Alternative Dispute Resolution in Civil and Commercial Disputes

Civil litigation is the natural home of settlement, because the subject matter is almost always a right in personam which the parties are free to compromise. The Code of Civil Procedure, 1908 provides three distinct routes: a compromise recorded in the suit under Order XXIII Rule 3, a reference by the court to one of the four modes under Section 89, and a reference to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 where the parties have contracted for it. For commercial suits of a specified value, Section 12A of the Commercial Courts Act, 2015 adds a compulsory attempt at mediation before the suit can be filed at all.

1. The Statutory Routes

The points at which a civil suit may leave the adjudicatory track, and where it returns

1. Compromise of the suit. Order XXIII Rule 3 permits the court to record a lawful agreement or compromise in writing and signed by the parties, and to pass a decree in its terms. The decree may cover matters beyond the subject matter of the suit, though it is executable only as to the subject matter of the suit.
2. Reference under Section 89. Where the court finds elements of a settlement, it may refer the dispute to arbitration, conciliation, judicial settlement including a Lok Adalat, or mediation. Order X Rules 1A to 1C require the court, after recording admissions and denials, to direct the parties to opt for a mode and to fix the date of appearance before the forum chosen.
3. Reference to arbitration under Section 8. Where the subject matter of the suit is covered by an arbitration agreement, the judicial authority must refer the parties to arbitration on the application of a party made not later than the date of submitting the first statement on the substance of the dispute, unless it finds prima facie that no valid agreement exists.
4. Lok Adalat. Section 20 of the Legal Services Authorities Act, 1987 permits a reference either on the agreement of the parties, or on the application of one of them where the court is satisfied that there are chances of settlement, or suo motu where the court thinks the matter appropriate.
5. Pre-institution mediation. For commercial disputes of a specified value where no urgent interim relief is contemplated, Section 12A of the Commercial Courts Act, 2015 requires the plaintiff to exhaust mediation before instituting the suit.

2. What May Be Settled

The general rule is that a civil claim capable of being compromised may be settled through any of these routes. The exceptions arise where the relief affects persons who are not parties, or where a statute confers exclusive jurisdiction. A compromise in a representative suit under Order I Rule 8 requires notice to the persons represented; a compromise on behalf of a minor or a person of unsound mind requires the leave of the court under Order XXXII Rule 7, and without such leave it is voidable at the instance of the minor. Suits relating to probate, insolvency and the status of persons are outside the field, as are proceedings in which the decree operates in rem.

3. Money, Property and Tort Claims

In practice the bulk of civil settlement work falls into a small number of categories. Money suits and bank recovery matters settle on payment terms, often with a schedule of instalments and a default clause, which is an arrangement that a decree could not conveniently produce. Partition suits settle by an agreed division, frequently drawn up with the assistance of a commissioner. Motor accident claims settle on quantum, and the Supreme Court in M.R. Krishna Murthi v. New India Assurance Co. Ltd., (2020) 15 SCC 493 directed attention to mediation cells for this class of case. Specific performance suits settle by a variation of the terms of the contract, such as an increase in the price against immediate conveyance. Claims under Section 138 of the Negotiable Instruments Act, 1881, though criminal in form, are compoundable and are among the largest categories disposed of in National Lok Adalats.

4. Commercial Suits and the Section 12A Gateway

A commercial dispute is defined by Section 2(1)(c) of the Commercial Courts Act, 2015 by a long enumeration covering ordinary transactions of merchants, construction and infrastructure contracts, carriage of goods, distribution and licensing agreements, joint venture and shareholder agreements, intellectual property disputes, insurance and reinsurance, and the like. The specified value is the threshold fixed by Section 2(1)(i), which was reduced from one crore rupees to three lakh rupees by the amendment of 2018.

The mediation is administered by the authorities constituted under the Legal Services Authorities Act, 1987, and the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018 prescribe the procedure and a period of three months, extendable by two months with the consent of the parties. The period is excluded in computing limitation.

5. Arbitration in Civil and Commercial Matters

Where the contract contains an arbitration clause, the dispute leaves the civil court entirely. Section 8 requires the judicial authority to refer the parties to arbitration, and Section 5 confines judicial intervention to the occasions provided in Part I of the Arbitration and Conciliation Act, 1996. The residual role of the civil court is to grant interim measures under Section 9, to appoint the tribunal under Section 11 where the agreed procedure fails, to assist in taking evidence under Section 27, to hear a challenge under Section 34 and an appeal under Section 37, and to execute the award under Section 36. Arbitrability is governed by Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 and by the fourfold test in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.

6. Effect of Settlement on the Suit

7. Related Topics and Provisions