Pre-Institution Mediation: The One Place Mediation Is Compulsory

First proviso: the period may be extended for a further period of two months with the consent of the parties.

Second proviso: the period during which the parties remained occupied with the pre-institution mediation shall not be computed for the purpose of limitation under the Limitation Act 1963.

Three months, extendable by two with consent, so five months at most. And the second proviso is essential: without it, a plaintiff compelled to mediate could watch its limitation period expire while doing what the statute required.

Note the non obstante clause. It overrides the Legal Services Authorities Act, which has no such timetable of its own.

Section 12A(4) and (5): the settlement and its force

Section 12A(4): if the parties arrive at a settlement, the same shall be reduced into writing and shall be signed by the parties to the dispute and the mediator.

Section 12A(5): the settlement 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.

Notice that the Act reaches for section 30(4) again, exactly as section 74 does for a conciliation settlement, chapter 570. That is the third time in this book: the Act's standard way of making a settlement enforceable is to give it the status of an award on agreed terms, which by section 35 is final and by section 36 is enforced as a decree.

Note the signature requirement in sub-section (4): the parties and the mediator. Compare section 73(2) and (3) for a conciliation, where the parties sign and the conciliator then authenticates. Here the mediator signs the settlement itself.

Patil Automation: section 12A is mandatory

M/s Patil Automation Private Limited v. Rakheja Engineers Private Limited, decided 17 August 2022, K.M. Joseph J with Hrishikesh Roy J.

Facts. Suits were instituted under the Commercial Courts Act without the plaintiffs having gone through pre-institution mediation, and no urgent interim relief was contemplated. The question was whether section 12A is mandatory or directory, and, if mandatory, what happens to a plaint filed in breach of it, in particular whether it can be rejected under Order VII rule 11 of the Code of Civil Procedure.

Held. The Court's declaration is worth learning in its own words:

We declare that Section 12A of the Act is mandatory and hold that any suit instituted violating the mandate of Section 12A must be visited with rejection of the plaint under Order VII Rule 11. This power can be exercised even suo moto by the court.

The Court made the declaration effective from 20 August 2022, so that concerned stakeholders would become sufficiently informed, and gave directions protecting matters already concluded: where plaints had already been rejected and no steps taken within the period of limitation, the matter could not be reopened on the basis of the declaration; and where an order of rejection had been acted upon by filing a fresh suit, the prospective effect would not avail the plaintiff.

Why it matters. Three propositions, and each is examinable.

• Section 12A is mandatory, not directory.
• A suit filed in breach must be visited with rejection of the plaint under Order VII rule 11.
• The court may do this of its own motion, without the defendant applying.

"Prospective overruling", which the judgment discusses at length, is the technique by which a court declares the law but applies its declaration only from a future date, to avoid unsettling transactions completed on the earlier understanding. That is why the date 20 August 2022 appears.

Section 12A and section 89 compared

A worked example

A software company wants to sue a client for Rs. 90 lakhs in unpaid invoices. There is no arbitration clause, and the claim is a commercial dispute of Specified Value. The client is solvent and is not disposing of assets.

Can it file straight away? No. Section 12A(1) bars institution of a suit that does not contemplate urgent interim relief until the plaintiff has exhausted pre-institution mediation.

Where does it apply? To the authority under the Legal Services Authorities Act 1987 authorised by the Central Government under section 12A(2).

How long will it take? The Authority must complete the process within three months of the application, extendable by two months with the parties' consent, under section 12A(3).

Is limitation running meanwhile? No. The second proviso excludes the period during which the parties remained occupied with the pre-institution mediation.

They settle at Rs. 72 lakhs. Under section 12A(4) the settlement is reduced to writing and signed by the parties and the mediator, and under section 12A(5) it has the status of an award on agreed terms under section 30(4) of the 1996 Act, so it is enforced under section 36 as a decree.

Suppose instead it had filed without mediating. On Patil Automation, section 12A is mandatory and the plaint must be rejected under Order VII rule 11, and the court may do that suo motu.

Change one fact. Suppose the client is transferring its only asset and the company needs an urgent injunction. Then the suit does contemplate urgent interim relief and section 12A(1) does not bar it. But the urgency must be genuine, and a court asked to reject the plaint will look at whether the prayer for interim relief was a device.

What beginners get wrong

Section 12A is not confined to suits without an arbitration clause. It applies to commercial disputes of Specified Value that do not contemplate urgent interim relief.

The exception is urgent interim relief, not urgency generally.

The mediation is run by the legal services authorities, not by a private mediator, when the Government has so authorised.

A settlement is signed by the mediator too, under section 12A(4), unlike a conciliation settlement which the conciliator authenticates.

Breach is fatal to the plaint. Patil Automation requires rejection under Order VII rule 11, exercisable even suo motu, with effect from 20 August 2022.

Quick revision

• 12A(1): a suit not contemplating urgent interim relief shall not be instituted unless the plaintiff exhausts pre-institution mediation in the prescribed manner. Inserted by Act 28 of 2018 w.e.f. 3 May 2018.
• 12A(2): the Central Government may authorise the Legal Services Authorities to conduct it.
• 12A(3): three months from the application, extendable by two months with consent; the period is excluded from limitation under the Limitation Act 1963.
• 12A(4): a settlement is reduced to writing and signed by the parties and the mediator. 12A(5): it has the status of an arbitral award on agreed terms under section 30(4) of the 1996 Act.
• Patil Automation (17 August 2022): section 12A is mandatory; a suit in breach must be visited with rejection of the plaint under Order VII rule 11; the power may be exercised suo motu; the declaration was made effective from 20 August 2022.

Test yourself

1. When can a commercial suit be filed without pre-institution mediation? Where the suit contemplates urgent interim relief under the Commercial Courts Act. Section 12A(1) bars institution only of a suit which does not contemplate such relief.

2. Who conducts pre-institution mediation, and how long may it take? The Authorities constituted under the Legal Services Authorities Act 1987, where authorised by the Central Government under section 12A(2). Under section 12A(3) the process must be completed within three months of the plaintiff's application, extendable by a further two months with the consent of the parties.

3. Does the mediation period eat into the limitation period? No. The second proviso to section 12A(3) provides that the period during which the parties remained occupied with the pre-institution mediation shall not be computed for the purpose of limitation under the Limitation Act 1963.

4. What did Patil Automation decide? That section 12A is mandatory; that any suit instituted in violation of it must be visited with rejection of the plaint under Order VII rule 11; and that the power may be exercised even suo motu by the court. The declaration was made effective from 20 August 2022, with directions protecting matters already concluded.

5. What is the effect of a settlement under section 12A? Under section 12A(4) it is reduced into writing and signed by the parties and the mediator, and under section 12A(5) it has the same status and effect as an arbitral award on agreed terms under section 30(4) of the Arbitration and Conciliation Act 1996, so it is final and enforceable as a decree under sections 35 and 36.