September 21, 2020

Protecting Parties When External Circumstances Prevent Them From Performing Their Contractual Obligations: Drafting Solutions For Rapid Dispute Resolution

This article deals with compensation issues in contracts that become void after being signed because one or both parties are unable to perform their duties or obligations due to circumstances beyond their control.  

The article contains solutions to help lawyers draft agreements to rapidly resolve disputes arising out of situations concerning whether the contract has become void due to a breach by one party, or whether the same has happened without due to circumstances beyond the control of one or both parties.  

Keywords: Void Contracts, Act of God, Unforeseen Circumstances

Reference: Section 65, Indian Contract Act, 1872

Section 65, Illustration d:

A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.

In the illustration of the section, it is evident that the contract has become void despite neither party being in breach of the agreement. However, a dispute would likely arise when it is unclear whether the contract had become void because of some uncontrollable circumstance, or whether the same has occurred on account of a breach or failure by one of the parties. 

Our example deals with one such situation.

Modern-day Example:

X was engaged by Y as an expert speaker for a national-level, paid webinar. However, on the day of the webinar, X’s WiFi stopped working. Further, his mobile internet was also low on the day. Therefore, the webinar was a failure, and Y was forced to refund the participants’ money. While X agreed to refund the speaking fee paid to him by Y, he refused to compensate Y for the loss caused to him, arguing that he could not have foreseen that both his internet connections would fail on the same day.

Interpretation and scenarios:

In the above illustration, the Court would need to determine whether X’s argument that the circumstances that prevented him from speaking were truly beyond his control, or whether, given the nature of the contract, he ought to have taken additional precautions, such as ensuring he had a back-up WiFi network.

In order for the Court to arrive at it’s finding, it would need to consider factors such as the reliability of X’s WiFi network and mobile internet, or the standard precautions being taken by other speakers, either for the same webinar or for other online events. 

However, the dispute, as well as disputes of a similar nature, could be made rapid-resolution friendly by incorporating the following drafting solutions:

Solution 1 – Makes It Easy To Assign Liability, If Any

In any contract, the parties know in advance that events may occur or situations may arise that would prevent on or both of them from performing their obligations under the agreement. Therefore, to the extent possible, it is necessary for the agreement to define these situations and mandate that the parties are bound to take pre-agreed precautions to prevent those situations from voiding the contract. Then, if the agreement does become void, as long as the party due to who’s inability to perform its obligations the agreement has become void, shows that it has taken the pre-agreed precautions, it cannot be held liable to compensate the other party.

In our illustration, the parties would have known that a device failure or loss of internet connectivity would prevent X from speaking. Therefore, the agreement ought to have mandated that X maintain a minimum number of back up devices and internet connections. In that case, it would be reasonably straightforward for a Court or Arbitrator to determine whether or not X’s inability to speak at the webinar was actually due to circumstances beyond his control.

It is also pertinent to mention here that agreements must have a well-defined, customised, force majeure clause. Most contracts have standard force majeure clauses, which do not consider events that would affect one type of agreement’s performance, but not of another. For example, a cyclonic storm would certainly prevent X from physically traveling and speaking at a conference, but would not necessarily prevent him from speaking in a webinar.

Solution 2 – 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

Dr. Anil, a world-renowned cardiologist, was engaged by Good Heart Institute, a renowned medical college, as an expert speaker for a national-level, paid webinar for doctors. However, on the day of the webinar, Dr. Anil’s WiFi stopped working, and his mobile internet was also slow. As a result, the webinar was a failure, and Good Heart was forced to refund the money amounting to more than Rupees ten lakhs, paid by the participants. 

Dr. Anil had no problem refunding his speaking fee of Rupees One Lakh, but he refused to compensate Good Heart for the loss caused to them, arguing that he could not have foreseen that both his internet connections would fail on the same day. Eventually, Good Heart decided not to pursue the case as it did not wish to be involved in an acrimonious dispute with such a well-respected doctor.

However, the dispute could have been quickly and, most likely, amicably resolved had the agreement between Good Heart and Dr. Anil specified certain precautions that Dr. Anil had to take to ensure that he was not prevented from speaking due to a device or connectivity issue. 

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.

About the Author:

Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.