Principals Must Be Compensated Quickly For Negligence By Their Agents/Agencies: Drafting Solutions For Rapid Contract Enforcement

This article discusses solutions to enable rapid resolution of disputes between a principal and agent over how the agent has conducted the principal’s business.

The article deals with solutions to ensure that an agent cannot use ambiguous clauses in agreements to escape liability for negligence or misconduct.

Keywords: Agent, Principal, Agency Agreement, Standard Business Practices, Online Business Platforms

Reference: Indian Contract Act, Section 211, Illustration (a)

Section 211, Indian Contract Act:

Section 211 of the Indian Contract Act states that an agent must conduct his principal’s business as per the principal’s directions or, in the absence of such directions, in the same manner as similar businesses are conducted in the same location. The section further states that, in the event of the agent failing to act as per the principal’s directions or conduct the business as per standard business practices, the agent would be liable to compensate the principal for any direct or consequential losses that the principal may suffer on account of the agent’s failure.

Section 211, Illustration (a)

A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make such investment. A must make good to B the interest usually obtained by such investments.

In the above illustration, even though the principal failed to issue directions, the agent is liable to pay compensation as he failed to adhere to standard business practices. However, in an actual dispute, the agent would likely defend his conduct, stating that he had acted according to the prevailing business practices. In that case, the principal will have to prove that the agent has committed misconduct or was negligent in his duties

Modern-day Example:

A engaged B as his agent to operate his health food startup’s online platform as he wished to focus on marketing to grow the business. The contract between A and B stated that B would be responsible for managing inventory and orders, coordinating deliveries, and other associated activities required to ensure smooth business operation. However, the agreement did not specify whether or not B was also responsible for maintaining and updating the platform’s back-end technology. As a result, B did not carry out the maintenance and updating work required for the website to cater to increasing traffic.

A few months after signing the agreement, due to rapid growth and consequent increase in traffic, the business’ website crashed, and it took 48 hours to get the site back up.

A sued B for compensation for the time the site was down, alleging that B was responsible for ensuring that the website handled the traffic as the platform’s operating agency.

B defended the suit, arguing that its responsibility was limited to ensuring sufficient inventory and that orders were fulfilled. In support of its argument, B relied upon the clause stating that it was responsible for ‘managing inventory and orders, coordinating deliveries, and other associated business activities,’ contending that back-end technology would not fall under the’ associated business activities.’

Analysis and Drafting Solutions

In the above example, the dispute arose because the contract was not clear about the agent’s responsibilities. Therefore, a judge or arbitrator would need to decide the case based on the parties’ evidence regarding an online platform operating agency’s generally accepted responsibilities. This would likely render the dispute unsuitable for resolution using Online Dispute Resolution as the process of recording evidence in a trial is generally complicated and time-consuming.

However, if the following drafting solutions are incorporated into the agreement, the dispute can be resolved using Online Dispute Resolution:

Solution 1 – Makes It Easy For The Principal To Prove Misconduct Or Negligence

An agency agreement must be unambiguous about the agent’s responsibilities. Further, the agent’s obligations must be in language that does not leave any room for interpretation. It is also advisable for the contract to exhaustively define the agent’s duties, i.e., open-ended obligations such as ‘associated activities,’ ‘all things related to…’, or ‘as may be agreed by the parties from time to’ should be avoided as far as possible.

Drafting agency agreements in the preceding paragraph’s manner protect the principal by preventing the agent from using the ambiguity in the agreement to escape liability for his negligence or misconduct.

In our example, the agreement ought to have enumerated all the factors relevant to ensuring smooth business operations in the clause dealing with B’s obligations.

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.

Conclusion:

People and organizations that engage agents to manage their businesses, or any part thereof, must ensure that their contracts clearly and exhaustively define the agent’s obligations, to prevent the agents from taking advantage of ambiguities to escape liability for negligence and misconduct.

Simple Explainer For the Layman:

Nutri Eats Private Limited engaged Skytech Business Solutions as it’s agent to operate the company’s health food online platform. The contract between the parties stated that Skytech would be responsible for managing inventory and orders, coordinating deliveries, and other associated activities required to ensure smooth business operations. However, the agreement did not specify whether or not Skytech was also responsible for maintaining and updating the platform’s back-end technology. As a result, Skytech did not carry out the maintenance and updating work required for the website to cater to increasing traffic.

A few months after signing the agreement, due to rapid growth and consequent increase in traffic, the Nutri Eats website crashed, and it took 48 hours to get the site back up.

Nutri Eats sued Skytech for compensation for the time the site was down, alleging that, as the platform’s operating agency, Skytech was responsible for ensuring that the website could handle the traffic.

Skytech defended the suit, arguing that its responsibility was limited to ensuring sufficient inventory and that orders were fulfilled. In support of its argument, Skytech relied upon the clause stating that it was responsible for ‘managing inventory and orders, coordinating deliveries, and other associated business activities,’ contending that back-end technology would not fall under the’ associated business activities.’

Even though the Court eventually favored Nutri Eats, the case took several years to conclude. However, if the contract between Nutri Eats and Skytech had unambiguously and exhaustively listed out Skytech’s obligations, Nutri Eats could have recovered the compensation quickly and inexpensively using Online Dispute Resolution.

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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