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.
This article is an illustrated rapid resolution example that is intended for lawyers. It is useful when lawyers draft contracts for clients who enter into contingent contracts, and for rapid resolution of disputes arising out of questions of enforceability of such agreements.
Keywords: Contingent contracts, Investment Contracts, Mergers and Acquisitions
Reference: The Indian Contract Act: Section 32: Illustration (b)
Indian Contract Act: Section 32
Section 32 of the Indian Contract Act, 1872, deals with the enforceability of contingent contracts, i.e., contracts based on the occurrence of one or more uncertain future events. The section provides that a contingent contract cannot be enforced unless the event on which it is based takes place. If it becomes impossible for the event to occur, then the contract becomes void.
Illustration (b) – Contract Act: Section 32
The second illustration of section 32 is as follows:
“A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse.”
In the modern-day, goods and services sale/purchase agreements are unlikely to be drafted as contingent contracts. However, investment and mergers and acquisitions are often drafted as contingent contracts. Therefore, our example deals with an investment agreement.
Modern Day Illustration
X, an angel investor, agrees to invest in Z Private Limited based on the understanding that the company would generate a certain amount of revenue by a specific date. However, while the agreement reflected the condition that the company had to generate a certain amount of revenue, the agreement did not reflect the deadline by which it had to do so. Z did not reach the revenue figure within the deadline but did so a few months later. However, at that point, X refused to invest.
Z took X to Court to enforce the contract. In his defence, X contended that the agreement was always contingent on Z reaching the revenue figure within a fixed time, which it failed to do.
Interpretation and scenarios
In the above example, due to the contract’s ambiguity, the parties will need to lead substantial evidence to prove their respective cases in Court or before an Arbitrator.
X would likely rely on documents and communications where he made it clear that the investment was contingent on Z reaching the revenue figure by a specific point in time.
Z would contend that since X signed the agreement that did not provide for the time aspect of the contingency, he could back not out of the agreement.
The Court or Arbitrator would need to examine the agreement and all the evidence to determine the parties’ actual intention and decide whether Z could enforce the contract.
Making this Rapid Resolution friendly – Strategy
Disputes like the one in the example can be made rapid resolution friendly by adequately defining the contingent event and incorporating a clause that speeds up the dispute resolution process by pre-deciding some contentious aspects of the dispute.
This can be accomplished by inserting clauses that provided for the following:
1 – Makes the dispute rapid resolution friendly by removing ambiguity
Contracts, like the one in the example, where enforceability contingent on a future event taking place, must clearly define the contingent event.
It is also advisable for the contract to include a clause mandating that, once the contingent event either takes place or becomes impossible, the party that is excused from the performance or entitled to demand enforcement, as the case may be, must communicate the same to the other party.
In our example, the contract should have clearly stated that if Z did not reach the revenue figure within the stipulated time, X would not invest, and the agreement would be voided. It should also have provided that if Z reached the revenue figure within the stipulated time, it had to convey the same, in writing, to X.
2 – 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.
When parties are desirous of entering into agreements where enforceability is contingent on a future, uncertain event, they must ensure that the contingency is clearly defined in the contract. Unless this is done, disputes concerning the contingency will inevitably arise, and they will spend a lot of time and money in court or arbitration.
Simple Explainer For The Layman
Anil Kumar, an angel investor, agrees to invest in Earth Tech Private Limited, a company that has created technology to clean city lakes. The investment is based on the understanding that the company would generate 50 lakhs in gross revenue by the end of that financial year, which was likely to happen at the time of negotiations. However, Anil and Earth Tech’s agreement only stated that Anil would invest once the company generated 50 lakhs of revenue. Earth Tech reached the 50 lakh revenue figure 6 months into the new financial year. Consequently, Anil refused to invest.
Earth Tech took Anil to Court to enforce the contract. In his defence, Anil contended that the parties’ intention was always that Anil would invest only if Earth Tech reached 50 lakhs in revenue by the end of the financial year, even though the same was not reflected in the agreement.
Earth Tech, on the other hand, contended that the terms of the contract bound Anil, and, as the agreement did not have the condition, he was bound to invest.
In Court, Anil’s lawyers relied on numerous emails where Anil said that his investment was contingent on Earth Tech, reaching 50 lakhs in revenue by the end of the financial year.
Earth Tech’s lawyers argued that the agreement’s failure to provide for the time restriction showed that it had been dispensed with.
The entire litigation could have been avoided altogether or resolved quickly and inexpensively through an ODR Platform if the contract was unambiguous as to whether or not the time restriction existed, and had an ODR-friendly dispute resolution clause.
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.