Piyush Rewatkar on Enforceability of Mediation/Conciliation Clauses in India

INTRODUCTION

In India, if parties have chosen arbitration as a method of dispute resolution by way of an agreement, then in case of any dispute between them they have to resort only to arbitration and the courts do not interfere in the matter. But this is not true for either mediation or conciliation; there is no explicit law delineating the role of the court if the parties have a mediation or conciliation clause in their agreement. In a lot of cases, even though parties have a mediation or conciliation clause in their agreement they continue to approach courts in case of a dispute, thus begging the question – what is the significance and the legal enforceability of mediation/conciliation clause mentioned in an agreement?  In trying to answer this question, this article provides an analysis of the legal enforceability of a mediation or conciliation clause in an agreement.

  • ORTHODOXY AS A BARRIER FOR ENFORCEMENT

There are three orthodox positions which act as barriers for the courts and the legislature of India in making any mediation or conciliation clause enforceable, those three positions are:[i]

  1. An agreement to agree can arise when an agreement contains obligations to enter into a subsequent agreement in the future. Such an agreement is void in law if circumstances are not specified in the initial agreement. Similarly, an agreement to mediate is void.
  2. The requirement of good faith is fatal because it is not possible to ascertain whether party mediated in good faith; and
  3. The vagueness of such agreements because of lack of procedural specification

The developments of these issues have taken place in various places around the world. Talking about the first issue, it considers when the parties are getting into an agreement to mediate it is like parties are getting into an agreement where they are agreeing to agree to reach a settlement while being involved in mediation in case of a dispute and therefore it says as an agreement to agree is not good in law likewise agreement to mediate should also not be valid. A similar view was taken by the English court in Walford v. Miles[ii] where it was held that “if the law does not recognize a contract to enter into another contract, similarly, it cannot recognize contract to negotiate.”[iii] Although this case was concerned with the agreement to negotiate for the sale of a photographic processing business, this view of the court has not been adopted by the other courts specifically dealing with the cases of enforceability mediation/conciliation clauses.  For example, the English court in the case of Dunnett v.Railtrack[iv] clarified that the argument “agreement to mediate is void as agreement to agree” has no application in the case where an agreement to mediate/conciliate is enforced because the court said that an agreement to mediate is an agreement to undergo a process, not an agreement to achieve a result. In Lilian Halsey v. Milton Keynes General NHS Trust,[v], Dyson L.J. noted that “mediation can benefit parties by reducing the cost of the proceedings, offering a range of solutions that are not available to the courts, such as an apology, and the potential for greater party satisfaction at the outcome of the process.”

The second issue, i.e. affirmation of good faith stipulates that even if the parties are made to sit for mediation/conciliation mandatorily, but do not participate in good faith, they will not reach a consensus and seek resolution of the dispute in court due to this, thus rendering the role of mediation or conciliation nugatory.

The answer to this question may be that there is no set of rules to ascertain whether the parties were participating in good faith or not but the courts have made some progress to resolve the issue. Some of the important cases are as follows:

The Supreme Court of South Wales in Aiton Australia Pvt. Ltd. v. Transfield Pty Ltd.[vi] said that “there may be vagueness about a ‘good faith’ obligation, the court cannot be too ready in striking down a contractual clause as void if it is possible to attribute a meaning to a vague term that corresponds to a party’s intentions.”  What is enforced is not co-operation and consent, but participation in the process from which co-operation and consent might come.[vii]

A duty to negotiate in good faith is not much practical as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. Lord Ackner in Walford v Miles[viii] stated that each party involving in the negotiations is entitled to pursue his (or her) own interest, as far as they avoid misrepresentations.  In United Group Rail Services Limited v Rail Corporation[ix] the court said that to check whether the party negotiated in good faith court could see the honesty and the genuineness of the party by the approach it made for settling their dispute.

The third issue – lack stipulation, refers to the point where the agreement to mediate or conciliate can only be enforced only if the parties have properly made a stipulation in the agreement. If the words in the agreement are that the parties “may” or “might”  opt for  mediation or conciliation, then that agreement cannot be obligated on these vague terms, hence if there is a lack of stipulation, an agreement to mediate or conciliate, cannot be enforced.

In the landmark English judgment, Cable & Wireless plc v IBM United Kingdom Ltd [x], the court held that an agreement to mediate is an agreement ancillary to the main contract capable of being legally enforced, sand mere lapse in drafting that does not affect the substance of the agreement should not render the entire mediation agreement void.

While Cable & Wireless[xi] focused on the addition of the mediation clause in the agreement rather than focusing on small lapses in the drafting of the agreement, the more conventional courts are still stuck to the orthodox position such as in the case of Hyundai Engineering[xii] where the court refused to enforce the agreement to mediate because of a lack of stipulation in it.

At present, the courts in Australia, the U.S., U.K., and various other jurisdictions have very little development and there is no explicit law as such in making an agreement to mediate or conciliate mandatorily enforceable. Though the courts are making efforts towards the enforcement of such clauses depending upon the case to case basis.

  • DEVELOPMENT IN INDIA

A dispute resolution clause providing for mediation would be enforceable in India in the sense that if a suit is filed, then a court would most likely enforce the clause and send parties to mediation in pursuance of its power under section 89 of the Civil Procedure Code (CPC), 1908. However, there is no provision in any law in India talking about sanction if parties fail to adhere to the mediation or conciliation clause in their agreements before approaching courts. Under this section of the CPC, the court tries to make parties settle through various modes including mediation/conciliation irrespective of the fact that whether there was an agreement to mediation/conciliation or not.

Nonetheless, without proper legislation on the matter of enforceability of the mediation/conciliation clause, there has been development on this issue through various cases where the courts have given importance to the existence of such clauses. In the case of Nirman Sindia v. Indal Electromelts Ltd[xiii], the court held that “When the parties to a contract agree to any special mode for resolution of the disputes arising out of the agreement and they are bound to comply with the mode prescribed under the agreement. Without resorting to the first step provided for the resolution of the dispute in the agreement they cannot jump to the second step or to the final step to settle the disputes between the parties.”[xiv] The Supreme Court agreed with the Kerala High Court on this point in the case of Sushil Kumar Sharma v. Union of India[xv] and said that if the parties have agreed for mediation or conciliation and in case a dispute arises, and if by this process dispute resolution fails and then goes for arbitration, then in this case, the parties mandatorily will have to exhaust the mediation or conciliation remedy  before going to arbitration.[xvi]

  • CONCLUSION

Therefore, we can conclude from the above discussion that the courts around the world are definitely taking the pro mediation/conciliation stance keeping aside the orthodox position. Even though the courts are limited by the parties’ agreement but if there is a contract with carefully drafted mediation/conciliation clause in it then a law could be made where some sort of penalty can be imposed on the parties for non-compliance of such clauses. Noncompliance with a mediation or conciliation clause can also be taken as non-compliance with any other clause of a contract and the penal provisions will apply accordingly. Furthermore, with the increasing docket explosion along in courts, the legislature also needs to adopt a stricter view in framing legislation so that adherence to such clauses can be made and sanctions imposed in case of failure of adherence.

 

[i] LYE Kah Cheong, Apresistent aberration: The Movement to enforce agreements to Mediate, Singapore academy of law Journal pp.196, 2008

[ii] 1992 2 AC 128

[iii] Walford v. Miles 1992 2 AC 128

[iv] Susan Dunnett v. Railtrack Plc, [2002] 2 All ER 850.

[v] [2004] 4 All ER 920.

[vi] (1999) NSWSC 996 AT [129]

[vii] Hooper Bailie Associated Ltd v. Natcon Group Ltd 1992 28 NSWLR 194.

[viii] [1992] 2 AC 128

[ix] (2009) NSWSCA 177,

[x] [2003] BLR 89 (QBD) at 96.

[xi] Cable & Wireless plc v IBM United Kingdom Ltd [2003] BLR 89 (QBD) at 96.

[xii] Hyundai Engineering and Construction Co. Ltd. v. Vigour Ltd. [2004] HKCU 440 (HC) at [94]

[xiii] AIR 1999 Ker 440.

[xiv] Nirman Sindia v. Indal Electromelts Ltd AIR 1999 Ker 440.

[xv] (2005) 6 SCC 281.

[xvi] Sushil Kumar Sharma v. Union of India (2005) 6 SCC 281.

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