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

An illustrated rapid resolution example is intended for lawyers. Useful when lawyers draft contracts for clients who enter into sale/purchase agreements or services agreements. And for rapid resolution of disputes arising out of buyers refusing to accept or receive contracted goods or services in such agreements.

Keywords: Delivery of Goods, Service Contracts,

Reference: The Indian Contract Act: Section 38: Illustration

Indian Contract Act: Section 38

Section 38 of the Indian Contract Act, 1872, explains the effect of a promisee’s refusal to accept an offer of performance. It says that a promisor does not lose his rights under a contract if he offers to perform his obligations under the contract, but the promisee does not accept the offer.

The section further provides that the offer to perform the promise must satisfy certain conditions to be considered a valid offer for this section’s purpose. Those conditions are that:

1. the offer must be unconditional
2. it must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do;
3. If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity to see that the thing offered is what the promisor is bound by his promise to deliver. An offer to one of several joint promisees has the same legal consequences as an offer to all of them.

Illustration – Contract Act: Section 38

The illustration of section 38 is as follows:

“A contracts to deliver to B at his warehouse, on the 1st March 1873, 100 bales of cotton of a particular quality. In order to make an offer of performance with the effect stated in this section. A must bring the cotton to B’s warehouse, on the appointed day, under such circumstances that B may have a reasonable opportunity of satisfying himself that the thing offered is cotton of the quality contracted for and that there are 100 bales.”

In the modern-day, the refusal of one party to accept a promise’s performance is likely to occur in a contract where both parties have obligations, but one party, being unable or unwilling to perform its obligations, refuses to accept performance by the other party.

Our example deals with one such situation.

Illustration 1 – A modern-day example 

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

“X, a real estate development firm, acquired a large portion of land which had a few residential buildings, to construct a high-end residential complex. However, after obtaining the initial permissions, it entered into a Joint Venture with Y to complete the project due to a lack of financing. Per the agreement, X was responsible for getting the statutory permissions and the inhabitants’ consent of the existing buildings. Y was responsible for financing the project and doing the actual construction.

The agreement provided that the project’s profits would be split 60/40, with X getting 60 percent.

X was unable to get the required consent from the inhabitants. Therefore the project got stalled, despite Y being ready to perform it’s obligations and having already invested in the labour and material required.

Interpretation and scenarios

In the above example, Y is the promisor and X the promisee. Being ready and willing to perform its obligations, Y is entitled to be compensated for the cost incurred towards mobilizing labour and material. Y is also entitled to be compensated by X for an amount equalling 40% of the project’s profits, had it been completed.

In a dispute between the parties, Y would need to prove the following:

1. It was ready and willing to perform its promise under the contract
2. X refused to accept Y’s performance
3. It’s quantification of the expenses incurred towards mobilising labour and material
4. It’s quantification of the compensation being 40% of the expected profits of the project

Making this Rapid Resolution friendly – Strategy

A dispute arising out of the above example would be friendly to rapid resolution, only if the contract provides the following:

1. The process for the parties to express readiness to perform their obligations under the contract, and the process for the other party to accept or refuse such performance.
2. An estimation of the costs each party is likely to incur.
3. An estimate of the profit that would likely be made on the project.

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.

Three of those solutions are examined here.

The Drafting Solutions

Solution 1- Makes It Easy To Prove Refusal Of Performance Of The Promise

To make it easy for an arbitrator to determine whether or not the promisor was ready and willing to perform the promise, but the promisee refused performance, the contract must specify what constitutes a refusal.

To do this, the contract must incorporate the process by which the parties are to communicate their readiness to fulfil their obligations and the process by which the other party is to convey its acceptance or refusal of the same.

This process should also include a ‘deemed refusal’ clause, whereby if a party has expressed willingness to perform its obligations and the other party does not accept within a set time, it would be deemed that the other party has refused acceptance.

Solution 2 – Makes It Easy To Prove And Quantify Compensation And Damages

To make an agreement like the one in the example rapid resolution friendly, the agreement must make it easy for the arbitrator to determine the compensation and damages to which a party would be entitled. This would include compensation towards expenses incurred by the parties and the party’s share in the profits that it would have received if the project had been completed.

This can be done by providing an expert estimation of the cost of the project in the contract, with a breakup of the expenses that each party would likely incur. However, this would not be sufficient unless the contract also provides a process by which the parties acknowledge the costs incurred by each other in writing.

Similarly, to compute damages towards the loss of income, the contract should contain an estimation of the expected profit that the project would earn.

Solution 3 – Accelerates The Dispute Resolution 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 contractual disputes regarding non-acceptance of the valid and unconditional offer of performance (as in The Contract Act – Section 38, Illustration) can be made very friendly to rapid resolution, provided the contract is unambiguous.

Simple Explainer For The Layman

Anand Homes Private Limited, a real estate development firm, acquired a large portion of land with a few residential buildings to construct a high-end residential complex.

However, after obtaining the initial permissions, it entered into a Joint Venture with Kumar Realtors to complete the project due to a lack of financing. Per the agreement, Anand Homes was responsible for getting the government permissions required for the project, as well as the consent of the existing buildings’ inhabitants. Kumar Realtors was responsible for financing the project and carrying out the actual construction.

The agreement provided that the project’s profits would be split 60/40, with Anand Homes getting 60 percent.

Anand Homes was unable to get the required consent from the inhabitants. Therefore the project got stalled, despite Kumar Realtors being ready to perform it’s obligations and having already invested in the labour and material required.

Kumar Realtors was eventually forced to terminate the contract and sue Anand Homes for recovery of the expenses it incurred mobilising material and labour and damages amounting to its 40% share of the profits it would have earned had the project been completed.

Unfortunately, as the contract made no mention of the process by which the parties would communicate their willingness to fulfil their obligations, or the estimated cost and potential profit of the project, Kumar Realtors had to lead copious amounts of evidence to prove it’s case.

Had the contract contained the following clauses, it would have been much easier for Kumar Realtors to win the case:

1. The parties’ process to express readiness to perform their obligations under the contract and for the other party to accept or refuse such performance.
2. An estimation of the costs each party was likely to incur.
3. An estimate of the profit that would likely be made on the project.

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.