India's banking sector assumes a crucial role in the nation's economic progress. To bolster this vital sector, it is imperative to embrace alternative dispute resolution mechanisms for addressing commercial disputes, as well as tackling issues related to defaults in home loans, retail loans, and even in cases involving restructuring and One Time Settlements. Recognizing the value for international practices and methods for settling commercial disputes, the UNCITRAL Model Law on International Commercial Conciliation (2002) was adopted by the UN General Assembly. [This was based on the report of the Sixth Committee (A/57/562 and Corr.1)] 57/18, which ultimately culminated in the Model Law on International Commercial Conciliation of the United Nations Commission on International Trade Law.1 Mediation Act 2023 majorly draws support from the Model Law.

India has made significant progress in adopting alternative dispute resolution mechanisms (ADR). The Mediation Act of 2023 represents yet another forward stride in this ongoing journey, establishing a comprehensive legal framework to encourage and facilitate mediation across a wide spectrum of disputes. This article delves into the rationale behind advocating for mediation in India's banking industry, discusses the pivotal provisions of the Mediation Act and examines its far-reaching implications for the sector. ADR mechanisms in the banking sector.

There are already ADR mechanisms available through various schemes and enactments. Notably, the Centre for the Alternative Dispute Resolution in Banking aims to settle disputes between banks or non-banking financial institutions and consumers in a cordial, balanced and timely manner.

The Reserve Bank of India (RBI) also operates the Banking Ombudsman Scheme, which provides an avenue for resolving disputes between customers and banks without litigation.

Various other regulatory authorities also actively promote ADR. While, Consumer Mediation Cells are established under the Consumer Protection Act, Lok Adalats have been established as an alternative dispute resolution, particularly in cases related to motor accidents, family disputes, and other civil matters including bank default. On the other hand, the Industrial Dispute Act also provides for conciliation, arbitration, and adjudication mechanisms to resolve disputes between employers and employees in industrial matters. Furthermore, RERA authorities have the power to promote conciliation and dispute resolution between builders and homebuyers to address grievances related to real estate projects. The Family Courts Act, 1984 also aims to provide speedy and amicable resolution of family disputes, including divorce, maintenance, and custody matters. Lastly, under the Motor Vehicles Act, 1988, specialized tribunals handle compensation claims arising from motor vehicle accidents, with an emphasis on speedy dispute settlement.

Significance of Mediation: Mediation is a voluntary, non-adversarial process that fosters amicable dispute resolution. In the context of India's banking industry, it offers several compelling advantages. The major advantage being that of confidentiality. Mediation proceedings are confidential, enabling banks and the customer to discuss sensitive financial matters privately. This confidentiality is crucial when negotiating loan settlements or restructuring. Further, mediation allows for amicable dispute resolution, which enhances customer satisfaction and retention compared to the adversarial nature of litigation.

Flexibility: Mediation introduces a dynamic approach for creating mutually agreeable solutions, a facet of particular significance in One Time Settlements (OTS), loan restructuring, and rescheduling scenarios. It facilitates the formulation of tailored, mutually satisfactory solutions that align with the unique requirements and circumstances of the involved parties. The Mediation Act provisions extend the reach of these settlements and restructuring procedures, providing them with the enforceability akin to a court decree, as per the provisions outlined in the Civil Procedure Code.

The Mediation Act 2023 aims to enhance the effectiveness of mediation in India

The Act introduces several crucial provisions that apply to a wide range of disputes, including those within the purview of the banking industry. Some key provisions are:

Expanded Definition of Mediation

The Act broadens the scope of mediation to include pre-litigation mediation, online mediation, and community mediation.2 This recognizes the evolving nature of dispute resolution practice.

Applicability

The Act applies to mediations conducted in India, which encompasses disputes involving parties residing or conducting business in India.3 It also covers international mediations with Indian involvement,4 where mediation is conducted under the Mediation Act and one of the parties is covered under section 2 of the Act

Matters Fit for Mediation

While certain disputes such as criminal offences, tax & penalty related issues are excluded from mediation, the Act also expands the scope beyond civil and commercial disputes5 to encompass compoundable offenses.

Mediation Agreement

Parties can enter into mediation agreements in various forms, including separate agreements or clauses within existing contracts or through a letter or email (satisfying requirement of IT Act 2000), by way of pleadings in a suit or any other proceedings.6 This flexibility ensures that disputes can be referred to mediation at any stage.

Pre-Litigation Mediation

The Bill initially mandated pre-litigation mediation for civil and commercial cases, but recommendations led to a shift toward voluntary mediation before litigation commences.7 It may be noted that Section 12A of the Commercial Courts Act, 2015 mandates all disputes falling within the definition of "Commercial Dispute" under Section 2(1)(c) of the Commercial Courts Act, which are valued Rupees 3 Lakhs or more, shall not be instituted unless the plaintiff mandatorily exhausts the remedy of Pre-Institution Mediation.

Interim Orders

The Act empowers courts to issue interim orders to protect the interests of parties during mediation proceedings.

Appointment of Mediators

Parties can agree on the appointment of mediators, with foreign mediators subject to prescribed qualifications. In the absence of an agreement, a mediator can be appointed from a panel maintained by a Mediation Service Provider.8

Time Limit

The Act imposes a time limit of 120 days for mediation proceedings, extendable by mutual consent for up to 60 additional days.9 This ensures that mediation remains an efficient process.

Confidentiality

Mediation proceedings and communications within them are strictly confidential, offering a safe space for open discussions and negotiations.10

Mediated Settlement Agreements

Such agreements are required to be in writing, signed by all parties, and enforceable as court decrees.11

Challenge

Mediated settlement agreements can be challenged on specific grounds, including fraud and impersonation.12

Court/Tribunal referred Mediation

The Courts and Tribunals can also refer the parties to undertake mediation at any stage of the proceedings.13

Mediation settlement agreements in finance matters:

The utilization of mediation and alternative dispute resolution (ADR) in financial matters has been a well-established practice. In the United States, banks and financial institutions frequently turn to mediation to resolve various disputes, including lender-borrower conflicts, mortgage disputes, and issues related to complex financial transactions. One notable example is the mediation process used during the subprime mortgage crisis of 2008. Mediation played a pivotal role in facilitating agreements between banks and borrowers, resulting in successful loan modifications and foreclosure alternatives, thereby averting a more substantial housing market collapse.

Singapore, a hub for international trade and finance, encourages mediation for resolving disputes in the banking and trade finance sectors. The Singapore International Mediation Centre (SIMC) plays a pivotal role in facilitating mediations for banking and finance disputes. Its success in mediating cross-border trade finance disputes demonstrates the effectiveness of mediation in complex financial matters.

In the context of international trade and export financing, Indian banks have successfully employed Mediation/ADR to resolve disputes related to documentary credits, letters of credit, and trade finance arrangements. Mediation has proven effective in cases involving discrepancies in shipping documents or disagreements over the terms of export financing agreements.

Indian retail banks have increasingly turned to informal mediation to address customer complaints and disputes related to issues such as unauthorized transactions, account discrepancies and loan servicing errors. ADR has helped banks enhance customer satisfaction and maintain their reputation by resolving complaints swiftly and amicably.

Scope of Mediation settlement in finance matters in India:

The above examples illustrate how mediation has become a valuable tool for the banking and financing industry in both domestic and international contexts. However, for the most part, the implementation of mediation within the banking industry has primarily focused on addressing customer grievances and similar disputes, with relatively infrequent use in cases of loan defaults. With the backing of the mechanisms provided by the Mediation Act, the mediation process can enhance the potency and efficacy of restructuring and the One Time Settlement (OTS) procedures. These settlements, even involving a single default, can now be legally enforced as a court decree, effectively addressing the longstanding challenge of the OTS and restructuring process, particularly within the context of inter-creditor agreement (ICA) mechanisms under RBI Guidelines. There is a strong case for integration of mediation arrangements under the RBI Guidelines of Compromise or Negotiated Settlements of Non-Performing Assets (NPAs)/ Compromise / Negotiated/ One Time settlement of Non-Performing Assets and ICA.

Further, the Banking and financial institutions often enter into collaborative agreements with various stakeholders, including other banks, financial technology companies, and government agencies. Mediation could be helpful to navigate complex contractual disputes that arise within these collaborations, allowing parties to continue their partnerships while resolving disagreements.

Thus, the Mediation Act could solidify the role of mediation in the banking sector, offering a structured and effective alternative framework for dispute resolution in a wide range of matters including financial matters.

The Mediation Act's provisions can also be extended to home loan and retail loan and credit card segments. Banks dealing with disputes in these areas can benefit from the Act's principles of confidentiality, voluntary resolution, and enforceable agreement, thus, saving on legal fees, court costs, and administrative burdens associated with lengthy court proceedings.

The Mediation Act 2023 aligns with international best practices for dispute resolution and supports India's commitment to promoting alternative dispute resolution mechanisms. Banks that embrace mediation are likely to be seen positively from a regulatory perspective.

If used proactively by the Banking industry, Mediation Act 2023 could emerge as a game-changer for India's banking sector, offering a structured and effective framework for dispute resolution that aligns with international best practices.

Scope of Mediation settlement under Insolvency and Bankruptcy Code, 2016:

Section 7 of the Act, enable the Court or tribunals to refer the parties to opt for mediation at any stage of the proceedings. This provision opens up the possibility of mediation in insolvency matters. Mediation could also be an effective alternative mode in pre-pack insolvency matters.

While pre-packaged insolvency was introduced with the intention of expediting the resolution of distressed companies and financial disputes, it has faced significant challenges due to its complexities and conditionalities. Pre-packaged insolvency, touted as a way to expedite the resolution process for distressed companies, has faced significant challenges since its inception. Some of the key issues include:

  • Pre-packaged insolvency introduces an added layer of intricacy, necessitating agreement from 66% of financial creditors (FC) regarding the selection of a resolution professional and the base resolution plan. This is in conjunction with retaining all other procedural prerequisites, including application filing, court hearings for admission, and the potential for protracted litigation preceding the corporate resolution process. Another significant stumbling block in pre-packaged insolvency is the imposition of conditionalities, including the requirement for dilution of stake of promoters in case of haircuts to financial creditors and compulsory bidding process if there are haircuts for operational creditors. Thus, determining the extent of these haircuts can be contentious, resulting in prolonged negotiations that defeat the purpose of a swift resolution process.
  • Pre-packaged insolvency does not replace the existing corporate insolvency resolution process (CIRP) rather it runs as per the normal CIRP by adding additional processes and challenges.

In contrast to the complexities and challenges of pre-packaged insolvency, the Mediation Act 2023 presents a streamlined and efficient alternative for resolving defaults which is a more efficient and less burdensome alternative for resolving disputes. Although challenges may arise when seeking concessions from statutory bodies, but in typical scenarios where a financial plan finds acceptance among banks/and OCs, pursuing the process outlined in the Mediation Act can prove to be a more effective approach.

Steps which the Banks/FIs in India could adopt to take full advantage of ADR in the form of Mediation Act, 2023:

Considering the manifold advantages offered by the Mediation Act, Banks and Financial Institutions (FIs) should consider taking the following steps to harness the full potential of this system:

Establish a Mediation Policy

Banks/FIs should formulate a comprehensive mediation policy that outlines the circumstances under which mediation will be considered, the types of disputes eligible for mediation, and the internal process for initiating and managing mediation.

Identify Suitable Cases

Banks/FIs should conduct a thorough assessment of their existing disputes and identify cases that are suitable for mediation. This includes cases related to recovery, restructuring and other financial disputes.

Financial Delegation of Power

Banks/FIs should empower & designate personnel within the organization with the authority to approve mediated settlements within predefined financial limits. This delegation of power streamlines the decision-making process and expedites settlements.

Mediation Clauses in Contracts

Banks can proactively include mediation clauses in their contracts. These clauses should specify that mediation will be the first step in dispute resolution before resorting to litigation.

Mediation Training

Bank staff should receive training in mediation techniques and principles. This training helps them understand the mediation process better and equips them to represent the bank effectively during mediation sessions.

Mediator Selection

Banks should maintain a list of qualified and accredited mediators. When a mediation is initiated, the bank can select a mediator from this list or seek recommendations from reputed mediation service providers.

Encourage Voluntary Mediation

Banks can encourage borrowers and counterparties to consider voluntary mediation before disputes escalate. They can also highlight the benefits of mediation, including confidentiality, speed, and cost-effectiveness.

Record Keeping

Maintain detailed records of all mediation proceedings, including agreements reached. This documentation is essential for enforcing mediated settlements under the Mediation Act.

Regular Review and Updates

Banks should regularly review their mediation policy and practices to ensure they align with evolving legal requirements and international best practices. Updates should be made as needed.

Regulatory Compliance

Ensure that all mediation practices and policies adhere to the regulatory framework set forth by the Mediation Act and other relevant laws.

Evaluate Success and Efficiency

Continuously assess the success and efficiency of mediation in resolving disputes. Analyze the time and cost savings achieved through mediation compared to traditional litigation.

Collaborate with Industry Associations

Collaborate with industry associations and organizations to share best practices and experiences related to mediation in the banking sector.


By adopting these steps and integrating mediation into their dispute resolution strategies, banks in India can harness the advantages offered by the Mediation Act 2023. This proactive approach not only promotes efficient dispute resolution but also helps maintain healthy relationships with customers, borrowers and counterparties, fostering a culture of mutually beneficial resolution within the banking industry. Besides that, adoption of mediation and ADR could save huge financial and administrative costs and also free human resources for more productive business activities.

Footnotes

1. https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/03-90953_ebook.pdf

2. Clause (h) of Section 2 of the Mediation Act, 2023

3. Section 2 of the Mediation Act, 2023

4. Section 3 (g) of the Mediation Act, 2023, "international mediation" means mediation undertaken under this Act and relates to a commercial dispute arising out of a legal relationship, contractual or otherwise, under any law for the time being in force in India, and where at least one of the parties, is— (i) an individual who is a national of, or habitually resides in, any country other than India; or (ii) a body corporate including a Limited Liability Partnership of any nature, with its place of business outside India; or (iii) an association or body of individuals whose place of business is outside India; or (iv) the Government of a foreign country.

5. The term 'Commercial dispute' is defined under section 3(a) of the Mediation Act with reference to the definition of the term as defined in sub-clause(1) of Section 2 of the Commercial Courts Act, 2015.

6. Section 4 of the Mediation Act, 2023

7. Section 5 of the Mediation Act, 2023

8. Section 8 of the Mediation Act, 2023

9. Section 18 of the Mediation Act, 2023

10. Section 22 of the Mediation Act, 2023

11. Section 18 and section 27 of the Mediation Act, 2023

12. Section 28 of the Mediation Act, 2023

13. Section 7 of the Mediation Act, 2023

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