The decision of the Delhi High Court in the case of Kapil Goel v. Ram Dulare Yadav @ Gandhi Bhai1 (16 November 2022) provides a critical clarification in the context of Section 12A of the Commercial Courts Act, 2015 (the Act), read with Rule 3 of the Commercial Courts (Preinstitution Mediation and Settlement) Rules, 2018 (the Rules). Section 12A reads as follows –
“12A(1) – A suit which does not contemplate any urgent interim relief under this Act, shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation in accordance with such manner and procedure as may be prescribed by rules made by the Central Government”.
This Section thus pre-supposes that any suit in respect of a commercial dispute filed without attempting mediation would be barred by Section 12A and, therefore, liable to be rejected at the threshold itself.
In this backdrop, the District Court in the aforesaid case had dismissed the suit filed by the Plaintiff on the ground that the same was instituted without complying with the mandatory provisions of Section 12A as above. The Delhi High Court set aside the order of the District Court holding, inter alia, that once the Plaintiff initiates mediation prior to filing of a commercial suit, his further consent for the institution of the mediation proceedings is irrelevant if the Defendant refuses to move forward with it. The Hon’ble Court has also distinguished the facts of this case from the facts in Patil Automation Private ltd & Others v. Rakheja Engineers Private Ltd2 , where the Apex Court had held that Section 12A of the Act is mandatory, and if not complied with by the Plaintiff the suit ought to be dismissed under Order VII Rule 11 of the CPC as being barred by law.
Facts and Background
The Defendant defaulted in payment of INR 17,98,319/- (Indian Rupees Seventeen Lakhs Ninety-Eight Thousand Three Hundred and Nineteen) to the Plaintiff for certain goods purchased on credit basis. The Plaintiff approached the Secretary, Delhi Legal Services Authority (DLSA) by filing an application under Schedule I, Form 1 of Rule 3(1) of the Rules for initiation of mediation before instituting a Suit. Thereafter, both the Plaintiff and the Defendantrefused to participate in the process of Pre-Institution Mediation, and a non-starter report was generated by DLSA under Form-3 of Schedule-I of Rule 3(4) and 3(6) of the Rules. The non-starter report categorically recorded that “both the parties do not want to participate in the process of Pre-Institution Mediation.”
Since the mediation was a non-starter, a suit for recovery was subsequently filed by the Plaintiff before the District Judge. The learned District Judge (Commercial Court) dismissed the suit. The District Court concluded that the suit was filed without complying with the provisions of Section 12A of the Act and held the Suit to be barred by law. While dismissing the Suit, the District Court, inter alia, noted that the Plaintiff had filed an application before the DLSA only as a formality and had no real intention to proceed with the Pre-Institution Mediation.
Aggrieved by the aforesaid, the Plaintiff approached the Delhi High Court.
The Delhi High Court, in the appeal filed by the Plaintiff, restored the suit and held that the District Judge had erred in observing that the Plaintiff did not follow the mandate of Section 12A of the Act.
While interpretating the Rules for initiation of Pre-Institution Mediation, the High Court held that a holistic reading of the facts of the case as well as the law shows that consent of the plaintiff for the institution of the mediation is irrelevant if the defendant refuses to participate. The High Court clarified that the plaintiff is only required to initiate Pre-Institution Mediation prior to filing of a commercial suit.
Further, the High Court held that if after initiating the Pre-Institution Mediation, it is the plaintiff who refuses to move forward with the mediation, then the suit instituted thereafter would be barred by law. However, if both the defendant and the plaintiff do not wish to pursue the mediation and a non-starter report is generated subsequently, the suit filed thereafter would not be barred by law.
In the present case both the parties refused to participate in the mediation and not just the Plaintiff. On these lines, the Delhi High Court distinguished the Supreme Court’s judgement in Patil Automation Pvt Ltd and Others v. Rakheja Engineers Pvt Ltd. The High Court held that “the Defendant having refused to participate in the Pre-Institution Mediation would suffice for the Suit of the Plaintiff to be allowed to proceed without any encumbrance”.
The moot question before the Court, i.e. whether the factum of the Defendant not willing to participate in the Pre-Institution Mediation would suffice for Section 12A of the Act to be satisfied, was answered in the affirmative by the Delhi High Court. The Court has, thus, provided a purposive interpretation to the provisions by clarifying that in a situation where the Defendant itself does not wish to proceed with the mediation, then Plaintiff’s nonwillingness to participate is irrelevant.