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Monday, July 02, 2001



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Mediation: Effective alternative to dispute resolution

Sanhita Chakraborty

THE QUEST for the ideal recovery system is endless. This is more so in the Indian context, where delays in the system are endemic, costs are stupendous and retribution never an adequate deterrent. Seldom does an institution recover all its monies.

The wilful defaulter almost always drags litigation on endlessly and the genuine promoter is usually saddled with debts he cannot liquidate easily. As the system is unlikely to change overnight, all effort must be directed towards finding solutions befor e resorting to litigation. Arbitration is one such method. This article suggests another.

The article focusses on mediation, an alternative dispute resolution (ADR) process institutionalised in India by the Code of Civil Procedure (Amendment) Act, 1999. Mediation is defined in Black's Law Dictionary as ``a private, informal dispute resolution process in which a neutral third party, the mediator, helps disputing parties to reach an agreement.''

In contrast, arbitration is a formal, quasi-judicial process where a neutral third party, `the arbitrator' renders a binding award on the basis of material placed before him. Arbitration proceedings closely mirror proceedings in a court of law.

In a voluntary effort, the mediator facilitates communication between parties and encourages settlement. There is, unlike in arbitration, considerable latitude available to the mediator, as he can privately discuss the merits of a dispute with each part y individually -- unthinkable in the adversarial arbitration process.

In this context, there seems to be a considerable lack of clarity as to the scope of the words `mediation' and `conciliation'. There is, for example, no consistency in the use of these terms worldwide, and a number of ADR systems perceive them to be syno nymous. The US and Australia use the term `mediation' while `conciliation' is commonly used in China, Japan, Thailand and Singapore.

Black's Law Dictionary also fails to resolve this distinction, if any, by defining the word `conciliation' as ``the adjustment and settlement of a dispute in a friendly, unantagonistic manner, used in courts with a view to avoiding trial and in labour di sputes before arbitration.''

It is interesting that the United Nations Commission on International Trade Laws (UNCITRAL) has rules for conciliation and not for mediation, while the World Intellectual Property Organisation (WIPO) has rules for mediation but none for conciliation. Eve n the CPC (Amendment) Act incorporates, for the purposes of mediation and conciliation, the language used in the UNCITRAL Rules for Conciliation, thus perpetuating this verbal ambiguity. One is also, of course, tempted to ask why a reference to both conc iliation and mediation is made in the CPC (Amendment) Act, if both are the same.

As the French arbitrator Professor Charles Jarrosson says, there is a subtle difference between mediation and conciliation -- one of degree rather than nature. Mediation is a more proactive form of conciliation, the latter being more passive in t he sense that the conciliator has an evaluative role as opposed to the facilitative role of the mediator. Unlike a mediator, who has to be active and see that justice is done, the conciliator is a withdrawn neutral.

Why mediate?

The primary reason for mediation is always that litigation is time-consuming and expensive, and a litigant typically has little control over the litigation and the final orders passed. Mediation, by comparison, has certain inherent advantages that are pa rticularly useful to a financial institution (FI).

In a typical Indian situation, mediation offers certain benefits. First, the process can be slotted into a specific time period, as the FIs and banks may deem fit. Second, the conduct of a borrower in the mediation process is a good indicator of his cond uct in future dealings. A promoter's reluctance to participate and co-operate in the mediation process or to repay dues, and his actions in the course of mediation, are indicative of his actions in future litigation and thus help chart the institution's future strategy, such as the timing of its recovery actions.

Moreover, the institution typically blocks up a portion of its resources to grant reliefs and concessions to its borrowers. Reschedulement of loans; waivers of compound interest and liquidated damages; and reduction in the rates of interest are extended to most defaulting borrowers. The conduct of the promoters in mediation helps identify the promoter/company to whom such concessions should justifiably be extended.

The Indian context

Mediation was first introduced into India by the Arbitration and Conciliation Act, 1996. Section 30 of the Act specifically encourages parties to seek mediation and conciliation even when arbitral proceedings are underway. The Act, however, does not draw up the rules for mediation as it does for conciliation, thus rendering the provisions a dead letter.

In 1999, the Government enacted the Code of Civil Procedure (Amendment) Act, 1999 (CPC Amendment Act) where a new Section 89 was introduced into the Code of Civil Procedure. The new Section introduces the concept of what is known as `judicial mediation', as opposed to `voluntary mediation'. A court can now identify cases where an amicable settlement is possible, formulate the terms of such a settlement and invite the observations thereon of the parties to the dispute.

The observations received by the Court thereafter can be used to reformulate, if necessary, an acceptable settlement. Where the Court comes to the conclusion that mediation is the appropriate mode of settlement, it may itself act as a mediator and `shall effect a compromise between the parties'. One gets an idea of how a mediating authority functions by observing the workings of the Board for Industrial Financial Reconstruction, (BIFR).

The BIFR, in keeping with its envisaged role as a mediator, cannot compel any institution or party to participate in the rehabilitation process against their wishes. In 1991, the Government issued a Notification directing public enterprises to attempt to resolve pending disputes with the assistance of a Cabinet Committee, before litigating against each other, to prevent dissipation of public resources.

Mediation being a voluntary and informal process, there is no necessity for incorporating a clause in the Loan Agreement recommending its adopting. If a party is not interested in mediation, incorporating the provision would serve no purpose, as no dispu te can be resolved without support from both sides. A more practical approach would be to invite the other side for mediation and, once the party agrees, draw up a Pre-Mediation Agreement. A Pre-Mediation Agreement contains basic details pertaining to th e process, such as the names of the mediator, the parties and their counsels, the place and number of sittings, the nature of sessions and form of settlement, and so on.

There have been incidents where parties known to an FI have approached it in a bid to mediate between the institution, the defaulting borrower and prospective purchaser of the borrower's properties. The mediator, as it were, offers to facilitate a sale s uch that the property is transferred to the purchaser, the purchaser remits the purchase consideration to the FI, and the FI agrees to withdraw recovery proceedings instituted against the company or releases the company from its liabilities.

The inter se agreements for sharing of security can also incorporate provisions where securities common to all lenders can be disposed of, as part of a mediation-backed settlement. Proceedings before Debt Recovery Tribunals (DRTs) typically involve a two -stage process. The first, where the Presiding Officer actually verifies the quantum payable to an institution and, second, the recovery stage, where a Recovery Officer sells off assets in an effort to pay the plaintiff.

When to seek it

Ideally, mediation should be resorted to before litigation, when positions are more flexible and before substantial sums have been spent. Typically, there is a time difference between an account becoming irregular and recovery suits being filed against a company. It is in this period that mediation may be resorted to by companies between whom channels of communication have broken down.

It could be a handy tool to assess the promoters' commitment, preparedness to meet eventualities, capacity to bring in additional contribution or enhance security, before the company slips further and finally becomes a non-performing asset (NPA) or befor e a hostile atmosphere sets in.

Every FI has a certain component of defaulters whose businesses have failed or who are in distress on account of legitimate reasons. There is yet another class of wilful defaulters, who typically render their businesses sick after siphoning off funds fro m the company. Financial distress in these companies is induced. In both types of cases comes a stage when entreaties asking the companies to pay up no longer generates a satisfactory response. It is at this stage when the institution could consider invi ting both sides to try mediation.

Mediation also proves useful when it is used to help sides take positions in complex financing arrangements. While negotiating structured financial deals, there could be times when mediators are required to assist the parties analyse competing positions. Given the fact that every representative can at best appreciate his own position, a mediator sometimes helps one side perceive the inherent logic in the opposite point of view.


The success of mediation always depends on goodwill and a willingness to resolve disputes. Its voluntary and informal nature allows parties to evaluate the progress made in resolving their dispute and offers them the option to exit an unfruitful exercise ; such freedom is not available to those involved in litigation or arbitration.

Despite the factors limiting the efficacy of mediation, it undoubtedly remains as a strong tool in the hands of participating institutions, to devise a mutually acceptable and workable reschedulement of debt in potentially stressful cases. By and large, mediation tends to succeed, and personal commitment and involvement in finding solutions could be more effective than Court orders.

Case studies

The Microsoft anti-trust case is a fascinating study of the mediation process. Judge Thomas Penfield Jackson hearing the matter referred it for voluntary mediation to Justice Richard A. Posner, a sitting Federal US Judge, in November 1999. The entire pro cess of mediation took four months as opposed to two- to three-year period it was likely to take in the courts. Expressing his disappointment at the failure of the process, Judge Posner made certain observations about the criticality of success in such m atters and how the success of mediation would have been in national interest.

According to Justice Posner, almost twenty drafts of the consent decree were prepared in the matter, but disagreements, between the parties concerning the likely course, the outcome and consequences of continued litigation as well as the implications and ramifications of alternative terms of settlement, were too deep seated to be bridged.

The last word about the mediation came from Bill Gates himself who, while insisting that the details of the mediation were confidential, pointed out that ``it was unfortunate that a settlement wasn't possible. Microsoft had offered concessions beyond wha t a court would have requested, and mediation failed because of the difficulty in finding a common ground among so many parties.''

In 1999, Afro-American farmers filed what became the largest civil rights class action lawsuit in US history. The suit, namely, Black farmers v. The Department of Agriculture, alleged discrimination by US Dept. of Agriculture (USDA) in delaying or denyin g loans and withholding technical assistance crucial to the farmers' livelihoods. The parties agreed to mediation pending litigation, with the USDA taking the lead. Though in the early stages eight attempts failed, mediation finally succeeded, making it the largest recovery in a civil rights case in the history of the country and set a precedent, avoiding long and costly court proceedings in future civil cases. Asked why the Government agreed to such a large settlement, an official responded saying that as the USDA decided it could not win the suit in a court -- as there had been discrimination -- they thought it best to arrive at a settlement through mediation rather than pay the huge damages which a court order would have entailed.

Mediation, thus, supplements other efforts made to recover monies, so that litigation is resorted to only in the extreme case of a failure of efforts at amicable settlement. While it is not always the final solution, mediation is successful in a majority of cases, and that alone justifies increased resort to it.

(The author is Manager -- Legal, ICICI, New Delhi.)

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