Commercial Counterclaims And The Mandate Of Mediation: The Jurisprudential Expansion Of Section 12a

By Rima Majumdar and Anuj Dhar

Introduction

In today’s legal landscape, understanding the finer details of procedural requirements is more important than ever – especially in commercial disputes. One such provision that often gets overlooked but carries significant importance is Section 12A of the Commercial Courts Act.

This article delves into the critical role of the mandatory provision of Section 12A of the Commercial Courts Act, wherein the Hon’ble Court raised an important issue as to whether Section 12-A is applicable only on original commercial suits, or whether the same would be applicable even in counterclaims / countersuits, considering that Pre-Institution Mediation (PIM) proceedings already took place in the original suit.

Legal Framework Of Pre-institution Mediation In Suits As Well As In Counter-claims

The legal basis for mandatory pre-institution mediation is found in Section 12A of the Commercial Courts Act, 2015, which was introduced through the 2018 Amendment.

The primary objective behind this provision is to encourage parties to resolve their commercial disputes amicably through mediation before resorting to formal litigation. This not only aims to reduce the burden on commercial courts but also provides a more efficient and cost-effective dispute resolution mechanism. The provision essentially states that a commercial suit, unless such a suit seeks urgent interim relief, cannot be instituted without the plaintiff first exhausting the remedy of pre-institution mediation. Failure to comply with this mandatory requirement could result in the rejection of plaint under Order VII Rule 11 of the Civil Procedure Code, 1908.

In this article, we will discuss about the Delhi High Court’s judgment in the case titled – Aditya Birla Fashion and Retail Ltd. v. Saroj Tandon, where the Court addressed the important issue regarding the applicability of Section 12A in counterclaims / countersuits.

Brief Facts Of The Case

• Mr. Saroj Tandon (hereinafter referred to as ‘Respondent’) owned a commercial shop, which he had leased out to Aditya Birla Fashion and Retail Limited (hereinafter referred to as ‘Petitioner’) on March 15, 2013, for business purposes.
• However, due to disruptions caused by the COVID-19 pandemic, the Petitioner was forced to shut down the business from the said premises. Subsequently, the Petitioner issued notice of termination of lease, and demanded the refund of security which had been paid by the Petitioner to the Respondent at the time of entering the lease.
• Since the said refund was not returned by the Respondent, the Petitioner filed an application under Section 12A of the Commercial Courts Act, 2015, to initiate Pre-Institution Mediation (PIM) proceedings, before filing a suit for recovery against the Respondent.
• Despite due service of summons, the Respondent failed to appear for the mediation proceedings, and accordingly, the mediation was declared as non-starter.
• Thereafter, the Petitioner proceeded to file a commercial suit, seeking recovery of the unpaid security deposit, against the Respondent. After institution of the Suit, the Respondent filed its Written Statement on February 05, 2022.
• Further, during the pendency of the Suit, the Respondent also filed a counterclaim against the Petitioner on February 21, 2022, seeking recovery of unpaid rent. Since the Counterclaim also pertained to a commercial dispute, it was registered as a Commercial Suit. The said Counterclaim was merely seeking recovery of money, and did not pray for any urgent reliefs.
• Since the Respondent failed to initiate Pre-Institution Mediation proceedings before lodging the counterclaim, the Petitioner filed an Application under Order 7 Rule 11 of the Code of Civil Procedure, 1908, seeking rejection of such counter claim.
• However, the Learned Trial Court, vide Order dated February 02, 2023, dismissed the Petitioner’s application, stating that initiating PIM proceedings was mandatory for a Suit, but not for Counterclaims.
• Aggrieved by the decision of the Learned Trial Court, the Plaintiff filed the present Petition under Article 227 of the Constitution of India, challenging the Trial Court’s Order dated February 02, 2023.

Contentions Of The Parties:

Petitioner

• Counterclaim is also a Suit, in its individual and distinct capacity, and has to be treated as a regular suit.
• Since the Respondent’s counterclaim involved a commercial dispute, it had to mandatorily follow the rules and procedures, as prescribed for a Commercial Suit. The Commercial Courts Act, 2015, and the Code of Civil Procedure, 1908, do not contain any provisions providing for a different treatment for such Counterclaim.
• Counterclaim did not pray for any urgent reliefs; thus no urgency can be established by the Respondent to file the Counterclaim without initiating PIM proceedings.
  The Respondent’s Counterclaim is liable to be rejected under Order VII Rule 11 of CPC, for failure to comply with the mandatory provision of Section 12A, as held by the Supreme Court in the case titled ‘Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd.’

Respondent:

• Since both the parties had already undergone mediation proceedings during the original Suit and the process proved to be a “non-starter,” the same parties cannot be compelled to go through the entire process again, as it would be futile, redundant, and against the objective of a speedy trial.
• Applying the provision of Section 12-A to counterclaims would undermine practicality, and stretch the provision beyond its reasonable intent, especially when the same parties and facts are involved.

Issues Raised By The Hon’ble Court And Its Subsequent Findings

1. Whether the mandatory requirement of Pre-Institution Mediation under Section 12A of the Commercial Courts Act, 2015, is confined solely to the institution of the primary commercial suit, or whether it extends to counterclaims filed within the same proceedings.

The Hon’ble Delhi High Court held that the mandatory provision of Pre-Institution Mediation under Section 12A of the Commercial Courts Act applies not only to original suits but also to counterclaims, as counterclaims are treated as independent suits under Order VIII Rule 6A CPC.

Therefore, the counterclaim is also a suit in its individual and distinct capacity – once lodged, it has to be treated as a regular suit. Since, the counterclaim involves a commercial dispute it has to be mandatorily follow the rules and procedures as prescribed for the regular commercial suit.

2. In the event that Section 12A is applicable to counterclaims, whether the requirement of pre-institution mediation can be considered fulfilled or otherwise dispensed with on the ground that mediation was already undertaken at the stage of filing the original suit.

The Hon’ble Delhi High Court made it clear that just because mediation was attempted in the original suit, it does not mean a counterclaim gets a free pass. Since a counterclaim is treated as a separate suit under the law, it must go through its own round of pre-institution mediation under Section 12A of the Commercial Courts Act. The Court explained that the issues in a counterclaim might be different, so a new attempt at resolution is required unless urgent relief is sought.

Court’s Observation

• The core issue the Delhi High Court had to decide was whether a counterclaim in a business dispute also needs to go through the mandatory mediation process (called “pre-institution mediation”) before it’s filed, as required by Section 12A of the Commercial Courts Act, 2015. The Court looked into the Civil Procedure Code (CPC), especially into Order VIII Rule 6A which says that a counterclaim should be treated like its own separate lawsuit.
• Further, the Court pointed out that all the standard legal steps and requirements that apply to a regular lawsuit also apply to counterclaims. Because of this, the Court decided that a counterclaim must be considered an independent commercial lawsuit. The Court specifically noted that there’s nothing in the relevant laws (the CCA Act and CPC) that says counterclaims should be treated differently. Therefore, it’s also subject to that mandatory pre-institution mediation under Section 12A. The only exception is if someone is asking for urgent temporary relief.
• The Hon’ble Court also looked into a crucial Supreme Court case from 2022, Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd. wherein, the Court confirmed that Section 12A (mandatory mediation) is indeed compulsory. If you do not follow it, your lawsuit will be rejected under Order VII Rule 11. This rule came into effect from August 20, 2022. The Apex Court added that this power can be exercised even suo moto by the court. This declaration has been made effective from August 20, 2022, so that concerned stakeholders become sufficiently informed.
• The court clarified that simply having attempted and failed pre-institution mediation for the original suit (“non-starter”) does not exempt a counterclaimant from the mediation requirement. If no urgent relief is contemplated, the counterclaimant cannot proceed directly to filing a commercial suit.
• The Court clarified that counterclaims are distinct from original suits, even if they involve the same parties who already underwent Pre-Institution Mediation. This is because counterclaims can seek different relief and concern a different subject matter, potentially impacting the entire case. It was also noted that a suit may not get settled but a counter claim arising from such suit could very well get settled. Therefore, counterclaims should mandatorily undergo the Section 12-A process as if they were separate suits.

Court’s Observation

Judgement

• The Hon’ble Court observed that Section 12-A is an “indispensable provision which cannot be kept aside on the whims and fancies” of the parties. The Court placed reliance on its decision in Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd., wherein it was held that pre-institution mediation was mandatory, and its non-compliance would entail rejection of the plaint. However, it was held in Patil Automation (supra) that such consequences would be applicable prospectively from August 20, 2022. In view of the same, the Court held that the said cut-off date would be applicable to the present case as well.
• The Hon’ble Court, while disposing the Petitioner’s application under Order VII Rule 11 of CPC, 1908, held that since the Counterclaim had been filed on February 21, 2022, i.e., before the cut-off date, thus, the same came cannot be rejected in the present case.

Author’s Comment

The Delhi High Court’s decision in Aditya Birla Fashion and Retail Ltd. v. Saroj Tandon marks a notable moment in commercial litigation, clarifying that the mandatory pre-institution mediation under Section 12A of the Commercial Courts Act, 2015 applies not only to original suits, but also to counterclaims. This interpretation reinforces the judiciary’s growing commitment to encouraging alternative dispute resolution as a first step in commercial disputes.

For lawyers and litigants, this means paying closer attention to procedural requirements, as missing a mandatory step like pre-institution mediation could lead to serious setbacks in the case, like rejection of claims or prolonged proceedings. At the same time, the judgment also raises another important question – should the law be more flexible in how it applies pre-institution mediation in suits of commercial nature?

Shaurya Singh, Junior Associate Advocate at S. S. Rana & Co. has assisted in the research of this article.