THEME: Mediation and Commercial Law
This article was authored by Ram Kumar from Chanakya National Law University, Patna.
Solving commercial disputes through litigation and arbitration remain futile in majority of cases. Even court-annexed mediation often results into no settlement. In litigation huge amount of cost were involved and cases keep pending for number of years with no result. Also, there is high likelihood of adverse impact of judgments given in litigation which may or may not favor any party. So, in order to remove all these difficulties and to grow the mediation culture in India, Indian Parliament has introduced Section 12A through the Commercial Courts (Amendment) Act, 2018. The author made an attempt to understand 2013 Italian model of mediation, 2019 Turkey mediation model and latest 2020 Azerbaijan model of mandatory mediation. The key provisions existing in all three countries had been thoroughly examined and further suggestion has been incorporated at the end of the article to incorporate in the Indian mediation system. This paper analyze in what ways mandatory pre-institution mediation differs from Italian, Turkey and Azerbaijan model of mediation, which were the most successful commercial mediation models in the world. In order to reach the conclusion the author highlights the various advantages and disadvantages of Section 12A as a mediation process. The article discusses various shortcomings and loopholes in the implementation of Section 12A namely Authorities under the Commercial Courts Rules, 2018, no clarity regarding in what circumstances a case qualifies as “urgent interim relief” which may be misused by the companies. In the end, the author suggest key changes like exclusion of certain commercial disputes i.e. petroleum disputes, recognizing present mediation centers such as Indian Institute of Arbitration and Mediation (IIAM) and its accredited mediators as the professionals to mediate the commercial dispute, need of a complete overhaul in the law school curriculum and ethics for mediators which should be regulated.
In India it is often seen that many cases of commercial nature especially which involves complex technical skill where referred for the court-annexed mediation. Deciding such cases through litigation takes many years and huge amount of cost, which often led the companies to went bankrupt. Even in court referred mediation process parties to the disputes keep delaying the process and ends with no settlement. To remove all these problems in commercial disputes and to grow the mediation culture in India, where mediation is still unknown form of dispute settlement and was in its very nascent stage, an amendment was introduced by the Indian Parliament on 10 August 2018 i.e. the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Bill, 2018 (hereinafter as Bill or Amendment).This Bill was retrospectively made applicable from 3 May 2018. The main intent of legislators behind introducing this Bill is to make India an Investment friendly nation. This Bill will further help the parties to avoid the harmful effect of unpredictable judgments given by the court which may harm both the parties.
- This is the first time mandatory provision for mediation has been introduced in commercial related cases following the successful result of mediation model in Italy.
- The suit for mandatory mediation should be filed if the party exhaust the option of mandatory pre-institution mediation. This provision can only be escaped by parties if their dispute qualify as “urgent interim relief”.
- The government authorizes the Authorities constituted under Legal Services Act,1987 to settle the dispute between the parties.
- The whole process of mandatory mediation should be completed within the three months which may be extended to two months. This period of maximum five months should not be counted under the Limitation Act,1963.
- The settlement reached by the parties should be written in writing which includes signature of both the parties and the mediator.
- To give the power to the settlement reached between the parties, the settlement should be deemed to be an arbitral award.
A major chunk of litigations around the world ends in settlement. Litigation often takes much time and in this process incurred heavy cost by parties as well as the expenditure of the government is also involved for delivering judgment. It often leads the parties to a situation where they may face adverse impact of the future judgment. The preference of litigation to settle dispute will further increase the case backlog and ultimately it will lead to compromise the justice delivery. It is well accepted that attending the first court session by the parties lead to a reduction in the time of justice delivery.
It is evident from the fact that Arbitration is the most popular mechanism to resolve commercial dispute in the international community. Ninety-percent of all the contracts of commercial nature contains an arbitration clause.Similar provisions like arbitration clause were present in approximately ninety-three percent out of total three to five thousand interstate investment treaties which includes bilateral investment treaties (BITs).The continuous rise of cost involve in arbitration has put a considerably enormous challenge to the arbitration process. Another prominent problem is that it takes many years to resolve such disputes. In these circumstances mediation is the best way to resolve the dispute .Still there is a long way to go because parties are still hesitant to adopt the process of mediation in commercial disputes. It is understood why parties still prefer to mediation because commercial mediation is an area where least attention has been paid to develop the best global practice of procedure and rules to adopt it in their domestic legislations. Moreover there is an absence of international legal mechanism like New York Convention, which has been ratified by 156 parties and the Convention for Settlement of Investment Disputes between States and Nationals of Other States (commonly referred as ICSID Convention), which has been ratified by 153 states.There is an immediate need to make such Rules and Convention at the International level so that no ambiguity arises in the cases of domestic legislation for mandatory provisions for commercial mediation.
The Italian model of mediation is the most successful model till date to resolve the disputes of commercial nature. The opt-out mediation model in Italy is popularly known as “Required Initial Mediation Session”,(hereinafter as required initial mandatory session or initial mandatory session) but in fact it is not mandatory in nature which is a misconception. The Italian model is the combination of both mandatory and voluntary mediation process. It was enacted by the Italian legislators in 2013. If the parties do not attend the initial session intentionally then fines should be imposed upon them. The mediation process must be facilitated by the professional mediator as well. The essential features of “Required Initial Mediation Session” model are:
- The parties related to the disputes should be present during the mediation session and if lawyers assisting them were present without their clients then mediation should not proceed further.
- The mandatory session should be conducted by a professional mediator who must have the minimum requisite training in mediation.
- The parties present in the session must be free to opt-out from initial mediation session voluntarily.
- If the parties fail to present during the initial mediation session then sanctions should be imposed upon them.
Following the success of opt-out mediation model of Italy, countries where mediation is almost non-existent like Azerbaijan and Turkey, similar legislations were introduced to facilitate mediation. It will further help to grow the mediation culture in their countries. Despite the fact that Azerbaijan has a time-bound judgment delivery system, it had introduced the mediation system based on Italian model to resolve disputes of various kinds. The opt-out mediation model introduced by Azerbaijan is based on the principles of UNCITRAL Model.The rules regarding opt-out mediation model has been first introduced by the American Arbitration Association in 2013 and there has been a continuous change in these rules adopted by different countries around the world. The Italian model seeks that there should be a mandatory initial mediation session before the beginning of formal mediation process. It gives the opportunity for the parties to decide the rules, advantages and disadvantages and moreover an opportunity to know the mediation process if they are unaware of it. It helps them to decide whether they should go for formal mediation process or not.
Turkey recently in December 2018 passed a law which makes it mandatory for commercial disputes subject to mandatory mediation.This is applicable to dispute relating to commercial and monetary in nature. The time limit to resolve the dispute is six week which may be extended to further two week under special circumstances. The first meeting is important for the parties to attend. The Turkey’s provision of mandatory mediation is based on the Italian required initial mediation session model. Some of the essential features of the Turkey’s model are:
- The dispute should fall within the ambit of Article 4 of the Turkish Commercial Code which includes IP ,banking and financial issue ,dispute relating to contract, merger and acquisition etc. This prerequisite requirement puts a challenge to decide whether a case falls within Article 4 or not.
- The new law requires both the parties to jointly choose the mediator to settle the commercial dispute. If they fail to do so then the law requires that the court should decide the mediator from the list of accredited mediator.
- The law requires that the mediation fee should be paid by both parties equally.
- In the case if any party fails to appear before the first meeting of mandatory mediation settlement then that party will have to bear all the cost of mediation as well as the litigation regardless of the outcome of judgment.
- In the event both the parties fail to settle the dispute then the mediator fee for the first two hour will be paid from the budget from the Ministry of Justice of Turkey.
The latest development in the commercial mediation is introduced by the Azerbaijan on March 29,2019.The law is based on both opt-out Italian model and UNCITRAL Model Law.Similar in provisions like other models it requires parties to join the initial mediation session. This law is not only applicable in commercial disputes but also in labour, family and administrative disputes. Azerbaijan has the best timely-delivered legal system, it was felt the need of mediation due to the recent increase in cases. Some of the key provisions are:
- Only person older than 25 years with 3 year work experience can become the mediator after obtaining the mediation training certificate.
- It is required by the parties to attend the initial mediation session and they were exempted from paying court fee if they are applying for mediation.
- The provision of voluntary mediation is also included in which both parties agreeing with each other can apply for voluntary mediation with the approval of the court.
- In case if a party fails to appear in the initial mediation session then the full expenses of the initial session borne by them.
- In case if there is a clause existing in the agreement or contract between parties then it shall apply to that Mediation organization and mediator referred in the agreement. Then, the mediation organization should ask both parties to initiate mediation proceedings.
- There is a very unique provision that after reaching a settlement both parties should comply with the settlement voluntarily and in case if a party does not comply with the settlement then other party can apply to the court or notary.
It is to be noted that to ensure the success of such stringent requirement of law of initial mandatory session, high quality of mediation service as well as no dearth of professional mediators should be ensured. It is yet to be seen that the intent behind introducing the legislation i.e. to increase the quality of justice by decreasing the workload meet its objective or not.
Mediation is undoubtedly the best dispute resolution method especially in cases of family and property dispute but how far is it true for the commercial disputes, it needs a thorough examination. If in mediation, if the parties fails to reach a settlement then it will cause a huge investment of cost and time of parties like in litigation process. It is well argued that the case to first undergo through the compulsory mediation process infringe the freedom of parties to decide upon the mechanism for the dispute resolution. In mandatory mediation parties may delay the process of mediation because there is no provision to impose sanction if they fail to appear before the authorities. Not everybody in commercial sector knows about the mediation process and relies on it as an effective way for dispute resolution. Further compulsory mediation is not proper for petroleum cases which involves Bilateral Investment Treaties (BITs) investment in it. Thus, there is a dire need to exclude few areas of dispute under the provision of mandatory mediation.
Confidentiality of information transpired throughout the mediation session should be kept secret by the mediator involved in the mediation process. It is in principle with ethics. Confidentiality of information should be maintained and in no case stenographic/audio/video recording of the mediation process should be allowed to be recorded. Authorities and Mediators involved in the whole process were also barred from keeping the record of information in the form of documents. Usually in litigations, trade secrets and other important confidential information were disclosed in the public domain through the judgments delivered. These leakages of trade secrets and confidential information has a very high likelihood of spoiling the image and goodwill of the company. The Act requires that every sort of information except in few cases should be kept secret. Thus, confidentiality is very important in cases which involves commercial disputes. It enables the parties to feel comfortable to disclose the information in an active manner during the whole mediation process.
The form of mediation process which the government has introduced through the Amendment is a welcome step by the government. In litigation and arbitration process the time taken to deliver the judgment or arbitral award has no limit and it takes years and years to complete the process. Due to no limitation of time the cost incurred by parties is very heavy which often lead companies to become bankrupt. Due to the complexity of the matter, courts often refer the case for mediation. On the contrary, the Amendment introduced by the government requires the parties to use five month as maximum time for the process of mediation . So, the whole mediation process won’t take more than five months.
Mediation in India is not so much popular and parties still prefer litigation and arbitration in commercial issues. Earlier the mediation in India mainly deals with family and property disputes. Considering that the major chunk of cases in India are commercial in nature it was felt that there is an urgent need to promote commercial mediation by bringing the necessary amendments which finally leads to the enactment of the Commercial Courts (Amendment) Act, 2018.The model adopted through the amendment is based on Italian ‘required initial mediation model’. Further to give the power to the settlement reached by the parties, mediation settlement was given the status of an arbitral award.
The Indian government has introduced initial mandatory mediation process which is based on opt-out mediation model. This is the most successful model which has been adopted by Italy, Turkey and Azerbaijan to resolve their commercial disputes. The commercial disputes were resolved by using this model in Italy since 2013.Italian model has been evolved through the continuous legislations.As per the Commercial Courts Rules, 2018 introduced by the government the case should be referred to Authorities under Legal Services Act, 1987. These Authorities then issue a notice to opposing party to appear within the 10 days of the receipt of the notice. The Authority will further re-issue the notice if it is not received by the party within 10 days. Even after re-issuing of notice opposite party fails to appear before the authorities, it shall deemed to be the non-starter and a report to that effect shall be prepared. After giving consent by both parties a date will be fixed and mediator will be assigned to them.
The process of mediation gives a chance for the parties to assess the strength and weakness of their case and their opponent. It give them an opportunity to analyze their dispute from all angles which will further help them if both parties moves towards litigation exhausting the pre-institution mediation process.
This new Amendment brings both the parties to a position where they can negotiate. Negotiation will protect them from the harmful effect if the judgment is delivered which may be in favor of one party or may not be favor of any other party to the dispute.
Giving the power to conduct the pre-institution mediation to Authorities (also called Lok Adalats) under the Legal Services Authorities Act, 1987) is a premature step taken by the government. To understand why it is a premature step, we need to understand the objective behind the establishment of these Legal Services Authorities (hereinafter LSA Authorities). Lok Adalat is a free justice delivery mechanism to the poorer section of the society who cannot fight due to economic reason. Same intent cannot be applied in the commercial matters which usually involves disputes of crores of rupees. The current LSA Authorities lacks infrastructure and expertise to mediate commercial matters. These Authorities often deals with family, labour, civil and property disputes. Commercial matters are rare in these courts. The intent and objective to deliver judgments by the LSA Authorities is for the weaker section of the society which may conflict with the process of commercial mediation. A very different set of technical skills and commercial knowledge is arguably the requirements to successfully mediate any commercial matter, which is totally lacking under LSA Authorities. Further it is expected that the mediator must have some training in mediation to settle commercial disputes which is technical in nature. Government while introducing the Amendment did not paid the heed to such shortcomings. It is totally a setback for the parties of commercial disputes.
The threshold of pecuniary value of commercial disputes has been lowered from three crore to three lakhs rupees. It is definitely a positive step taken by the government but likely to have long term negative impact on the mediation settlements. This lowering of threshold will ultimately lead more and more pre-institution mediations cases to be filled to before the LSA Authorities. The increase in such pre-institution mediation cases will overburden the LSA Authorities which lacks infrastructure as well as the professionals and expertise to deals with commercial matters.
Section 12A authorizes the parties to settle the commercial disputes through pre-institution mediation but at the same time it allows parties to escape this mediation process. This provision may hamper the overall objective of the Amendment and parties can use it as a tool to escape from the mediation settlement. For Example, in disputes relating to patent infringement parties often seek preliminary injunction. This preliminary injunction deemed to be an “urgent interim relief” under Section 12A of the Act and thus will divert the case to be settled through litigation process ,where there is no time limit to decide the case and infringing party get the license to continue to use the patent. On the contrary where parties don’t seek urgent preliminary injunction must go through mandatory pre-institution mediation.
The law requires parties to the dispute to approach the Authorities under LSA. This left the large number of professional mediators and dedicated mediation centers untouched. It is to be noted that the reason behind the success of the mandatory initial session mediation in Italy is that the certified professional mediators were involved in the mediation process and the dispute of commercial nature were resolved by mediation centers which is totally lacking in India.
The government must take all the shortcomings and limitations for the effective implementation of Section 12A into their account and should made necessary changes to it. Mediation does not fit for all categories of commercial dispute, especially petroleum related disputes which involves Bilateral Investment Treaties (BIT). Certain categories of disputes should be made as exceptions under Section 12A.For this purpose, legislators should follow the Turkey model of mandatory mediation. Voluntary provision of mediation which is key feature of Azerbaijan model of mandatory mediation should be introduced so that no party will be coerced to settle dispute only through mediation.
In my opinion monetary sanctions should be imposed if the parties fails to attend the pre-institution mediation settlement or tries to delay it. This is in accordance with Turkey, Italian and Azerbaijan mediation model. An initial meeting with the mediator should be conducted for the parties and time-frame to initiate such meeting should be decided. If the parties fail to attend first meetings, then sanction should be imposed on them. Rules should be made regarding the charges taken by the mediator, so that it won’t become a very costly settlement like arbitration and litigations. There is also a need to further amend the provisions relating to pre-institution mediation process which must take into account if the parties are not participating in it seriously or tries to delay the whole mediation process.
A dedicated nationalized Mediation Centre should be established which will not only impart the high quality mediation training but also settle the dispute relating to commercial matters under Section 12A of the Act. Such mandatory training should be the minimum requirement which every mediator should undergo. Further changes must be made to meet the requirement of mandatory opt-out model of Italy. Efforts should be made by the Indian Ministry of Law and Justice to accredit a large number of mediators who goes through a minimum requisite training through such Centers. There is no lack of trained professional mediators and centers in India. These centers have certified mediators which undergo a certain level of minimum training. For the temporary purpose mediation centers such as Advanced Mediation Practice, Indian Institute of Arbitration and Mediation (IIAM) etc should be recognized as the leading centers for the dispute settlement of commercial matters. In fact Ministry of Law and Justice of India has come out with a list of dedicated mediation centers to settle their disputes through other method of dispute resolution. There is also a total lack of regulations regarding charges to be taken by mediator. Charges should be given for a certain minimum hours to the mediator irrespective of the fact whether parties reached a successful settlement. Regulations regarding the same should be notified. Following the model of Turkey separate budget should be made by the government from which the expenditure of mediator should be met. Once the parties reached the settlement, then this must be put in writing and signed by both the party. Certain conditions like age criteria with a minimum year of work experience should also be introduced to become a qualified mediator. Provision to choose mediator voluntarily by both parties will also build the confidence among corporate houses to choose mediation process for their dispute settlement. Efforts should be made so that there is no dearth of qualified mediators, by increasing the number of dedicated mediation centers throughout the country.
Companies should include the mediation clause in their contracts and agreements with other companies. It will help them to maximize the benefit through the mediation process. Further amendment should be made to the Advocates Act, 1961 and Bar Council of India Rules,1975 so that the lawyers meet the need of those clients who seeks dispute resolution through mediation. Curriculum of law schools needs an overhaul to include Alternative Dispute Resolution as a subject with clinical training .This needs a complete change in the law school curriculum which in today’s scenario only focuses on arbitration and litigation. Further help should be taken from mediation centre such as Indian Institute of Arbitration and Mediation (IICM) to decide the curriculum and impart the training through seminar and conferences in law schools.
Information of technical nature or of prime importance relating to the case must not be disclosed during the litigation, irrespective of the fact that settlement has been failed. This is in consonance of Article 9 of the ICC Mediation Rules. The Supreme Court of India in the case of Moti Ram vs. Ashok Kumar said that a report given by the mediator after the successful mediation process must not disclose whatever transpired during the mediation process. If the mediation process remains unsuccessful then it simply must state that the mediation has been unsuccessful.In compliance with this judgment professional ethics for mediators should be written down.
Mediation in India is still in their nascent stage which requires more awareness. The mediation culture should be promoted so that it should mitigate the apprehensions of lawyers, corporate houses and business community and build confidence in them to choose mediation for their dispute settlement. Mediation in India needs to be regulated and but it should also be noted that mediation in commercial disputes not always guarantee a settlement.
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