In the recent case of Aditya A Birla Fashion and Retail Limited v Mrs Saroj Tandon, Delhi High Court observed that as a matter of law, pre-institution mediation (PIM) under section 12A of the Commercial Courts Act, 2015, is mandatory for counterclaims where no urgent relief was sought. As a result, counterclaims can be dismissed for non-compliance. In November 2024, the Supreme Court declined to interfere with this judgment.
In Aditya A Birla, the plaintiff-tenant claimed refund of a security deposit. The plaintiff’s PIM ended in a non-starter report. The landlord filed a counterclaim seeking the payment of rentals without applying for a PIM. The court, relying on the Supreme Court ruling in Patil Automation Private Limited and Ors v Rakheja Engineers Private Limited held that the bar under section 12A applied prospectively from a date after the landlord had filed the counterclaim. The counterclaim was allowed to proceed despite no PIM.
The decision, technically consistent with prior rulings, opens a debate on the efficacy of a PIM and whether a second PIM between the same parties should be required after one has already failed. Applying the inversion test approved by the Supreme Court in State of Gujarat and Ors v Utility Users’ Welfare Association and Ors, the above observation is not the ratio decidendi of the case. Yet, future counterclaims will now be subjected to a PIM, wasting time, money and infrastructure.
Section 12A, inserted by the Commercial Courts Act in 2018, mandates pre-litigation mediation for commercial disputes to reduce court burdens and encourage out-of-court settlements. The Supreme Court in Patil Automation held that section 12A offers an opportunity for amicable dispute resolution, saving time and costs. Mediation is a one-time, low-cost process, with expenses shared equally, unlike the recurring costs of litigation. The provision aimed to promote settlements and improve India’s ease-of-doing-business rankings, according to the statement of objects and reasons in the 2018 amendment.
Claims and counterclaims are often two sides of the same dispute. Order VIII rule 6A of the Code of Civil Procedure, 1908 (CPC), permitting defendants to file counterclaims, was added through a 1976 amendment. The intention was to avoid a multiplicity of proceedings. Courts hear claims and counterclaims together, saving judicial time and ensuring comprehensive justice. In SSMP Industries Limited v Perkan Food Processors Private Limited, Delhi High Court held that although a moratorium under the Insolvency and Bankruptcy Code, 2016, may strictly bar a counterclaim, where the case needs to be adjudicated as a whole, courts cannot adopt a “blinkered approach”. Therefore, the court refused to stay the counterclaim.
It is unreasonable to force parties into a second mediation for a counterclaim, while the plaintiff’s suit proceeds. Grounds for a counterclaim would have likely been addressed in the initial mediation unless the defendant failed to appear. Once parties are unwilling to settle, further mediation for the counterclaim only causes unnecessary delay and costs, something plaintiffs can exploit. Under section 89 of the CPC, parties are, in any event, free to mediate at any stage, by themselves or with the court’s encouragement.
Data suggests that section 12A has under-delivered. The Economic Advisory Council’s 2023 working paper, “Why Commercial Mediation Should Be Voluntary” paints a grim picture of the effectiveness of a mandatory PIM. In two Mumbai commercial courts, 97% to 99% of PIMs between 2020 and 2023 finished as non-starters because parties refused to participate. Of those who participated in the process, about 50% settled – an overall success rate of about 1%. Settlements were more likely the result of willingness of the parties and not a result of sitting across the table under procedural duress.
Delhi High Court’s judgment in Aditya A Birla reinforces the rigidity of section 12A by extending it to counterclaims. Because settlements take place in the shadow of litigation, a swifter and more predictable court process would more likely ease courts’ dockets than forcing parties to mediate a second time. A more flexible approach, in which mediation is encouraged but not imposed, strikes a better balance between promoting settlements and ensuring timely access to justice.
Ambar Bhushan is a partner and Divyam Sharma is an associate at Bharucha & Partners.
