For businesses, unpaid invoices and broken contracts are a part of life. When negotiation fails, the instinct is to file a suit. But since 2018, most commercial disputes in India cannot go straight to court: they must first pass through a statutory pre-institution mediation.
Handled strategically, this step is not a delay — it is an opportunity. A large number of commercial claims settle at this stage, often within weeks, without court fees, years of trial or damaged business relationships.
This guide explains when Section 12A applies, how the process runs in Delhi, what happens if the other side ignores it, and how to make pre-litigation mediation work in your favour.
What is a 'commercial dispute'?
Section 2(1)(c) of the Commercial Courts Act defines commercial disputes broadly. It includes disputes arising from ordinary transactions of merchants, bankers and traders; export and import of goods and services; supply and distribution agreements; franchising; partnership and shareholder agreements; construction and infrastructure contracts; intellectual property; insurance; technology development; and agreements relating to immovable property used exclusively in trade or commerce.
The Act applies where the specified value of the dispute is three lakh rupees or more. In Delhi, commercial suits are heard by the Commercial Courts at the district level and the Commercial Division of the Delhi High Court, depending on value.
When is pre-institution mediation mandatory?
Section 12A states that a suit which does not contemplate any urgent interim relief shall not be instituted unless the plaintiff first exhausts the remedy of pre-institution mediation. In Patil Automation Pvt. Ltd. v. Rakheja Engineers Pvt. Ltd. (2022), the Supreme Court held this requirement to be mandatory and that suits filed in violation are liable to be rejected under Order VII Rule 11 CPC, with prospective effect from August 2022.
The exception is urgent interim relief — for example, an injunction to stop the sale of disputed goods, misuse of a trademark or encashment of a bank guarantee. Courts examine whether the urgency is genuine; a claim for interim relief cannot be a mere device to bypass mediation.
- Mediation required: Recovery of unpaid invoices, breach of contract damages, partnership accounts — where no urgent relief is needed.
- Mediation may be skipped: Suits genuinely seeking urgent injunctions or attachment, such as IP infringement or bank-guarantee encashment.
The Section 12A process in Delhi, step by step
The procedure is governed by the Commercial Courts (Pre-Institution Mediation and Settlement) Rules, 2018. In Delhi, applications are made to the relevant District Legal Services Authority.
- 1. Application: The claimant files an application in the prescribed form with the DLSA, with a brief statement of the claim and a nominal fee.
- 2. Notice: The Authority issues notice to the opposite party to appear and consent to mediation, typically within a short period.
- 3. Non-starter report: If the opposite party does not appear or refuses to participate, the Authority issues a non-starter report and the claimant may file the suit.
- 4. Mediation sessions: If both parties participate, a mediator conducts sessions — jointly and separately — to explore settlement.
- 5. Settlement or failure report: A settlement is reduced to writing and signed; otherwise a failure report is issued, clearing the way for the suit.
Timelines and limitation
Pre-institution mediation must be completed within three months from the date of the application, extendable by a further two months with the parties' consent. Importantly, the time spent in pre-institution mediation is excluded when computing the limitation period for filing the suit.
Even so, do not wait until the last days of limitation. Start mediation early so that a non-starter or failure report is available well before your claim becomes time-barred.
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Is a pre-institution settlement enforceable?
Yes. A settlement reached under Section 12A, signed by the parties and authenticated by the mediator, has the same status and effect as an arbitral award on agreed terms under the Arbitration and Conciliation Act, 1996. It can be enforced in the same manner as a decree of a court.
That makes careful drafting essential. Include the exact amounts, payment dates, interest on delayed payment, consequences of default (such as acceleration of the entire balance), and mutual releases where appropriate.
Special options for MSME suppliers
If you are a micro or small enterprise registered under the MSMED Act (Udyam registration) and a buyer has delayed payment beyond the agreed period (maximum 45 days), you have additional protection. Section 16 entitles you to compound interest at three times the bank rate notified by the RBI on delayed payments.
Under Section 18, you may refer the dispute to the Micro and Small Enterprises Facilitation Council, which first attempts conciliation and, failing that, arbitrates the dispute. Delhi's facilitation councils can be approached through the MSME Samadhaan portal. Choosing between Section 12A mediation, the MSME Council and a direct commercial suit is a strategic decision best taken with a lawyer.
How to use pre-litigation mediation strategically
The most successful claimants treat Section 12A mediation as the opening move of their litigation strategy, not a formality.
- Send a strong legal notice first: A well-drafted demand notice sets out your claim and interest and often prompts early settlement.
- File a clear claim statement: Attach invoices, ledgers, purchase orders and correspondence so the other side sees the strength of your case.
- Have the suit ready: If the opposite party knows the plaint is drafted and ready, settlement becomes more attractive.
- Be flexible on structure: Instalments with a default clause can recover more money faster than a decree years later.
- Document everything: Ensure the settlement covers interest, costs, GST implications and connected cheque-bounce cases.