Settlement of Commercial Disputes by Mediation in India: Need for Formalized Enforcement Mechanism

Prateek Kumar Singh and Shambhavi Shekhar*

Abstract

Mediation as a dispute resolution mechanism has witnessed tremendous growth in the last two decades.  It can be considered as the most effective means of dispute resolution owing to its convenient combination of features like flexibility, cost-effectiveness, simplicity and amicable resolution. The unprecedented outbreak of COVID-19 and its ramifications across various business sectors & economy in general has left the corporates in great turmoil. In India, COVID-19 and consequent lockdowns have resulted in breach of obligations under multiple agreements and understanding between the business entities, which has bolstered the role of Mediation for resolving such disputes. This is also because disputants do not want themselves to be entangled in litigation, which is expensive, delayed and at present, burdens the judiciary even more. This article focuses on settlement of commercial disputes via mediation and the need to formalize a structured framework for enforcement of commercial private mediation settlements.

Introduction

For a country to prosper socially, economically and politically, it must possess a robust judicial system and a prompt dispute resolution framework. The Twenty-first century boasts of  well-performing economies and timely dispute resolution is indispensable for any country in order to attract business, promote trade and boost growth. Consequently, Alternative Dispute Resolution (“ADR”) mechanisms, especially Arbitration, gained popularity over conventional judicial methods, particularly for commercial disputes. COVID-19 has disrupted the world order and dispute resolution has suffered immensely. With a surge in cases of contract negotiations-renegotiations, employment and payment related issues in addition to the existing judicial backlog; other suitable means must be resorted to. Mediation, a comparatively lesser explored avenue, can pose to be a prudent and a potent way out. “Settlement by ‘Mediation’ means the process by which a mediator appointed by parties or by the Court, as the case may be, mediates the dispute between the parties to the suit by the application of the provisions of the Mediation Rules, 2003 in Part II, and in particular, by facilitating discussion between parties directly or by communicating with each other through the mediator, by assisting parties in identifying issues, reducing misunderstandings, clarifying priorities, exploring areas of compromise, generating options in an attempt to solve the dispute and emphasizing that it is the parties own responsibility for making decisions which affect them.”[1] It may be argued that it is a process of negotiation, however with assistance.

Settlement through Mediation in India- Current Position in India

In India, resorting to mediation as a cogent mechanism has been underrated. In spite of its unique advantages like convenience, cost friendliness and time-bound resolution, mediation is yet to become a preferred choice for dispute resolution in absence of a multi-faceted legislative framework. Mediation is classified under two categories, Court Referred and Private. While the former applies to cases which are pendente lite and Courts refer them to mediation, the latter is when disputing parties themselves resort to amicable settlement. It can either be undertaken when the matter is pending before Courts, or in pre-litigation stages. Statistics show lower affinity towards resorting to mediation. A December 2016 report by Vidhi Centre for Legal Policy states that the “absence of a conducive environment for mediation is partly attributable to the lack of judicial understanding and training, especially in the subordinate judiciary”. Further, since the Courts lack confidence in mediation, the same is reflected by the parties. With COVID-19, the world is adopting new norms and mediation is the way forward. At present, different statutes in India have individual provisions for referring disputes to mediation, more particularly family law matters under the Hindu Marriage Act, 1955 and The Special Marriage Act, 1954; settlement of industrial disputes[2], buyer-supplier disputes as regards payment obligations[3]; disputes between promoters and allottees in the real estate sector[4] and effectuating a compromise between parties if instances of settlement exist.[5] Further, The Consumer Protection Act, 2019 discusses mediation at length including inter alia establishment of mediation cells at all three levels of dispute redressal forums and mandating respective Dispute Redressal Commissions to validate written settlement agreements by passing appropriate orders. However, since mediation is a party-centric mechanism, it gives rise to enforcement related loopholes. Consequently, the parties resort to giving a legal sanction to the agreement by getting it enforced as a ‘consent decree’[6] before the Courts.

COVID -19 and Commercial Disputes- Tracing the Path from Settlement to Enforcement

COVID-19 and the subsequent lockdown has had a domino effect on the economy, industries and corporate realm threatening business relationships, disrupting supply chains, causing lay-offs and abrupt terminations, contract renegotiations, invocation of force majeure clauses, debt recovery and a catena of other issues. This situation poses a two-faced problem.

First, it is non-viable for businesses to sustain the cost of litigation/arbitration and delayed court battles. Second problem is the non-accommodation of an array of disputes by the Courts which can lead to a meltdown of the judicial machinery in dealing with commercial disputes consequently threatening the corporate base. A thoughtful, tailor-made legal-commercial solution is needed to protect business interests in the longer run. As observed by the Supreme Court in M/S Afcons Infra case, cases concerning trade, commerce and contract are suited for resolution through ADR. Quite a few legal disputes arising now are not very technical in nature and can be resolved with effective cooperation, negotiation and settlement by the parties. To exemplify, disputes arising out of renting of commercial spaces can be resolved by waiver of the rents by landlords for some time and agreeing to a revenue-sharing model where the retail and commercial occupants can share the revenue generated with landlords. Disputes concerning Mergers & Acquisition or Shareholding Agreement can be renegotiated along the lines of representations, obligations, event of defaults or the structure of the transactions/investments among other issues, eventually leading to a settlement between parties.

Today, some of the major industry players are stuck in “a catch 22 situation” wherein one party is aggrieved by non-fulfillment of contractual obligations by the counterparty, while defaulting or risking default in its own contractual obligation towards the same or some other party. In such a situation, parties do not want to spoil their long-term relationship due to transactional disagreement. A framework which brings the parties on a table to acknowledge each other’s difficulties and preserve their business relation would be appreciated.  Here is where Mediation takes the forefront affording greater control on the outcome and offering commercially sound solutions. It offers a less cumbersome, non-adversarial solution to facilitate such negotiations and preserve business relations.

The Finance Ministry recently proposed decriminalization of minor offences across nineteen legislations including Negotiable Instruments Act, 1881 (cheque dishonour) and The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (repayment of bank loans). For instance, consider cheque bounce cases, a robust institutionalized mediation framework wherein settlements are recognized and enforced in a hassle free manner would contribute effectively in dispute resolution of such disputes thereby reducing judicial backlog and promoting speedy redressal. The Delhi High Court in 2017 observed, “The guidelines laid down by the court in Damodar S. Prabhu unequivocally encourage settlement. Mediation, as a mechanism for dispute resolution and arriving at a settlement automatically gets reinforced so far as a case under Section 138 of the NI Act is concerned.”

From a commercial standpoint, S. 442 of Companies Act, 2013 read with Companies (Mediation and Conciliation) Rules, 2016 (“Rules”) enshrines provisions for mediation. The Rules provide an alternate mechanism to resolve shareholder and creditor disputes. The parties get a three-month period to mediate and settle the disputes. However, the settlement agreement is non-binding on the parties until and unless the central government, tribunal or appellate tribunal passes an order containing the terms of the settlement agreement. The flaw of such a framework is that either party may use mediation as a dilatory tactic as the settlement is non-binding in nature.

Further, in 2018, S. 12A was inserted in the Commercial Courts Act, 2015, introducing the model of ‘pre-institution mediation’ in India. The provision provides for mandatory mediation with exclusion of only urgent interim relief. Consequently, The Commercial Court (Pre-Institution and Mediation Settlement) Rules, 2018 (“PIMS Rules”) were notified which provide for a written, mutually agreed settlement, signed by the mediator and the parties. In case of failure of mediation, the mediator submits a failure report as well. Although mandating mediation prior to litigation is a good step towards reducing the burden on Commercial Courts, the silence surrounding the interpretation of ‘urgent interim relief’ can be highly misused to overstep the process. Parties may try to resort to litigation under the garb of urgency, thereby diluting the intent of the Rules. The Rules do not explicitly reflect upon the binding value of the settlements arrived at and therefore lack clarity.

Next, The Code of Civil Procedure, 1908 vide S. 89 read with Order X Rule 1A also provides an ADR mechanism including mediation. High Courts in India have adopted mediation rules pursuant to the Supreme Court ruling in Salem Bar Association case (I) and (II). However, even under the respective rules, once the parties reach a settlement agreement, it has to be accepted by the court and enforced as a ‘settlement decree’. This principle was affirmed in the M/S Afcons Infra case wherein the Court observed, “Whenever such settlements reached before non-adjudicatory ADR Fora are placed before the court, the court should apply the principles of Order 23 Rule 3 of the Code and make a decree/order in terms of the settlement, in regard to the subject matter of the suit/proceeding.” Mediation provided under the aforementioned statutes is predominantly ‘court annexed’ which dilutes the purpose of an out-of-Court settlement. It grapples with inordinate delays and primary enforcement flaws since it attains finality only when enforced by the court, meaning thereby that the settlement on its own is non-binding. 

Currently, private meditations are merely terms of settlement agreed upon by the parties having the effect of a legal contract. In the absence of a legal framework which allows settlements to be binding, recognized and enforced events of non-compliance of terms call for litigation on the grounds of breach of contract rather than simply filing an enforcement petition, which is the case in typical private mediation across jurisdictions. Recently, Singapore enacted the Covid-19 (Temporary Measures) Act, 2020 to provide relief in cases of non-performance of contractual obligations in the wake of COVID-19. Subsequently, the Singapore International Mediation Centre brought into force a protocol for expediting commercial dispute resolution in the wake of COVID-19. It allows for mediation at any point of time and affirms enforceability of settlement agreements.

India should take a cue from this setup and enact a framework to provide relief to corporates. Private mediation in India is left to the mercy of Arbitration and Conciliation Act, 1996 wherein the settlement agreement arrived by the parties in consonance with the statutory requirements under S.73 of the Act shall be final and binding and shall have legal sanctity of an arbitral award, as held in the case of Haresh Dayaram Thakur. The uncertainty brought about by COVID-19 and the consequent losses incurred by businesses cannot be remedied by protracted and expensive litigations.  Mediation brings with it party supremacy and confers a lot of flexibility in arriving at a settlement, the role of the mediator being confined only to that of a facilitator.

Formalization of a Structured Framework for Private Mediation and the Way Forward

The lack of a formal and an all-encompassing statute on mediation offering peculiar features such as binding settlement agreement, hassle-free enforceability and confidentiality, fails to instill confidence of private mediation in corporate entities. Elements of confidentiality and enforceability are indispensable to corporate and commercial entities engaged in trade and business and it is a no-brainer that they tend to avoid Court procedure. With India attracting investments and ‘ease of doing honest business’ being on the continuous radar of the Government, it is time to accord legal sanction to private mediation and pave way for a separate legislation dealing with the basics of the same.

The Supreme Court in 2019 directed the Government to consider enacting Mediation legislation and acknowledging the pace of mediation picking up in India.  The same intent was shown by the Government of India, when the Union Cabinet approved the signing of the United Nations Convention on International Settlement Agreements Resulting from Mediation (“Singapore Convention”). The Singapore Convention framework offers mediation as a dispute resolution mechanism for International Commercial Disputes and formal recognition & enforcement of the settlement like an arbitration award (under the New York Convention). It provides certainty to the parties that the settlement agreement shall be efficiently enforceable without relegating the issue to litigation or any arbitration forums.  The idea is to promote cross border trade by making it easier to enforce mediated settlement outcomes and save cost and time of the disputing parties.

The Singapore Convention, however, is not applicable to settlement agreements that have been approved by the court or concluded in court proceedings as such settlements are likely to be recorded as judgments and are enforceable as the same. In addition to this, settlement agreements recorded as an arbitral award are also not enforceable under this convention. All these would instill greater confidence in existing and potential investors and reflect upon India’s commitment towards adopting internationally accepted ADR practices. It was reiterated by the Chief Justice of India while attending a conference on Arbitration in February 2020. He emphasized on the need for having a mechanism certifying free consent while entering the agreement and provisioning for execution of the same as a Court decree.

Pursuant to the ratification of the Singapore Convention, the Supreme Court has formed a committee for formulation of draft Mediation laws emphasizing on neutrality, confidentiality, avoiding conflict of interest and enforceability of settlement. A model legislative framework should ideally be such as to encourage reliance on this mode of ADR for both, domestic and international mediation. It is pertinent to accord legal recognition to settlement agreements arrived at in a private mediation setup so that more commercial disputes can be resolved without spending exorbitant amounts. Further, an enforcement mechanism should be put in place to enforce the settlement as a Court decree. Qualifications of mediators and emphasis on a time-bound resolution should be provided for so that the parties can benefit from the commercial and industrial expertise of the mediators. A strict 90-day time period should be proposed to settle disputes through mediation, failing which only arbitration and further litigation can be resorted to. This would render the role of mediators useful in both: facilitation of negotiations and evaluation of possible solutions.

The Government should annex a list of private and institutional mediators in this regard. Further, parties should be given an option for self-regulation in matters of procedure to accord flexibility to negotiations. Confidentiality of the proceedings is another major issue which can be guaranteed by a formal signing of confidentiality/non-disclosure agreements. This would determine the scope of admissibility of documents and allied evidence during litigation.

A cue can be taken from the regime followed by the European Union which allows adducing evidence of the mediation proceedings only when the parties agree for the same, subject to existence of compelling reasons such as promotion of economic interest of India, or in furtherance of public policy or for the enforcement of the concerned settlement agreement itself.  A nodal ADR Authority should be set up for grievance redressal with respect to procedure, settlement agreements, non-starter issues, breach of confidentiality et cetera. Unsettled grievances can be scaled up to High Courts, as appeals from the orders of the nodal Authority.

As ‘enforcement of contracts’ and ‘resolution of insolvency’ are the criteria for evaluating the ‘Ease of Doing Business’ index, there exists a strong argument in favour of enacting a well devised Mediation legislation for promoting India as a commercially viable destination to conduct business and further aid in the country’s economic growth.                                                            


* Prateek and Shambhavi are graduates from Bharati Vidyapeeth Deemed University, New Law College, Pune.

[1] Civil Procedure – Alternate Dispute Resolution Rules, The Gazette of India, Part-1 Rule 2(a)(v) (2003).

[2] Industrial Disputes Act, 14 The Gazette of India § 4 (1947).

[3]The Micro, Small and Medium Enterprises Development Act, 27 The Gazette of India § 18 (2006).

[4]The Real Estate (Regulation and Development) Act, 16 The Gazette of India § 32(g) (2016).

[5]The Code of Civil Procedure, 5 The Gazette of India § 89(2)(d) (1908).

[6]Ibid, Order XXIII Rule 3.


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