An illustrated rapid resolution example that is useful when lawyers draft contracts for clients who enter into purchase agreements for goods or services. Furthermore, for timely compensation when such goods or services are not delivered to the expected specifications or expected quality.
Keywords: Breach of Contract, Compensation, Damages, Mitigation, Purchase Agreements, Manufacturing Agreements, Advance Payments
Reference: The Contract Act: Section 73: Illustration (f)
Contract Act: Section 73
Section 73 of the Indian Contract Act, 1872, deals with one of the various remedies available to an injured party for breach of contract. This section provides that a party injured by a breach of a contract will be entitled to compensation. However, the section limits the quantum of compensation to compensation for only those losses, which arise naturally from the breach of the contract, and any losses which the parties knew, at the time of signing the contract, would be likely to result from the contract being breached.
The section is also equally applicable to cases where there is no contract, but the injury has occurred on account of a party’s breach of obligations resembling those created by a contract. Additionally, the section’s explanation specifies that, while calculating the loss or damage arising from breach of a contract, the means available to the injured party to mitigate the loss caused by the breach must be taken into account. The Courts have also consistently ruled that an injured party must take all reasonable measures to mitigate the losses caused by a contract’s breach.
Section 73, Illustration f
A contracts to repair B’s house in a certain manner and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract
The illustration (f) to section 73 of the contract act proceeds on the assumption that B has proved that A did not repair the house in the manner specified under the contract.
However, in an actual dispute, B would first need to prove in court that A breached the terms of the contract. He would also need to prove his claim for compensation as A would likely dispute the quantum claimed as being excessive.
A, a T-shirt company, hired B to manufacture it’s designs and paid in advance for the first 5000 t-shirts. While the contract provided that the t-shirts would be manufactured using ‘acceptable quality cotton,’ the material’s standard was not specified. B manufactured the t-shirts, and A sold them. However, within a few weeks, about 5% of the customers returned the t-shirts as they had torn. A sued B for compensation.
B defended the suit, arguing that it had used market standard material, and supported the argument by pointing out that 95% of the t-shirts were not returned.
Interpretation and Scenarios:
In the above dispute, a Judge or Arbitrator would need to determine, based on evidence led by the parties, what constituted ‘acceptable quality.’ This finding would have to be based on whether or not the material used was as per market standards as well as the average return rate for that type of t-shirt.
However, the dispute could be made rapid-resolution friendly by incorporating some simple solutions into the contract, which should enable a Judge or Arbitrator to arrive at a finding on whether or not B was in breach of the agreement without the parties having to lead extensive evidence.
Solution 1 – Enables Rapid Determination Of Breach Of Contract
In a manufacturing contract, or a contract for the purchase of goods or services, it is essential to set out the required standards for the goods manufactured or purchased, or services rendered. The standards should be drafted so that a Judge or Arbitrator should be able to determine the required quality and quantity standards from the agreement itself.
Furthermore, the agreement should also contain a process for the purchaser of the goods or receiver of the services to verify that the goods or services are of the contractually mandated standards.
In our example, the dispute could have been rapid resolution friendly had the agreement specified the following:
- The type of fabric required to be used to manufacture the t-shirts
- A process for A to verify the quality of the goods
Solution 2 – Enables Rapid Quantification of Compensation
A contract for the manufacture or purchase of goods, or a service provider contract, must pre-decide the consequences of breach by either party, including the compensation payable, or the method for computing the compensation.
The method of computing the compensation payable by a manufacturer, vendor, or service provider will need to take into account the cost of the goods or services and income losses or opportunity losses that the purchaser has suffered on account of the vendor or service provider’s breach.
In our example, the contract could have provided that the compensation payable by the B, in the event the t-shirts were found to be defective, would be the sum of the following amounts:
- The fee paid to B.
- The cost of having to get the t-shirts manufactured by another manufacturer
- The income lost on account of A being unable to sell the t-shirts.
Alternatively, the contract could stipulate that in the event the t-shirts were found to be defective, B would replace them at its own cost and pay to A a fixed amount as compensation for the delay in fulfilling the order.
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.
Disputes arising from contracts for the manufacture or purchase of goods, as well as service provider agreements, where the supplier or service provider has not conformed to the contract, can be made rapid resolution friendly provided the required quality and quantity standards of the goods or services are unambiguously provided in the contract, along with the consequences if the supplier or service provider fails to conform to the said standards.
Simple Explainer For The Layman:
T-Design, a T-shirt company, hired Sameer Garments to manufacture it’s t-shirt designs, and paid in advance for the first 5000 t-shirts. While the contract provided that the t-shirts would be manufactured using cotton of ‘acceptable quality,’ the exact quality standards were not specified. Sameer Garments manufactured the t-shirts, and T-Design sold them. However, within a few weeks, about 5% of the customers returned the t-shirts as they had torn. T-Design sued Sameer Garments for compensation.
Sameer Garments defended the suit, arguing that it had used market standard material, and supported the argument by pointing out that 95% of the t-shirts were not returned.
On the other hand, T-Design argued that a 5% return rate was higher than the market average for t-shirts, which showed that Sameer Garments’ had used sub-standard material.
The trial was lengthy and expensive as both parties had to lead substantial evidence to prove their respective cases.
However, the dispute could have been quickly and inexpensively resolved using an Online Dispute Resolution Platform if the agreement had been specific about the type and quality of material that the manufacturer had to use and the compensation it would have to pay if it did not do so.
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.