An illustrated rapid resolution example intended for lawyers. Useful when lawyers draft contracts for clients who enter into purchase agreements for goods or services. And for timely compensation when such goods or services are not delivered, or the seller backs out from the commitment to deliver as promised
Keywords: Breach of Contract, Compensation, Damages, Mitigation, Purchase Agreements, Goods & Services, Goodwill
Reference: The Contract Act: Section 73: Illustration (a)
Contract Act: Section 73
Section 73 of the Indian Contract Act, 1872, deals with one of the various remedies available to an injured party for breach of contract. This section provides that a party injured by a breach of a contract will be entitled to compensation. However, the section limits the quantum of compensation to compensation for only those losses, which arise naturally from the breach of the contract, and any losses which the parties knew, at the time of signing the contract, would be likely to result from the contract being breached.
The section is also equally applicable to cases where there is no contract, but the injury has occurred on account of a party’s breach of obligations resembling those created by a contract. Additionally, the explanation to the section specifies that, while calculating the loss or damage arising from breach of a contract, the means available to the injured party to mitigate the loss caused by the the breach must be taken into account. The Courts have also consistently ruled thatit is the duty of an injured party in such to take all reasonable measures to mitigate the losses caused by the breach of a contract.
Illustration (a) – Contract Act: Section 73
The first illustration of Section 73, Indian Contract Act, 1872 is as follows:
“A contracts to sell and deliver 50 maunds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 maunds of saltpeter of like quality at the time when the saltpeter ought to have been delivered.”
Illustration 1 – A modern-day example
Let us examine a modern-day example of this type of agreement:
X, an olive oil distributing firm, entered into an agreement with Z, a small eatery owner to sell 100 gallons of olive oil for a certain price. As X receives a better offer for his olive oil, he breaks the contract with Z and refuses to sell to him. Z, in consequence has to buy oil at a cost more than that of contract price for the same amount of oil. He also suffers loss of goodwill among his customers, as he was compelled to use a different oil while he made arrangements to procure the olive oil from an alternate source.
Interpretation and scenarios
A reading of the above example would indicate that Z is entitled to receive as damages from X, compensation equalling the difference between the contract price and the price at which Z eventually bought the olive oil, as well as damages for the loss of his goodwill among his customers. To claim such damages, Z most likely would take X to Court or invoke arbitration.
In his defence, X would likely contend any one, or both, of the following:
- Z didn’t take all the reasonable measures to mitigate the losses, which he could have taken, as he could have easily procured olive oil at the contract price from an alternate source since the contract price was the prevailing market price
- The losses incurred by Z on account of loss of goodwill were not proximate consequences of the breach of contract.
On the other hand, Z would contend that the losses incurred by him aren’t remote or indirect losses but are proximate consequences of the breach of contract, and he took every reasonable measure in his capacity to mitigate them.
Making This Situation Rapid Resolution Friendly – Strategy
A dispute arising out of the above example would not ordinarily be friendly to rapid resolution as, both sides would need to lead substantial amounts of circumstantial evidence to prove their respective cases, especially with respect to the issue of loss of goodwill.
However, there are simple drafting solutions to ensure that disputes arising out of an agreement like the one in the example above can be made rapid resolution friendly. These solutions involve combining online dispute resolution efficiencies, with pre-decided steps of the arbitration process.
Three of those solutions are examined here.
The Drafting Solutions
Solution 1- Protects the Buyer (Making it easier to prove proximity of losses incurred)
One way to ensure that any dispute regarding the proximity of losses incurred by the injured party is rapid resolution-friendly is to explicitly incorporate a list of certain predictable losses that would feasibly arise from a breach of contract by the supplier and, in the event of an allegation of breach, to limit the heads of claims to these losses. This list can include claims compensation for the difference in purchase price, loss of goodwill, etc. The agreement should also have a formula to compute the quantum of the losses. Incorporating such a list into the contract would leave very little room for disputes which would require substantial evidence to be lead.
The contract should also clearly state that olive oil is a key ingredient in the food prepared in Z’s eatery, either due to the type of cuisine or because it is advertised as such. This would eliminate the need for Z to prove loss of goodwill in the event of a dispute.
An agreement drafted in the manner specified above makes it comparatively easier for Z to recover compensation and damages from X, resulting in the agreement being extremely amenable to rapid resolution using an online dispute resolution platform. Further, the need to produce circumstantial evidence is greatly reduced.
Solution 2 – Protects the Seller (Making it difficult to prove proximity of losses)
The agreement can be made rapid resolution friendly for X by ensuring that the contract contains a clause whereby X states that he will not be responsible or liable to compensate Z for any loss incurred by him, whether proximate or not, unless Z has suffered the loss despite taking a pre-defined set of remedial measures.
Solution 3 – Accelerates Dispute Resolution for Both Parties (Pre-decides contentious elements of the Arbitration process)
The agreement gives the claimant the right to ask for the arbitrator’s appointment by a named institution or ODR platform; and for such appointment to be made within 35 days of receipt of the defendant receiving notice.
In these cases, it will better serve the parties if the institution or ODR platform promises a process that binds the arbitrator to rapid resolution. Platforms often do this by minimizing oral hearings, not accepting documentation delays, and not allowing adjournments unless in emergencies.
In conclusion, it is fair to say that breach of sale agreements [as in the Indian Contract Act, 1872 – Section 73, Illustration (a)] can be made very friendly to rapid resolution. Such ODR friendly contracts can usually be enforced in a matter of a few months and generally within half a year.
About the Above Article
Rapid Contract Enforcement is an essential requirement for the growth and prosperity of India. It will enable more investment, entrepreneurship, and trust for all stakeholders in business and commerce. The community of lawyers in India does not have access to a practical and scholarly manual that gives them a path to deliver rapid contract enforcement to their clients. Such a manual will also help lawyers to draft contracts that enable timely enforcement. Rapid enforcement requires effective use of the Arbitration Act, the institutional framework and technology enabled dispute resolution infrastructure. This article belongs to a series, where the author analyses each of the Illustrations available in the Contract Act and recommends practical approaches to rapid enforcement.
Simple Explainer for the Layman
Rajat Gupta was the owner of ‘Bookberry Diners’, a premium fine dining Italian eatery,
To provide his customers with the best Italian dining food and experience, Rajat entered into a contract with Sunlight Enterprises Pvt. Ltd. to purchase the best quality olive oil available.
The negotiations concluded rapidly and the agreement was signed. But, thereafter Sunlight Enterprises Pvt. Ltd. denied to supply the oil, thereby breaching the Contract.
Rajat, lost a lot of money as he had to buy the olive oil from another supplier, who charged a higher price on account of the order being placed on short notice. He also had to use a different oil in the meantime due to which his goodwill was affected and he lost substantial amount of customers.
There were three things Rajat’s and Sunlight Enterprises’ lawyers could have done while drafting the contract, to ensure that Rajat was adequately and quickly compensated for the loss.
The first was to include in the contract, a list of consequences that would result from a breach of agreement by the seller, leaving very little room for unprecedented disputes between the parties.
The second was to include a set of pre-defined remedial measures that Rajat would be required to take to mitigate his losses in the event of a breach by Sunlight.
The third was to include an ODR friendly arbitration clause which pre-decides contentious aspects of the dispute resolution process.
If the agreement had been drafted this way, the dispute would have been resolved, the contract enforced and damages awarded to Rajat within 3 to 6 months.
About the Authors
Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.
Devansh Garg is a third year law student at the Vivekananda Institute of Professional Studies, and an associate editor of Indian Law Portal, an online legal news publication