Why Mandating Mediation Will Not Be Effective For Litigants In Commercial Disputes

Recently, private solutions such as mediation and online arbitration are increasingly being endorsed in India to resolve commercial disputes. India has had a legal framework in place for arbitration and conciliation since 1996. To formalise mediation in India, the Mediation Bill is underway. This Bill proposes to mandate Pre-litigation Mediation for civil and commercial disputes. While the intent of this proposal is to reduce judicial burden, how does this impact a party to a dispute?

What Is Pre-Litigation Mediation?

Pre-Litigation Mediation under the proposed law means that any party, who wishes to file a civil or commercial suit in a court, must first attempt to settle the dispute by mediation. The law allows the parties to proceed to court only if the mediation fails. It further mandates both parties to participate in at least two mediation sessions. Even if the parties do not have a mediation agreement in place, they must engage in mediation prior to litigation. If mediation fails, due to the non-appearance of any party in the first two sessions, the courts are empowered to impose penalties on the defaulting party as they deem fit during subsequent litigation.

This is not the first attempt in India to statutorily mandate that litigants resort to mediation before filing a suit. In 2018, Section 12A was inserted in the Commercial Courts Act, 2015, with similar provisions. According to the Act, a commercial suit cannot be filed in court unless the parties first attempt to resolve their dispute through mediation. The settlement arrived at by the parties during the Pre-institution Mediation process will have the effect of an arbitral award.  

An assessment of the working of this provision under the Commercial Courts Act can provide some valuable insights for the successful working and impact of the proposed mediation law.

Has Mandating Mediation Worked?

A litigant seeking to resolve a commercial dispute takes into consideration several factors. Crucial among these are two: certainty in the time taken for resolution and the monetary cost involved. The Commercial Courts Act that mandates mediation before the institution of a suit, prescribes that the mediation process must be completed within three months. While the monetary cost incurred by the litigant would include advocate fees, court fees and travel expenses, any delay in completing the resolution process has a direct impact on cost as well.

The figure below shows the total workload and the status of mediation applications, as reported on the e-Courts portal by district-level commercial courts in Mumbai. Across three years from 2020 to 2022, about 31% of total applications filed were pending for more than three months.

Further, the graph shows an increase in the number of applications received for mediation from 2020 to 2022 and a reduction in the total number of pending applications by about 50%. Correspondingly, there is an improvement in the disposal rates. Taken as a percentage of the total workload, the disposal rate in 2022 is almost two times that in 2021. But these disposal rates do not represent the success of the mediation process itself.

There are three types of disposals as laid down in the Commercial Courts Act and reported by the courts:

(i) Settled: Cases in which mediation was successful and the parties have amicably arrived at a mutual settlement;

(ii) Failed: Cases where mediation was attempted and failed;

(iii) Non-starter: Cases where the opposite party has refused to participate in the mediation process.

The table below shows the number of disposed cases categorised under each of these types.

In all three years, about 96-98% of total disposed of cases are non-starters. The failed and settled ones are under 2%. This means that, in most cases, parties are reluctant to mediate and subsequently proceed to courts to resolve their dispute. By compelling unwilling parties to mediate, the dispute resolution process is further delayed by a minimum of 3-5 months. Additionally, the litigants incur excess monetary and non-monetary costs.

Why Does Mandating Mediation Fail?

Such a staggering proportion of non-starter cases in commercial disputes mediation warrants a systematic understanding of the underlying reasons, rather than a coercive measure as proposed in the Mediation Bill.

Firstly, most commercial contracts have built-in clauses where parties attempt to settle, before proceeding to courts. A court-mandated mediation then becomes a repetitive and redundant process. Secondly, litigants may not consider mediation as a judicious form of dispute resolution. Specifically, litigants with lower bargaining power or access to resources (monetary and social capital) may feel coerced to settle. When mandated, parties would participate in the mediation process insincerely and ultimately proceed to courts. Thirdly, such high levels of reluctance mean the parties do not see the value of mediation and the proposed monetary penalty is unlikely to have a deterring effect.

What Can Be Done?

Mediation is a voluntary process by nature. Mandating it not only takes away a party’s autonomy to litigate but further increases the time and cost of an already expensive and time-consuming litigation process. State intervention through coercion must be limited to addressing market failure. In all other instances, freedom works well. Given the infirmities of the legal system, private individuals have ample incentives to find alternative pathways for dispute resolution that best serve the mutual interest of both parties. In such an instance, there is no market failure and a law-mandated solution is unlikely to produce better outcomes.

Many have seen the use of mandatory mediation in other jurisdictions (such as Singapore, France, and some states of the U.S. and Australia) and concluded that it is the solution to the litigants’ woes in India.

There is no doubt that mediation can benefit the litigants. For one, it is a less adversarial process. It can help preserve business relationships that are especially favourable for markets characterised by small firms, long-term players and oligopoly.

But as the evidence above shows, there is a problem of reluctance and bias against the mediation process in India. This cannot be solved by mandating it. Therefore, the first step towards increasing the use of mediation is to reassure the litigants of its efficacy and judiciousness. This includes building awareness about the process and its benefits, establishing principles of accuracy and fairness of the resolution process, and periodically measuring its outcomes.

Pavithra Manivannan is Senior Research Associate at XKDR Forum, Mumbai. 

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.