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 drafting contracts with reciprocal promises.
The article discusses drafting solutions to help lawyers protect their clients’ interests if they are prevented from performing their obligations under the contract by the other party, by enabling them to quickly and inexpensively void the contract and receive compensation.
Keywords: Reciprocal Promises, Compensation, Damages
Reference: The Indian Contract Act: Section 53
Indian Contract Act: Section 53
Section 53 of the Indian Contract Act, 1872, deals with a situation when one party to a contract with reciprocal promises prevents the other party from performing its obligations, despite the other party being ready and willing to do so. The section provides that the contract becomes voidable at the instance of the party that is ready and willing to perform its obligations. Furthermore, the said party is also entitled to claim compensation for its loss because of being prevented from performing its obligations.
Illustration to Section 53:
A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and, if he elects to rescind it, he is entitled to recover from A compensation for any loss which he has incurred by its non-performance.
The illustration to section 53 does not specify how A prevents B from performing his obligations under the agreement.
For example, A could actively prevent B from performing his obligations by refusing to let him into the location where the work is to be performed or deliberately withholding information that B requires to execute the work, despite B’s requests.
A could also prevent B from performing the work by refusing or failing to perform certain obligations that he is liable to perform under the contract, which must be performed before B can perform his part of the contract.
This article contains examples of both situations, active prevention and prevention caused by the other party’s failure or refusal to perform its obligations.
Modern-day illustration 1:
A, a furniture manufacturer, was engaged by B to design and build various pieces of furniture for B’s new house. Per the agreement, A was to pay for the raw material required to build the furniture. However, the contract was silent on when A would be required to pay for the same. Therefore, once B completed the designs, he requested A to transfer the raw material’s money. However, A refused to do so and asked B to charge for the same along with the final invoice.
B had already spent time on the design, as well as money on the raw materials. Therefore, he took A to court seeking compensation for the losses suffered on account of having to spend time creating the designs for A, which could have been spent on other assignments.
Interpretation and Scenarios:
In the above example, A would contend that he was willing to complete the assignment, but was prevented from doing so by B’s refusal to pay for the raw material. Since the agreement was silent on when the payment for raw material had to be made, A would need to lead evidence to prove that the parties’ intention was that the payment had to be made once the designs were completed. Additionally or alternatively, A would lead evidence to show that the standard business practice was for raw materials to be paid for in advance.
On the other hand, B would deny the allegation and take the defence that since the contract did not mandate him to pay for the raw material in advance, his refusal to do so would not amount to preventing A from fulfilling his obligations under the contract.
Since the agreement was silent on when the money for raw material had to be paid, a judge or arbitrator would need to arrive at a finding based on an interpretation of the contract, read with the evidence lead by the parties concerning their intentions, and the evidence led to establishing what the standard business practices are.
Modern-day illustration 2: Prevention due to other party’s failure to perform it’s obligations
X, a media and content curation company was engaged by Y to create and operate Y’s online platform. As part of the agreement, X was to create videos based on Y’s themes and submit them to Y for approval. Once Y approved the videos, X had to publish them on the platform. X was to receive a fee for each video within ten days of publication of the video on the platform. However, the agreement did not provide any timelines for the entire process.
X diligently complied with its obligations under the agreement and sent each video to Y for approval. Y, on the other hand, in order to delay having to pay for the videos due to a company fund crunch, took several weeks to approve each video, meaning that while X continued to incur expenses for video creation, it was unable to publish the videos and raise invoices for the same.
Eventually, X terminated the agreement and sued Y for compensation towards the costs it had incurred in creating the videos and opportunity losses on account of it not being able to use it’s human and technology resources to serve other clients.
Interpretation and Scenarios:
In the above example, X would contend that it was entitled to void the contract and claim compensation as Y, by delaying approvals, prevented it from performing its obligation of publishing the videos.
On the other hand, Y would claim that the contract did not provide a specific time for it to grant approvals, and hence, X could not claim that it was prevented from performing its obligations. Y would also, quite likely, attempt to show that the approvals process to a long time on account of X’s substandard work.
Both parties would need to lead substantial evidence, and the trial or arbitration would likely be lengthy and expensive.
Making The Agreements Rapid Resolution Friendly – Strategy:
In both of the above examples, the agreements could be made raid resolution friendly if the contract incorporated the following:
- Removing ambiguity by clearly defining timelines for the parties to fulfil their obligations
- Properly defining the process that the parties had to follow to accomplish the objective of the agreement
- Pre-defining either the compensation a party could claim for breach or the formula for computing the same
- Incorporating a rapid resolution friendly dispute resolution clause
The solutions mentioned above are described in detail below.
Solution 1 – Removes Ambiguity (Makes It Easy For A Party To Prove That It Has Been Prevented From Performing Its Obligations)
Firstly, each party’s obligations under a contract have to be exhaustively defined. However, it is equally important to define the parties’ obligations in a manner that leaves no room for interpretation as to nature, standards, and timelines of their obligations.
As far as possible, obligations must be defined in such a manner that a bare reading of the agreement is sufficient for a judge or arbitrator to arrive at a finding of what precisely the parties were required to do. Ideally, there should be little to no legalese in the clauses defining parties’ roles and responsibilities under a contract.
Secondly, the contract must clearly define the process according to which it is to be performed. If there is any ambiguity in the process, a party suing for compensation on the ground of being prevented from performing its obligations under a contract may have to lead substantial evidence to prove it’s case. Worse, it could enable the other party to allege that the Plaintiff was in breach of the contract.
In the first illustration, the contract ought to have mentioned that once B approved the designs and the cost estimate, he was bound to pay for the raw materials within a fixed time. Ideally, the agreement should also have given B only a limited amount of time to approve.
In the second illustration, the contract ought to have provided for Y to approve the videos within a fixed time, failing which they would be deemed to have been approved.
Solution 2 – Makes It Easy For The Arbitrator To Compute Compensation And Damages
To ensure that a dispute arising out of an agreement with reciprocal promises, where one party has been prevented from performing its obligations, is rapid resolution friendly, the agreement must make it easy for the arbitrator to determine the compensation and damages a party would be entitled. This would include compensation towards expenses incurred by the party towards performing its obligations under the contract, as well as compensation towards income it would have earned had both parties fulfilled their obligations and the object of the agreement had been met.
In order to make it easy for the arbitrator to arrive at a finding regarding the costs incurred by a party, the agreement should incorporate estimation of the costs each party is likely to incur on account of performing its obligations under the contract. However, merely incorporating an estimation of likely expenses would not be sufficient unless the contract also provides a process by which the parties acknowledge the actual 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/income that the parties will earn, assuming the object of the agreement is fulfilled.
In the first illustration, the agreement ought to have specified that, in the event of a breach by B before the furniture being built, he would be liable to pay a fixed amount as compensation for the time A had spent on the designs. However, in the event of a breach, either during the furniture building process or after its completion, he would be liable to pay a higher amount. In both cases, the amount could be fixed as A’s usual rate for similar work.
In the second illustration, the agreement ought to have provided for a clause stating that, in the event, Y breached the agreement, it would be liable to compensate X, not only for the costs it incurred in making the videos but also for the opportunity losses suffered on account of X working on Y’s assignment, which time would otherwise have been spent on other assignments. The compensation amounts could be decided based on X’s usual expenses and charges for that type of video.
In both cases, the contracts should have also contained clauses providing for interest to be payable at a fixed rate until the compensation was finally paid.
Solution 3 – Accelerates The Dispute Resolution Process
The agreement should have a dispute resolution clause giving 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 either the dispute resolution clause itself or the institution or ODR platform promises a process that binds the arbitrator to rapid resolution. ODR Platforms often do this by minimizing oral hearings, not accepting documentation delays, and not allowing adjournments unless in emergencies.
Simple Explainer For the Layman:
Blossom Media Private Limited, a media and content creation company, was engaged by First Wave Education Private Limited to create and operate it’s online education platform. As part of the agreement, Blossom Media was to create videos based on First Wave’s themes and submit them for approval. Once First Wave approved the videos, Blossom Media had to publish them on the platform. Blossom Media was to receive its fee for each video within ten days of publication of the video on the platform. However, the agreement did not provide fixed timelines for the creation-approval-publishing process.
Blossom Media diligently complied with its obligations under the agreement and sent each video to First Wave for approval. First Wave, on the other hand, in order to delay having to pay for the videos due to a company fund crunch, took several weeks to approve each video, meaning that while Blossom Media continued to incur expenses for video creation, it was unable to publish the videos and raise invoices for the same.
Eventually, Blossom Media terminated the agreement and invoked arbitration against First Wave, seeking compensation towards the costs it had incurred in creating the videos and opportunity losses because it could not use its human and technology resources to serve other clients.
In arbitration, Blossom Media contended that First Way had prevented it from fulfilling it’s obligations under the agreement, and hence it was entitled to void the agreement and seek compensation. First Wave disputed the claim, arguing that since the agreement did not provide for fixed timelines, it could not be said to have prevented Blossom Media from performing its obligations under the agreement. First Wave also raised a defence that the delays were caused due to Blossom Media’s substandard work.
The entire dispute could have been quickly resolved had the agreement between the parties contained the following:
- Fixed timelines for video creation, approval, and publishing, as well as invoice clearance
- A clause providing either for fixed compensation, or a formula for determining compensation, in the event either party breached the agreement. The compensation or computing method in respect of a breach by First Wave would need to take into account the cost of creating the videos and operating the platform and the opportunity losses incurred on account of Blossom Media being unable to use its resources to work on other assignments.
- A rapid-resolution friendly dispute resolution clause that pre-decided certain aspects of the dispute resolution process such as the arbitral institution, the process for submitting documents, conducting hearings, etc.
About the Author:
Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.