more people to access commercial courts and facilitate resolution of more commercial disputes, it is likely to adversely impact the pre-institution mediation. A broad definition of “commercial dispute” combined with a lower pecuniary threshold is more likely than not to result in more suits filed under the Act, which in turn means more pre-institution mediations – the LSA Authorities are simply not equipped with the appropriate capacity currently to effectively deal with this, especially without compromising on the justice administered to the weaker sections of society, which is of course an undesirable outcome.

Moreover, it is likely that the LSA Authorities lack adequate and relevant experience and expertise to mediate commercial disputes as the disputes they typically address pertain to labour, family and insurance matters. Experience and training in commercial mediation is always preferable as the issues involved can be fairly technical and a skilled mediator in this regard can ensure effective dialogue and a workable settlement. Even if one were to legitimately reason that facilitative mediation does not necessarily require a mediator to be trained in the area of dispute, there is no guarantee that the officers and members of the LSA Authorities have any experience at all in any sort of facilitative mediation, let alone any training. Efficient, useful and effective mediation of commercial disputes requires, at the very least, some basic minimum training in and exposure to mediation. This is all the more essential in a country like India where awareness of mediation is minimal and, therefore, parties rely on the mediator to effectively guide the process. In my opinion, in this respect, the Bill reflects a widely-held perception in India that anyone can mediate and that mediation is not a distinct discipline which requires its own skills-set.

Ideally, the successful implementation of any reform, such as pre-institution mediation in this case, requires adequate infrastructure and resources to be established and available prior to its introduction. Italy and Turkey invested in resource-building prior to their respective pre-institution mediation reforms, which have played a pivotal role in the success of the reforms. India’s mediation machinery is minimal – there is no pool of certified accredited mediators, no central statute governing mediation and opportunities to be trained are limited. The legislature should have taken into account these constraints and designated external institutions and centres dedicated to ADR and mediation as well as mediation centres attached to courts as the responsible authorities. Such institutions and centres have empanelled mediators who are certified and have undergone certain minimum training. In addition, they are likely to have more experience and skills in commercial mediation than the LSA Authorities.

Further, Section 12A creates a carve-out from mandatory mediation for “urgent interim relief” – neither the Act nor the Bill clarifies what constitutes an “urgent” interim relief. This could potentially be misused by parties and/or counsel to wriggle out of participating in mediation or delaying the same, which in turn would defeat the overall objective of the statute. In addition, it is not clear if pursuit of the urgent interim relief temporarily delays the mediation or eliminates the mandatory requirement to mediate altogether.

Lastly, in my opinion, there are two important questions to consider – (1) should there be any monetary sanction if either party does not appear for mediation or participate in the mediation seriously? and (2) is the three-month time period (extendable by two months) for completion of the mediation too long? Mediators and practitioners in India agree that these are relevant issues, however these are complex issues to which there are no easy/straight-forward answers and merit detailed analysis.

This is all the more so in India where mediation is nascent, and resources and awareness limited. For instance, who would determine whether or not a party participated seriously and on what basis? And would a penalty actually guarantee serious participation or only encourage parties to pretend to be participating seriously? Likewise, would a shorter time period actually be feasible given the capacity crunch highlighted above and instead have an adverse impact on the quality of mediation? While a detailed analysis of these issues is beyond the scope of the post, they are definitely worth deliberating and examining in the context of the Bill.

While urgent reforms are required to promote mediation in India, and in particular commercial mediation, any such reform requires an enabling environment to succeed, which India currently lacks. Allocation of the responsibility to the LSA Authorities reflects short-sightedness and lack of careful thought on the part of the legislature. Now that only the President’s assent is required to make the Bill into law (which will almost certainly be given), it remains to be seen how this reform will work in practice. A silver lining, perhaps, is that this Bill may hopefully generate discussion and awareness about commercial mediation, which could lead to more sensible initiatives and reforms in the future.

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