Drafting Solutions For Rapid Recovery Of Compensation By Suppliers For Transporter’s Negligence

This article discusses solutions to enable rapid resolution of disputes between a principal and an agent engaged in providing transportation and logistics services when the principal suffers losses on account of the agent’s delay in completing deliveries.

The article also highlights the importance of incorporating having a well-crafted, customized, force majeure clause.

Keywords: Agency Agreement, logistics provider, goods transporter, Negligence, Compensation, Force Majeure, Logistics Agent

Reference: Indian Contract Act, Section 212, Illustration (d)

Section 212, Indian Contract Act

Section 212 of the Indian Contract Act sets out that an agent is bound to maintain such a standard of care while conducting his principal’s business, as is expected of any person conducting similar business. In effect, the section provides that an agent is bound to conduct his principal’s business with the same standard of care and skill as if he was conducting the business for himself.

The section further provides that an agent is liable to compensate his principal for losses caused by his misconduct, negligence, or lack of skill unless he has made the principal aware of his lack of skill, and the principal still appoints him as his agent. However, the section limits the agency’s liability only to losses resulting from negligence, misconduct, or lack of skill. He is not liable to compensate the principal for any remote or indirect losses.

Section 212, Illustration (d)

A, a merchant in England, directs B, his agent at Bombay, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival the price of cotton rises. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise.

In the above illustration, while it is clear that the agent was negligent and is liable to pay compensation, in an actual dispute, the agent would likely dispute that the delay was on account of his negligence. The agent would contend that circumstances beyond his control caused the delay. 

In such cases, a well-drafted force majeure clause in the agreement becomes essential. An ambiguous force majeure clause could allow an agent to avoid liability for losses ostensibly caused by circumstances beyond his control, but the occurrence of which he ought to have foreseen and taken measures to prevent.

Our example deals with one such situation.

Modern-day Illustration:

A, a packaged foods manufacturer based in Mangalore, engaged B as its logistics and transportation agent. 

A few months after the agreement was signed, C, one of A’s biggest customers, placed a large order to be delivered urgently. Accordingly, A instructed B to deliver the order to C. However, the truck from its fleet that B assigned for the delivery developed a mechanical issue, and B could not arrange for an alternate vehicle. Therefore, B was unable to deliver the order on time due to which C refused to accept delivery. 

A called upon B to pay compensation for the losses caused by B’s failure to deliver to C. However, B refused, stating that the delay was caused due to circumstances beyond its control and argued that the agreement’s force majeure clause would cover the delay.

Interpretation and Analysis:  

A would argue that B ought to have foreseen the potential that its vehicle could have developed mechanical problems and, therefore, should have had processes in place to ensure that this did not affect delivery schedules. A might also further argue that, given that the order was to be delivered urgently, B should not have been transporting the goods by road in the first place.

B would argue that the truck developing a mechanical issue was beyond its control. B would further argue that, had the truck been available, the goods would have reached C on time.

A judge or arbitrator would need to take into consideration factors such as the provisions in the agreement for delivery processes and force majeure and the standard industry practices, in order to determine whether B should be held liable for the losses caused by its failure to deliver the goods to C on time. This exercise will require parties to lead substantial evidence, and it is likely to require several oral hearings, making the dispute unsuitable for rapid resolution through Online Dispute Resolution.

However, incorporating the drafting solutions discussed below will reduce the need for evidence and oral hearings, thereby enabling the dispute to be resolved through Online Dispute Resolution.

The Drafting Solutions:

Solution 1 – Incorporate Easy To Follow Processes

Contracts between manufacturers, suppliers or distributors, and their transportation and logistics service providers must incorporate processes that both parties must follow to ensure smooth operations. These processes must provide the method by which the goods are handed over to the service provider, payment of service charges, mode of transportation to be used, delivery schedules, and any other factors that may affect business. If these processes are known, it becomes easy for an adjudicator to determine whether the service provider is in breach of the agreement.

In our example, the agreement ought to have specified either that B would always ensure multiple vehicles were available to transport A’s products or that if a vehicle were not available, B would arrange for alternate means of transportation for the goods. The agreement could have even specified that, when the delivery was urgent, B would mandatorily have to transport the goods by air (the fee would be higher).

Solution 2 – Incorporate Transaction Specific Force Majeure Clause

All contracts must have a well-defined, customized, force majeure clause. Most contracts have standard force majeure clauses, which do not consider events that would not affect the performance of that type of agreement but would affect other agreements. For example, in cases where goods are to be delivered to a location where air, sea, or rail delivery is not possible, an unforeseen problem with the delivery vehicle could constitute a force Majeure incident. However, as in our example, where the delivery was possible by road and air, an unforeseen mechanical problem with the truck may not be considered a force majeure incident.

Solution 3 – Incorporate A Rapid Resolution Friendly Dispute Resolution Clause

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:

Agreements between businesses and transportation or logistics service providers can be made rapid resolution friendly by incorporating proper processes and customized force majeure clauses to ensure that the service provider cannot take advantage of ambiguous clauses to escape liability for delays or defaults caused by its negligence or misconduct.

Simple Explainer For The Layman:

Good Taste Foods, a packaged foods manufacturer based in Mangalore, engaged Safe Cargo Logistics as its logistics and transportation agent. 

A few months after the agreement was signed, one of A’s biggest customers placed a large order to be delivered urgently. Accordingly, Good Taste instructed Safe Cargo to deliver the order. However, the truck from its fleet that Safe Cargo assigned for the delivery developed a mechanical issue, and Safe Cargo was unable to arrange for an alternate vehicle. Therefore, it was unable to deliver the order on time due to which the customer refused to accept delivery. 

Good Taste called upon Safe Cargo to pay compensation for the losses caused by its failure to deliver the shipment. However, Safe Cargo refused, stating that the delay was caused due to circumstances beyond its control and argued that the agreement’s force majeure clause would cover the delay.

Good Taste sued Safe Cargo for compensation and damages, arguing that Safe Cargo ought to have foreseen the potential that its vehicle could have developed mechanical problems and, therefore, should have had processes in place to ensure that this did not affect delivery schedules. It further argued that, given the fact that the order was to be delivered urgently, Safe Cargo should not have been transporting the goods by road in the first place.

The dispute could have been resolved using Online Dispute Resolution, and Good Taste could have quickly recovered compensation if the agreement contained proper processes and customized force majeure clauses to ensure that Safe Cargo could not take advantage of ambiguous clauses to escape liability for delays or defaults caused by its negligence or misconduct

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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