Mandatory Mediation Before You File a Commercial Suit

What Section 12A mediation is, and why it comes first

Section 12A of the Commercial Courts Act, 2015 is short and blunt. If your suit doesn't contemplate urgent interim relief, you can't file it until you've tried pre-institution mediation. The mediation is run by the authority set up under the Legal Services Authorities Act, 1987, which in practice means the District Legal Services Authority (DLSA) for the district where your suit would be filed. A trained mediator sits down with both sides and tries to get them to agree. That's all it is.

Parliament added this step in 2018. A big share of commercial suits are plain money disputes, and plenty of them would settle if someone made the parties talk properly. For you, the claimant, it's a hurdle. It's also cheap. The other side gets an official notice from a public body, and quite often that's the first time it takes your claim seriously. Debtors who ignored five reminders and a legal notice will sometimes agree a payment plan once the DLSA writes to them. And that plan becomes enforceable.

Two things can happen. If mediation fails, or the other side never turns up, the Authority gives you a report and you file the suit with it. If it works, the settlement can be enforced as if it were an arbitral award. You may never need a suit at all.

What the law actually says

Which suits need it and which don't

You need mediation when three things line up. The dispute is a commercial dispute under Section 2(1)(c) of the Act, it's worth Rs 3 lakh or more, and the suit doesn't genuinely ask for urgent interim relief. That catches most of what comes across our desk. Recovery suits on unpaid invoices. Claims for the price of work done or a refund of an advance. Damages for breach of contract, and fights under distribution, franchise and supply agreements or leases of commercial property.

People assume a summary suit under Order XXXVII of the CPC is exempt because it's the fast track. It isn't. A summary suit on an unpaid invoice or a bounced cheque still goes to mediation first. The exception is where it also asks for urgent interim relief, say attachment before judgment, and that request stands on real facts.

Some matters don't need it at all. An execution petition on a decree you already hold doesn't, and nor do applications under the Arbitration Act. If your contract has an arbitration clause, the dispute normally goes to arbitration anyway, not to a suit; petitions under Sections 9, 11 and 34 of that Act are dealt with on arbitrationlawyer.in. Claims below Rs 3 lakh aren't commercial suits. They go to the ordinary civil court, where Section 12A doesn't apply.

What about suits filed before 20 August 2022 without mediation? They aren't thrown out for that. The Supreme Court made its ruling prospective, so pending cases were left alone.

When urgency lets you skip mediation

The exception is for a suit that contemplates urgent interim relief. Think of an injunction against a copycat brand, or an order stopping a bank guarantee from being invoked. An order against selling goods that are in dispute would qualify too, and so would attachment of a debtor's assets while they're being moved out. If three to five months of mediation would do real damage, you can go straight to court with the interim injunction or attachment before judgment application.

The trouble starts when people stretch it. Picture a plain recovery suit on two-year-old invoices, with a token prayer for attachment and not one line in the plaint showing the debtor is getting rid of assets. That's exactly what the Supreme Court warned against in Yamini Manohar. Courts have rejected plaints like that. The plaintiff loses months. Then mediates anyway.

Clients often ask Advocate B.K. Singh whether their case can skip mediation. He asks them one thing back: what will the debtor, or the infringer, do in the next ninety days that can't be undone later? If there's a clear answer you can prove, file with urgent relief. If the honest answer is nothing, mediate. Usually it's nothing.

How it works, one stage at a time

Each stage has a short time limit under the rules. When things drag, it's nearly always because the application was incomplete or an address was wrong. Both are in your hands.

1. Find the right Authority

   You apply to the Legal Services Authority with territorial and pecuniary jurisdiction over the suit you mean to file. Usually that's the DLSA for the district where your commercial court sits. In Delhi every district has its own DLSA inside the district court complex.

2. File Form 1

   The application names both parties with their addresses, describes the dispute briefly and states the amount claimed. You can file it by hand or by post, and some Authorities take it online. Pay the Rs 1,000 fee. Attach copies of the main documents so the mediator can follow the claim without guessing.

3. Notice goes to the other side

   The Authority sends a Form 2 notice by registered or speed post and by email, asking the opposite party to appear and consent to mediation on a date within ten days. If nothing comes back, a final notice follows. If the other side asks for more time, it can get a fresh date within ten days of asking.

4. Non-starter, or a mediator

   Sometimes the notice isn't acknowledged, the other side refuses outright, or it doesn't appear on the alternate date. The Authority then treats the mediation as a non-starter and issues a Non-Starter Report in Form 3. If both sides appear and agree, the dispute goes to a mediator. That's when the mediation fee is paid.

5. The sessions

   The mediator meets you together and then separately. Everything said is confidential, and none of it can be used later in the suit. Your lawyer can sit with you. Sessions usually happen at the mediation centre in the district court complex. Expect several sittings.

6. Settlement or a failure report

   If you agree, the terms go into writing and the parties and the mediator sign. If you don't, the mediator reports the failure to the Authority, and the Authority issues the report that goes with your plaint. Start to finish, three months. Five with consent.

7. Sue, or enforce

   With a non-starter or failure report in hand, file your suit in the commercial court. A settlement is different. It's enforceable like an arbitral award, so if the other side defaults you go straight to execution.

Which office: Delhi, Noida, Ghaziabad, Gurugram, Faridabad

In Delhi, the Delhi State Legal Services Authority works through a DLSA in each district. The court complexes at Tis Hazari, Saket, Patiala House, Karkardooma, Rohini and Dwarka each house the DLSA office for their district. You go to the one whose commercial court would hear your suit. That depends on where the defendant is, or where the cause of action arose.

In Uttar Pradesh, the DLSA for Gautam Buddh Nagar at the Surajpur court complex takes applications for Noida and Greater Noida. Ghaziabad's is at the Ghaziabad district court. In Haryana, the DLSAs at Gurugram and Faridabad do the same job. One wrinkle. Suits above Rs 2 crore in Delhi go to the Delhi High Court, and for those you should check with the Authority which body is handling Section 12A applications for High Court suits when you apply.

Picking the wrong office isn't fatal. It does cost time. The Authority may send the application back, or the defendant may argue later that the mediation wasn't properly held. Our page on the Legal Services Authorities explains how these bodies work. To fix the district in the first place, see which commercial court will hear your case.

How long it takes and what it costs

Papers to have ready for the application and the first sitting

• Both parties' correct legal names, exactly as they appear on the GST, company or firm records
• The other side's current registered office and working address, and email IDs and phone numbers that actually get answered
• Whatever shows the agreed terms, whether that's a contract, purchase orders, work orders or only an email trail
• Invoices, delivery challans and e-way bills, plus something showing the goods or services were received
• A ledger or statement of account with the outstanding amount and how you've worked out the interest
• The legal notice you sent before mediation, and the reply if one came
• A board resolution or authority letter for whoever attends for a company
• Your own decision, made inside the business before the first date, on the lowest figure and the payment terms you'll accept

Getting ready for the sitting: what actually moves a settlement

Send someone who can say yes. When the company's man has to step out and phone the owner for every offer, the mediator's time is wasted and the other side reads it as a lack of seriousness. If a director can't come, give your representative written authority with a clear range.

Bring a one-page account statement. Mediators settle money disputes on numbers, not on who was rude to whom on the phone. Show the principal, what's been paid, the interest you're claiming and why. If the interest rests on an invoice clause or on the MSMED Act, say so and show it. Be ready to explain what you'd realistically get after a two to four year suit, once court fee and the risk of an unpaid decree are counted. The other side's lawyer is doing that same sum.

Ask for security. Promises alone are thin. A settlement saying the debtor will pay in six instalments is worth more if it also says the whole balance falls due at once on any default, and more again if it's backed by post-dated cheques, a personal guarantee or a charge on an asset. Settlements do come back to Advocate B.K. Singh for enforcement, and the weak ones usually have no default clause and no security. We'd push hard on both.

If the other side doesn't turn up

This happens a lot. Debtors who already know they owe the money often just don't respond. Once the final notice goes unanswered, the Authority issues a Non-Starter Report and you've done what Section 12A asks of you. File the suit with that report, and keep the postal and email proof of the notices on file.

Their silence can help you later. Under Section 35 of the CPC as it applies to commercial disputes, the court decides costs by looking at how the parties behaved, including whether someone refused reasonable steps towards settlement. A defendant who ignored mediation and then runs a weak defence for three years is taking a real risk on costs.

What a mediated settlement is worth if they default

Section 12A(5) gives a settlement reached in pre-institution mediation the same status and effect as an arbitral award on agreed terms. An arbitral award, in turn, can be enforced like a court decree under Section 36 of the Arbitration Act. Put the two together. If the debtor stops paying, you file an execution petition directly. There's no fresh suit on the original claim.

Execution then runs under Order XXI of the CPC, with attachment of the judgment debtor's bank accounts, receivables, property and other assets. Our page on execution of decree goes through those steps. It's also why the wording of the settlement matters so much. Names, the exact amount, due dates, the default clause and any security all have to be clear enough for an executing court to act on them without asking anything further. A vague settlement turns into a long argument in the execution court two years later.

Sometimes only part of a dispute settles. The settlement can record the agreed part, and you sue for the rest with the failure report. Settling after a suit has already been filed is a different route. That's covered on our page on settlement during a suit.

Limitation: will mediation use up your time to sue?

It won't, as long as you start in time. The proviso to Section 12A(3) says the period the parties spend in pre-institution mediation isn't counted when limitation is worked out. Say your three years run out halfway through mediation. You still get the excluded period back.

But mediation won't revive a claim that was already time-barred on the day you applied. Most money claims have three years under the Limitation Act, 1963, counted from the due date or the date of the last invoice. A written acknowledgment of the debt (Section 18) or a part payment (Section 19) starts the clock again. Check this date before you do anything else. Our guide on limitation for recovery of money shows how to count it. If you're only a few weeks from the deadline, file the application today and keep proof of the filing date.

Mistakes we keep seeing

• Filing the suit without it. No mediation report and no genuine urgent relief, and the plaint is liable to be rejected under Order VII Rule 11. You end up mediating anyway, months later.
• Naming the wrong party. We see a proprietor's trade name used as if it were a company, a similarly named company, or a director sued personally when the contract was with the company. The mistake follows you into the report and turns into an objection in the suit.
• Understating the claim. The figure in the application should match the suit you plan to file, with interest up to the date of the application. If the plaint later claims far more, expect the argument that a different dispute was mediated.
• Signing a vague settlement. 'The balance will be cleared shortly' isn't a term anyone can enforce, and nor is a settlement with no dates and no default clause. Insist on exact amounts and dates.
• Treating it as a formality. Walk in with no number and no authority, and you've thrown away a real chance of being paid in months rather than years.

If you've received a Section 12A notice

Go. Turning up isn't an admission of the claim. Nothing said in mediation can be used against you in the suit, and the fee is modest. You'll find out what documents the claimant has and how serious it is about suing. If you have a real defence, such as defective goods, short delivery or a set-off, mediation is a good place to put it on record informally and see how the claimant reacts.

If you do owe some of it, a mediated payment plan is usually far cheaper than defending a suit. In a commercial suit, the 120 day deadline for the written statement, full disclosure of documents and the loser-pays rule on costs all work against a slow defendant. And if you think the claim is completely false, attend anyway and say so. Then get your documents ready for the suit that may follow.

How it tends to go for different businesses

Suppliers and MSMEs chasing unpaid invoices gain most, because the debtor usually wants time, not a fight. If you're a registered micro or small supplier, look at the MSME Facilitation Council under Section 18 of the MSMED Act, 2006 as well. It offers conciliation and then arbitration, with interest at three times the RBI bank rate. That's a separate route, and it doesn't need Section 12A mediation.

Service firms and IT vendors usually fight over scope and quality rather than plain non-payment. A mediator can help split the difference on a disputed final milestone. Lenders recovering inter-corporate deposits or trade advances should use the sitting to get acknowledgments and security in writing, which helps on limitation too. Claims by banks and financial institutions of Rs 20 lakh and above usually go to the DRT instead.

Large companies need internal approvals sorted before the sitting. Otherwise every offer stalls while someone waits for an email from head office. Startups up against a bigger customer often find that a formal notice from a public authority gets the attention months of emails didn't. Delhi, Uttar Pradesh and Haryana all follow the same central rules. Each DLSA does things a little differently on scheduling and paperwork, though, so check the local requirements before you file.

What to do this week

Start with the limitation date. Then gather the contract, invoices, delivery proof and ledger, check the other side's exact legal name and addresses against its GST registration, and ask yourself honestly whether anything urgent is happening that would justify going straight to court. If not, file Form 1 with the right DLSA. Decide beforehand what settlement you'd take.

If mediation fails, the suit comes next. That's on our page on the money recovery suit. Fees for the mediation and for any suit are discussed at the first meeting and agreed in writing, one stage at a time.

If you'd like your claim papers checked before you apply, or a straight answer on whether your case counts as urgent, send them to Advocate B.K. Singh's team through the contact page.