About the 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 the 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.

Summary

This article is an illustrated rapid resolution example intended for lawyers. It is useful when lawyers draft contracts for clients who enter into purchase agreements to be executed in installments. Furthermore, for rapid compensation when one or more such installments are not delivered as promised.

Keywords: Breach of Contract, Purchase Agreements, Damages, Termination, Compensation, Acquiescence, installment default

Reference: The Indian Contract Act: Section 39: Illustration (b)

Contract Act: Section 39

Section 39 of the Indian Contract Act, 1872, deals with breach of the contract. According to this section, a party to the contract is said to breach the contract when:

1. He either refuses to perform the contract in its entirety, or

2. Disables himself from performing the contract in its entirety.

The other party in such a situation may exercise any one of the following two options:

i. He can either continue with the contract, by signifying his acquiescence, either by words or by conduct; or

ii. He can put an end to the contract.

Breach of contract by one party does not automatically put an end to the contract. The contract remains alive and enforceable against both parties till the time the other party repudiates it. When a contract is kept alive by the promisee, the promisor may perform the same even though he had earlier repudiated it.

Illustration (b) — Indian Contract Act: Section 39

The second illustration of Section 39 is as follows:

“A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights every week during the next two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night, A wilfully absents herself. With the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A’s failure to sing on the sixth night.”

A modern-day example of the illustration

Let us examine a modern-day example of this type of agreement:

“X, a piston rings manufacturer based in Kerala, entered into a contract with Z, the owner of a cast iron foundry situated in Karnataka to purchase 60 quintals of cast iron, to be delivered by Z in Kerala in 6 monthly installments. Z delivered the first batch of cast iron to X as per the contract, and X paid him. However, the next month Z refused to deliver the second installment of cast iron and asked X to make arrangements to collect it. X refused and was forced to procure that month’s cast iron from another vendor at a higher price. However, despite Z’s failure to deliver the second installment of cast iron, X accepted the third installment delivered by Z and paid for it.

Interpretation and scenarios

A reading of the above example would indicate that, while X could have terminated the agreement on account of Z’s failure to deliver the second installment, he chose not to do so. Therefore, he is bound to accept and pay for subsequent deliveries. However, he would be entitled to claim damages from Z for the loss caused due to Z’s failure to deliver the second installment.

There are mainly two disputes that could arise out of this contract:

The first would be concerning the quantum of damages Z would have to pay for failing to deliver a particular installment of iron, but X does not terminate the contract.

The second would be if X terminates the agreement on account of Z failing to deliver a particular installment, after having accepted a subsequent delivery.

A contract like the one described in the illustration can be made rapid resolution friendly, irrespective of what kind of dispute may arise, by incorporating the drafting solutions discussed below:

Solution 1 — Protects the Purchaser

The contract, like the one described in the illustration above, can be made rapid resolution friendly by incorporating a clause defining the quantum of damages that the purchaser can claim based on the supplier’s failure to deliver a particular installment of goods.

The clause can either specify that the purchaser would be entitled to claim the difference between the contract price and the price at which the purchaser bought the replacement goods, plus income lost on account of canceled orders that could not be fulfilled because of the delay in procuring raw material.

If this kind of clause is incorporated into the contract, the purchaser would need to produce invoices to quantity the difference in the contract price and the price of the material he bought. He would also need to produce documentation from the previous months to show the month’s loss in question. There would be no need to lead circumstantial evidence, and oral hearings would also be limited.

Solution 2 — Protects the Supplier

The contract can protect the supplier from the purchaser’s termination despite subsequent acquiescence if it includes a clause barring the purchaser from terminating the contract after acceptance of subsequent delivery of goods.

Better still, the agreement can specify that, if the supplier fails to deliver a particular installment of goods, the purchaser has a fixed number of days to terminate the agreement, after which he would be deemed to have agreed to continue the contract.

Solution 3 — Accelerates Dispute Resolution for Both the 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.

Conclusion

In conclusion, it is fair to say that purchase agreements where the purchase is made in installments can be made very friendly to rapid resolution by incorporating a few simple clauses.

Simple Explainer for The Layman

Sanjayay Boyyappa, was the owner of a piston manufacturing firm in Kerala, He entered into a contract with Panchtatva Iron Foundry, in Karnataka, to buy 60 quintals of cast iron in 6 monthly installments.

Panchtatva delivered the first installment of iron on schedule, but refused to deliver the second installment to Sanjay, and asked him to collect the installment himself. Sanjay refused and was forced to buy that month’s iron from another supplier at a higher price. However, Sanjay accepted and paid for the third installment of cast iron delivered by Panchtatva.

Subsequently, Sanjay terminated the contract with Panchtatva citing breach of contract and sued for damages for the losses caused by their failure to deliver the second installment. Panchtatva countersued alleging that the contract was still valid since Sanjay accepted the third installment of iron. After long and expensive litigation, the court held that while the contract was valid, Panchtatva has to pay Sanjay damages.

Sanjay and Panchtatva could have avoided the time and money-draining litigation if their contract had included three clauses:

Firstly, the contract should have specified and limited the quantum of damages Sanjay could claim if Panchtatva failed to deliver a particular installment.

Second, the contract should have had a clause limiting the time Sanjay could take to terminate the contract if Panchtatva failed to deliver a particular installment.

Third, the contract should have had an ODR friendly arbitration clause that pre-decided contentious aspects of the dispute resolution process.

If the agreement had been drafted this way, the dispute would have been resolved quickly and cheaply.

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