Drafting Solutions For Rapid Compensation In Case Of Damage To Rented Or Leased Equipment, Property Or Machinery

This article discusses drafting solutions that lawyers can adopt when drafting agreements for clients who bail (rent) out goods and equipment, to ensure that they can rapidly enforce their contracts and get compensation in the event the goods are damaged due to the bailee’s breach of the contract.

Keywords: Bailment, Equipment rental agreements, equipment damage, compensation

Reference: Indian Contract Act 1872, Section 154, Illustration a

Section 154 Indian Contract Act:

Section 154 of the Indian Contract Act provides that a bailee is liable to compensate a bail for damage caused to bailed goods if the goods were used in a manner contrary to what was agreed between the parties. Notably, the section states that the bailee is liable to pay compensation even if they have exercised due care while using the goods.

Section 154, Illustration a

A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury done to the horse.

In the above illustration, it is clear that the bailee (B) has breached the terms of the contract by allowing someone other than himself to ride the horse. 

In the modern-day, a dispute would be likely to arise where the goods have been damaged, but the bailee denies that he has used the goods in a manner contrary to the agreement. Our example deals with such a situation.

Modern-day Illustration:

Company X was in the business of renting high-end exercise equipment to gyms across the country. Company Y, which owned gyms in multiple cities, hired equipment worth several lakhs from X. The agreement, however, was silent on the gym in which the equipment will be used. 

Y used the gym equipment in Mumbai for a few months and then moved it to a gym in Pune. However, in Pune, the equipment got damaged, despite Y taking the precautions required as per industry practices. 

X sued Y for compensation. 

Interpretation and Analysis:

In the above example, Y would argue that since the agreement did not explicitly state that it could not move the equipment between its gyms, it was not liable to compensate X for the damage since it took the required care. 

X, on the other hand, would likely argue that even though the agreement was silent on the point, it was understood by both parties that equipment would be used only for one gym.

Since the agreement itself was silent, both parties would need to lead evidence to prove their respective cases in Court or before an Arbitrator.

However, lawyers drafting such agreements like the one in our example can incorporate some simple drafting solutions to reduce the likelihood of such a dispute arising and enable rapid resolution of the dispute if it did arise.

Drafting Solutions

Solution 1 – Makes It Easy To Determine Breach Of The Agreement

In an agreement for the hire of equipment, the contract must be clear about the terms and conditions on which the equipment is let out. The clauses in the agreement that provide these terms and conditions must provide for the following:

  1. The duration for which the equipment is let out
  2. Who is authorized to use the equipment
  3. How the equipment is to be used and stored
  4. If possible, what constitutes acceptable wear and tear of the equipment, i.e., the condition it must be in when it is returned

It is also advisable for the agreement to, as an annexure, include photographs of the equipment at just before it being handed over to the bailee. These pictures will enable a judge or arbitrator to arrive at a finding in the event of a dispute as to whether or not the goods have suffered damage beyond regular wear and tear. 

In our example, the agreement ought to have been clear about whether or not Company Y was permitted to use the equipment in only one particular gym, or whether it could transport the equipment to other locations. This is especially true since X was aware that Y owned and ran multiple gyms across the country.

Solution 2 – Allows For Rapid Computation of Compensation

In cases where one party has sued the other for breach of contract, where the allegation is that the breach of their terms of bailed goods or equipment, the primary relief sought is compensation for the damage caused to the goods or equipment. However, if the contract does not either pre-decide the compensation payable by the bailee or at least provide the method for computing the compensation, the dispute will not be suitable for resolution through rapid resolution methods like ODR. Therefore, an agreement for the bailment of goods or equipment must make it easy to compute compensation for damage caused due to the bailee’s breach.  

Computing compensation arising out of bailee’s breach in an agreement for bailment of goods or equipment can be made rapid resolution friendly by providing that, if the goods suffer damage, the bailor will get a quote for the repair costs. If it is found that the bailee is liable to compensate the bailor for the damage, then the liability would be limited to the quotation produced by the bailor. However, if the equipment cannot be repaired, the bailee would be liable to replace the equipment at his cost.

In cases, like our example, where goods and equipment are let out commercially, the bailee would also be liable to compensate the bailor for the opportunity losses caused by the bailor being unable to let out the goods they are being repaired or replaced. In such cases, the contract can provide that the bailee would be liable to pay a fixed daily or weekly fee until the goods or equipment are repaired or replaced.

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:

Premier Fitness Supplies Private Limited was in the business of renting high-end exercise equipment to gyms across the country. Fit Universe Private Limited, which owned gyms in multiple cities, hired equipment worth several lakhs from Premier Fitness. The agreement, however, was silent on the gym in which the equipment would be used. 

Fit Universe used the gym equipment in Mumbai for a few months and then moved it to a gym in Pune. However, in Pune, the equipment got damaged, despite Fit Universe’s staff in Pune taking the precautions required as per industry practices. 

Premier Fitness sued Fit Universe for compensation for the damage caused to the equipment and for compensation for the opportunity losses it suffered as it was unable to rent out the equipment for two months while it was being repaired.

In Court, Fit Universe’s lawyers argued that since the agreement did not explicitly state that they were not permitted to move the equipment between their gyms, and since their staff took the required care, they were not liable to compensate Premier Fitness for the damage caused to the equipment. 

Premier Fitness’ lawyers, on the other hand, argued that even though the agreement was silent on the point of whether or not Fit Universe was permitted to transport the equipment between properties, it was understood by both parties that equipment would be used only in one gym.

Eventually, after both parties led substantial documentary and oral evidence, the Court ruled in favor of Premier Fitness.

Premier Fitness cold have secured rapid compensation from Fit Universe had the agreement been clear that the equipment was to be used only in the Mumbai gym, and if it had pre-decided the method of computing the compensation Fit Universe would have to pay if the equipment was damaged on account of it breaching the terms of the contract. 

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. Quick 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.

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