Mediating Before Litigating Section 12A and the Procedural Journey of Joint Venture Disputes Before India’s Commercial Courts

Mediating Before Litigating: Section 12A and the Procedural Journey of Joint Venture Disputes Before India’s Commercial Courts
Author: [ISHITA BHUSHAN]

Introduction
Joint ventures in India used to be about two companies collaborating in the same factory only. Luckily or unfortunately, today it is not the case. Now joint ventures comprise a wide range of different areas: from infrastructure and road projects, technology, and renewable energy to defence production. Despite being separate entities, two companies share risks, costs, and profits under one contract, which leaves a lot of room for disagreement. One company will believe that another one takes too much control; they will differ in financial distribution policy. Some rules for behaviour in the contract area will be considered unacceptable by one party. And in case of such disputes, the joint venture becomes a permanent battleground between two equal and strong partners.

The present article traces back this procedural trail from the very genesis of the cause of action till the ultimate appeal, probing closely upon the said Supreme Court ruling in Patil Automation Pvt Ltd v Rakheja Engineers Pvt Ltd , which essentially laid down a binding position on a truly contentious issue. However, beneath this overarching question lies another, thornier issue – that of whether mandatory mediation in cases of joint venture disputes is actually a helpful tool for the litigants, who in every other sense stand to benefit from a settlement, or merely an added hurdle on the road to litigation, and this article attempts to address this issue as well, using the statutory language, the legislative history of the Act, and the case law on the said provision which has since developed, with a concluding observation on the efficacy of the tool itself.
Background and Legal Framework

Indian law does not provide a specific definition of a joint venture. It is entirely a contractual concept. Thus, stripped of its jargon, a JVA is essentially what is referred to as a contract between two separate entities to pursue a common business activity, usually involving the contribution of capital, technology, or expertise by both the parties in a manner permits them to remain independent in their operations. Courts interpreting such agreements have consistently held that such contracts have to be construed on the same principles that govern the formation of any contract. However, they have also recognized that such agreements have some unique aspects that govern the relationship between the parties involved in a joint venture. Therefore, while interpreting a JVA, courts will look to the specific terms of the contract between the parties, as well as the equity and good faith between the involved parties, which may be presumed to exist if the contract is silent on these aspects.

Two features usually distinguish a JVA from an ordinary supply agreement. First, both sides bring substantial input to the joint venture, which may take the form of capital, technology, distribution resources, or other assets, and this allocation usually needs to be spelled out in detail since it determines the distribution of liability in case of defects. Second, both sides retain managerial control of the joint venture, normally implemented through a joint steering committee or a board of directors, with decisions typically requiring majority or unanimous approval. It is the second characteristic that makes a JVA different from a standard contract, particularly one involving the supply of goods or services, and that leads to the most disputes: two companies that have agreed to make major decisions jointly, but that cannot agree on anything, essentially can be blocked by either party.

A related but separately analysable source of conflict is of a fiduciary in nature. When one partner controls the other’s day-to-day managerial decisions or has access to that partner’s information on the joint venture, the court will sometimes require a standard of complete honesty and good faith in the dealings between the partners, even if such a term is not specifically stated in the contract. A partner who steals away a business opportunity belonging to the joint venture or who steals away a business opportunity belonging to the joint venture or who deliberately withholds information from an equally privileged co-venturer can be subjected to a court proceeding that will consider both equitable and contract-based factors. Thus, joint-venture lawsuits tend to be exceptionally fact intensive, and often hinge on what each side was actually able to document.

Before the Commercial Courts Act, these disputes moved through ordinary civil courts under the Code of Civil Procedure 1908, with no guarantee of speed. The Law Commission’s 253rd in India and recommended specialized commercial courts. The Parliament responded by establishing Commercial Courts at the district level and Commercial Divisions at the High Courts with specific fast-track procedures including mandatory disclosure of documents, a verified Statement of Truth and case management hearings Report flagged judicial delay as a real barrier to India’s investment climate and recommended dedicated commercial forums. Parliament responded in 2015, setting up Commercial Courts at the district Before enactment of the Commercial Courts Act, disputes of this nature were handled by the civil courts under the Code of Civil Procedure 1908, without any particular assurance of expedience. The Law Commission’s 253rd Report identified judicial delays as a disincentive to investment in India and recommended specialized commercial courts. The Parliament responded by establishing Commercial Courts at the district level and Commercial Divisions at the High Courts with specific fast-track procedures including mandatory disclosure of documents, a verified Statement of Truth and case management hearings .

The Mandatory Character of Section 12A
After the amendment in 2018, the High Courts have taken sharply divided views on whether pre-court mediation was mandatory or merely directory as to enable a party to approach the court which is important because a directory law can be dispensed with while a mandatory law cannot. The Bombay High Court’s Division Bench has resolved the conflict within the Bench by overruling the single judge decision and holding mediation to be mandatory while the Madras High Court has taken the opposite view that access to justice cannot be made dependent on pre-court mediation.

The Supreme Court put an end to the chaos in Patil Automation by interpreting the word “shall” in section 12 A in a manner that rendered it mandatory and not directory. In this respect, referring to the test laid down in Sharif-ud-Din v Abdul Gani Lone for distinguishing between a mandatory and a directory provision, the Court ruled that a suit instituted in violation of the mandatory provision (i.e.), without exhausting mediation as a pre-condition) which does not also praying for interim relief of any sort should be rejected under Order VII Rule 11 .

A court is therefore entitled to reject such a suit Suo motu even in absence of any objection from the defendant. However, this ruling was prospective in nature with pending proceedings not being affected . In other words, for disputes which fall under the umbrella of joint venture, the litigants have to take notice that filing of a plaint without taking care of the mandatory provision of section 12A would result in rejection of the suit on the grounds of lack of jurisdiction. Put differently, compliance with section 12 A should be plead and prove as a matter of fact as it cannot be assumed to have taken place merely because of the filing of the suit.

A court is therefore entitled to reject such a suit Suo motu even in absence of any objection from the defendant. However, this ruling was prospective in nature with pending proceedings not being affected. In other words, for disputes which fall under the umbrella of joint venture, the litigants have to take notice that filing of a plaint without taking care of the mandatory provision of section 12A would result in rejection of the suit on the grounds of lack of jurisdiction. Put differently, compliance with section 12 A should be plead and prove as a matter of fact as it cannot be assumed to have taken place merely because of the filing of the suit.

The Procedural Sequence
When litigating a joint venture dispute, the following procedural sequence is generally adopted.
1. Identification of cause of action by drafting the plaint accordingly, since mistakes in this regard could result in early dismissal.
2. Interpretation of the dispute resolution clause and, if the contract stipulates arbitration, the court’s jurisdiction could be ousted under section 8 of the Arbitration and Conciliation Act.
3. Pre-institution mediation, unless the dispute is of an exceptionally urgent nature.
4. Drafting the plaint which must include a statement as to which court has jurisdiction, the value and must comply with section 12A.
5. Making of the Statement of Truth, which is a commercial pleading in the form of an affidavit.
6. Institution, scrutiny, and service of process. The defendant must file a written statement within thirty days, or at most 120 days , and failure to do so results in the defendant being unable to defend the action.
7. Disclosure of documents and issues, which narrows down the dispute for trial.
8. Evidence, submissions, and judgment, which could include an award of damages or an injunction.
9. Appeal to the Commercial Appellate Division.

Urgent Interim Relief and Supporting Precedent
Disputes in the context of joint ventures often require urgent interim relief, given the potential for immediate encashment of bank guarantees, realisation of assets or breach of confidentiality. Section 12A, however, provides a specific exception to the mandatory requirement to refer a dispute to mediation, which is appropriate in circumstances where the dispute requires urgent attention. In particular, the court will only grant interim relief on an urgent basis if it is satisfied that there is a prima facie case, the balance of convenience and the risk of irreparable injury. Courts are particularly aware that there is a difference between a dispute where there is an arguable case for urgency and one where the claimant is seeking to use urgency as an excuse to avoid mediation, and a claimant seeking to rely on the exception to mediation in section 12A will need to be careful not to fall foul of this distinction.

In addition to the guidance in Patil Automation, BGS SGS Soma JV v NHPC Ltd also provides useful guidance on the seat of arbitration in the context of cross-border joint ventures, whereas Kandla Export Corp v OCI Corp provides a useful reminder that the Commercial Courts Act does not create any appellate jurisdiction beyond that provided for in the Arbitration Act. This is a helpful reminder, given that the mandatory requirement to submit a dispute to mediation and the limited appellate jurisdiction in relation to arbitration awards are both set out in the Arbitration Act and should not be conflated.
Critical Analysis and Evaluation

Section 12A is a well-meaning law that is currently undermined by the absence of necessary infrastructure. Mediation centres are concentrated in major cities, which means that businesses operating from different states encounter vastly different realities when it comes to disputes that require a pre-litigation mediation.
Further, the law does not define “urgent interim relief,” creating ample opportunities for manipulation. Courts can interpret this notion differently, and some people can take advantage of the situation and try to request interim relief every time they feel like they are losing a case.

In case of a dispute between two companies that entered into a joint venture, the relationship between them is usually beyond repair by the time the conflict is brought to court. This dynamic creates an incentive for both sides to avoid putting in effort into mediation procedures, even when they are required to do so. By contrast, English courts promote settlements at all stages of proceedings, rather than allowing or enforcing them at a specific stage, such as before filing a lawsuit as in the case of India. The difference in approach may create the impression that in India, mediation is more of a hindrance that is better gotten rid of as soon as possible.

Further, defendants often raise objections regarding jurisdiction and the number of claims, and sometimes successfully defend against the lawsuits by proving that the dispute is not commercial in nature or that another court has jurisdiction over the case. Either way, objections add to the costs and procedural complexity of litigation in India. Coupled with the requirement to enter into mediation, they significantly reduce the efficiency of the dispute resolution process.
In order to improve the situation, India needs to provide clearer definitions of “urgent interim relief” and establish more mediation centres in different parts of the country. Finally, companies need to include more detailed dispute resolution clauses in their contracts.

All of this being said, it is important to note that the initial success of Section 12A should not be overlooked. The number of cases in which mediation has culminated in a settlement should be used as a metric of success, not the percentage of dismissed cases due to the failure to engage in mediation. As things stand, there is no source that provides statistics on the number of successful mediations. Therefore, it is impossible to conduct an accurate analysis; right now, everyone is relying on anecdotes and the few published cases of successful mediation that can be found online.

Conclusion
The Commercial Courts Act 2015 and (more importantly) section 12A represent a shift in Indian law towards encouraging negotiation over litigation in high-value commercial disputes, to the extent that even where litigation is inevitable, it must come after mandatory good-faith negotiations. In the context of joint venture disputes, which are typically disputes between parties who have every reason to negotiate a settlement, this is a sensible approach. The issue of whether section 12A has to be followed in joint venture disputes has been laid to rest by Patil Automation’s ruling on the first issue. What the case does not resolve is a more intriguing issue: whether mediation as a precondition to litigation, rather than an optional aid to litigation, causes settlements that neither party would have otherwise accepted. Counsel for joint venture defendants in similar circumstances would be wise to remember that mediation as a precondition to litigation may be the only opportunity to salvage a valuable ongoing business relationship, before the other side manages to finally beat them in court.

Frequently Asked Questions (FAQs)
1. Is pre-institution mediation under section 12A compulsory, or can the parties agree to dispense with it?
It is compulsory, as held by Patil Automation, and not open to the parties to the dispute to contract out of it. A plaintiff cannot, if they do not have an urgent relief claim, evade the mandatory mediation by pleading their right to urgent remedy, because they will always run the risk that the plaint will be rejected for this reason, even if the defendant does not take up the point.
2. Can a party sidestep mediation by praying for an injunction?
They cannot, unless they have a genuine claim for urgent relief. Courts are increasingly being cautious about granting relief on an application, if there is an underlying dispute which requires pre-institution mediation, because the balance of convenience and irreparable injury will be considered on a case-by-case basis, and one that comes up more than six months after the relevant breach is likely to cause such a motion to be met with a healthy degree of scepticism.
3. How long does pre-institution mediation take?
According to the 2018 Rules, the amicus has three months from the date of appointment, and the parties may agree to an extension for two further months, so a plaintiff would be well-advised to factor in three to five months before initiating proceedings.
4. Does the existence of an arbitration clause in the joint venture agreement negate the need for pre-institution mediation?
No, and conversely, the inclusion of a dispute resolution clause does not prevent the need for pre-institution arbitration. An arbitration clause, including a multi-tier one covering the appointment of mediators, is likely to have the effect of restricting the jurisdiction of the courts under section 8(1)(b) of the Arbitration and Conciliation Act, but this is a separate matter to whether the mediation process itself has been complied with. The two processes are separate and multi-tier clauses, to the extent that they require a party to comply with more than one dispute resolution method, are likely to require the satisfaction of all the conditions set out.
5. Is the Patil Automation decision retrospective?
No, as the Supreme Court ordered that it should be prospective only and came into force on 22nd August 2022. This means that cases brought prior to this date are not subject to the decision, while those brought subsequently are.
6. What can joint venture partners do to avoid this problem?
They can take legal advice on the dispute resolution clause in their contract and ensure that it does not create the possibility of the kind of conflict that brought about Patil Automation. If possible, advice should be taken prior to any disagreement arising.

References

Statutes and Rules
• Commercial Courts Act 2015 (India), ss 2(1)(c), 12, 12A, 13, 16.
• Commercial Courts (Amendment) Act 2018 (India).
• Code of Civil Procedure 1908 (India), Orders VI, VII, VIII, XV-A, XXXIX; ss 16–20.
• Arbitration and Conciliation Act 1996 (India), s 8.
• Legal Services Authorities Act 1987 (India).
• Commercial Courts (Pre-Institution Mediation and Settlement) Rules 2018 (India).
• Civil Procedure Rules 1998 (UK), r 1.4.

Cases
• Patil Automation Pvt Ltd v Rakheja Engineers Pvt Ltd (2022) 10 SCC 1 (SC).
• Ambalal Sarabhai Enterprises Ltd v KS Infraspace LLP (2020) 15 SCC 585 (SC).
• BGS SGS Soma JV v NHPC Ltd (2020) 4 SCC 234 (SC).
• Kandla Export Corp v OCI Corp (2018) 14 SCC 715 (SC).
• Swastik Gases (P) Ltd v Indian Oil Corp Ltd (2013) 9 SCC 32 (SC).
• Sharif-ud-Din v Abdul Gani Lone (1980) 1 SCC 403 (SC).
• Deepak Raheja v Ganga Taro Vazirani, 2021 SCC OnLine Bom 3124 (DB).
• Shahi Exports Pvt Ltd v Goldstar Line Ltd (Mad HC).

Government and Institutional Reports
• Law Commission of India, Report No 253, ‘Commercial Division and Commercial Appellate Division of High Courts and Commercial Courts Bill 2015’ (2015).