Why counter-claims must also undergo Pre-Institution Mediation under Commercial Courts Act: Delhi High Court Answers

In the world of business, transactions rely on mutual understanding between parties, known in legal terms as agreements. However, when this understanding falters, disputes arise, often leading to litigation. A common perception is that once a dispute reaches the hands of lawyers, the issue inevitably turns adversarial, shifting the focus from resolution to a zero-sum game, where one party must lose for the other to win.This mindset, along with other strategies, can result in multiple, separate claims and counterclaims arising from the same transaction, further overburdening an already overburdened judicial system.This adds to the perception that litigation in India drags on for years without any resolution in sight.

The Indian judiciary has long faced criticism for these delays, with cases lingering for years, sometimes decades. Initiatives like Lok Adalats were introduced to reduce the court backlog and offer quicker resolutions, but they have not delivered the expected results. To address this, as a major chunk of cases arise out of business transactions, the Legislature enacted the Commercial Courts Act, 2015 (“Act”), aimed at improving the resolution of commercial disputes. The Act introduced specialized commercial courts and made significant amendments to the Code of Civil Procedure, 1908 (“CPC”), enforcing strict timelines for pleadings and other procedures, ensuring commercial matters are dealt with efficiently and expeditiously.

A key provision of the Act introduced by the Legislature is Section 12A, which mandates that parties must undergo mediation before filing their suit before the commercial court, except where urgent relief is sought. The intent is to reduce the burden on courts and encourage faster settlements.However, a loophole remains: while mediation is mandatory, participation by the defendant is not.As a result, many mediations result in a non-starter report, leading to substantial time being wasted for the plaintiff, who must then proceed with litigation.

But when happens when a defendant, after avoiding mediation, files a counterclaim in response to the plaintiff’s suit? Should the counterclaim be considered an independent suit, thus being subject to pre-institution mediation? And, can the defendant bypass the mediation process for the counterclaim?These issues came before the Delhi High Court recently in Aditya Birla Fashion and Retail Limited v. Saroj Tandon1.

After an unsuccessful mediation, the plaintiff filed a suit to recover a security deposit related to a terminated lease.The defendant then filed a written statement and a counterclaim for outstanding rentals.

The moot question was whether the counterclaim, which did not involve any urgent interim relief, was subject to the same mandatory pre-institution mediation as an original suit.The plaintiff argued that the counterclaim required compliance with Section 12-A, and failure to do so warranted rejection under Order VII Rule 11 of the CPC.Whereas the defendant contended that since the original suit had already undergone mediation, it would be redundant to subject the counterclaim to the same process.

In its judgment, the Delhi High Court emphasized that a counterclaim is more than a defense mechanism; it is treated as an independent suit. Under Order VIII Rule 6A of the CPC, a counterclaim holds the same weight as a cross-suit, meaning it must be adjudicated alongside the original claim.To determine whether counterclaims should also be subject to pre-institution mediation, the court referred to the judgment of the Supreme Court in Patil Automation Private Limited v. Rakheja Engineers Private Limited, which held that Section 12-A is mandatory, and any suit filed without exhausting pre-institution mediation must be rejected under Order VII Rule 11 CPC (except in cases of urgent relief).Basis this reasoning, the Delhi High Court held that counterclaims in commercial suits are also subject to the same pre-institution mediation requirement, as they are treated as distinct suits.

The court emphasized that bypassing mediation for counterclaims would defeat the legislative intent behind Section 12-A, which aims to encourage dispute resolution outside the courts and reduce judicial delays. In support of this interpretation, the court cited the judgment in Harey Krishna Corporation v. Servotech Power Systems Ltd., where the Delhi High Court reiterated that pre-institution mediation is mandatory and extends to counterclaims.

This ruling in Aditya Birla (supra) is significant as, by holding that counterclaims are subject to the same mediation requirements as original suits, the court has emphasized the importance of mediation as a necessary and substantive step in resolving commercial disputes, in lines with the intent of the Act. This decision also highlights the Legislature’s intent to promote quicker, more cost-effective dispute resolution processes, thereby reducing the workload of courts across the nation and improving the ease of doing business in India.

By - Vaibhav Mehra

  1. 2024 SCC Online Del 6099
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