In many suits for breach of contract, even though it may be relatively simple for the Plaintiff to prove that the Defendant has breached the agreement, it is forced to lead substantial evidence to prove its quantification of the compensation.
This is especially true when the Plaintiff is seeking compensation for opportunity losses, where the injured party has successfully received the goods or services from an alternate source.
This article discusses drafting solutions that can be adopted to ensure that purchasers of goods and services can quickly get compensation for suppliers’ breach of contract, even if they have success
Keywords: Breach of Contract, Compensation, Service Provider, Supply Contracts
Reference: Indian Contract Act, Section 73, Illustration (b)
Section 73, Indian Contract Act:
Section 73 of the Indian Contract Act, 1872, provides that a party injured by a breach of a contract will be entitled to compensation. However, compensation is limited to:
- Losses which arise naturally from the breach of the contract; and
- losses that the parties knew were likely to result from the contract being breached when signing the contract.
The section is also equally applicable to cases where there is no contract, but the injury has occurred because a party breached 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 (b)
Illustration (b) to section 73 of the Contract Act deals with a situation where the party injured by a breach of contract has achieved the purpose for which he entered into the agreement despite the other party’s breach. However, in doing so, he has had to incur losses.
The illustration is as follows:
A hires B’s ship to go to Bombay, and there takes on board, on the first of January, a cargo, which A is to provide, and to bring it to Calcutta, the freight to be paid when earned. B’s ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense.
In the above illustration, although it would be reasonably easy to establish B’s breach of the contract, A would still be required to lead evidence concerning the amount of compensation claimed. Therefore, our modern-day example will deal with a similar situation, where the injured party is still forced to go through a long, expensive trial, even though it is clear that the other party has breached the agreement.
A and B entered into an agreement for B to supply gluten-free flour for A’s new cafe. However, a few days before the café was scheduled to open, B backed out of the agreement, forcing A to find an alternate supplier.
A succeeded in identifying a new supplier, who agreed to sell the flour to A at the same rate as he was to purchase it from B. However, B’s refusal to comply with his obligations and the consequent search for a new supplier forced A to postpone the café’s launch.
A sued B for compensation for the expenses incurred in identifying an alternate supplier and for compensation for the loss of revenue caused by the delayed launch.
B disputed A’s quantification of the compensation.
In the above example, while establishing that B has breached, the contract would be relatively straightforward, proving the compensation claims would not be.
A would need to lead evidence to prove the expenses incurred in identifying a new supplier. A would also need to lead evidence to prove that the delay in launching the café, caused by B’s breach of the agreement, was either:
- A natural result of B’s breach of contract; or
- When they signed the agreement, the parties knew that B failing to supply the flour would likely delay the launch of the café.
Finally, A would need to lead evidence to prove his quantification of the opportunity losses caused by B’s breach of the agreement.
The need to lead evidence to prove the compensation claims would render the dispute unsuitable for rapid resolution through Online Dispute Resolution. However, if the agreement provided for the consequences of B’s failure to supply flour, the dispute could be resolved using ODR. This can be done by incorporating the drafting solutions discussed below.
Solution 1 – Makes It Easy To Quantify Compensation Payable For Breach
To make a dispute arising out of a breach of contract rapid resolution friendly, the contract must provide the consequences that the party breaching the agreement will suffer. These consequences include compensation payable to the injured party.
An agreement where compensation is one of the consequences for breach of contract must, to the extent possible, either fix the quantum of the compensation payable or provide a method to calculate the same. The clause providing for either the compensation amount or method of computing the compensation must account for additional expenses and opportunity losses caused by a party’s breach of the contract.
In our example, the contract ought to have provided a fixed amount payable to A in the event B did not supply the flour as per the agreement. It could also have provided compensation for opportunity losses in the even B’s breach caused a delay in the café’s launch, calculated at a fixed amount per day of delay caused by the breach. However, to prevent A from misusing this provision, the agreement could limit B’s liability to either a pre-agreed amount or limit the number of days for which A could claim opportunity losses.
Finally, it would also be advisable for the agreement to acknowledge that, since gluten-free flour is a niche/premium product, B’s failure to deliver the flour would cause A to incur much expense and suffer significant opportunity losses
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.
When drafting an agreement, it is essential to ensure that it is easy for an adjudicator to arrive at a finding regarding the compensation payable in the event of a party’s breach of contract. Unless this is done, even if the actual breach is established quickly, the dispute may take a lot of time and money to get resolved, as the injured party will be forced to lead evidence to provide its compensation claims.
Simple Explainer For The Layman:
Karan entered into an agreement with Gluten Zero to supply gluten-free flour to Karan’s soon-to-be-launched cafe. However, a few days before the café was scheduled to open, Gluten Zero backed out of the agreement, forcing Karan to find an alternate supplier.
While Karan succeeded in identifying a new supplier, who agreed to sell the flour at the same rate as Gluten Zero, since gluten-free flour was a niche product, he had to incur much expense to identify a new supplier. Furthermore, Gluten Zero’s failure to comply with its obligations and the consequent search for a new supplier forced Karan to postpone the café’s launch.
Karan sued Gluten Zero for compensation for the expenses incurred in identifying an alternate supplier and the loss of revenue caused by his having to delay the launch.
Gluten Zero disputed the claim primarily on the ground that the amount Karan sought as compensation was excessive, mostly since Karan was able to purchase the flour at the same rate as he would have purchased it from Gluten Free.
Gluten-Free further argued that the losses caused due to the delay in opening the café were not a direct result of its breach of contract. Therefore Karan was not entitled to compensation for opportunity losses
Karan had to lead substantial evidence to prove that his claims were legitimate, especially his claims for opportunity losses.
However, the dispute could have been resolved using a rapid dispute resolution method like Online Dispute Resolution if the contract had:
- Specified that any failure to supply by Gluten Free would likely cause Karan to incur much expense and suffer significant losses.
- Provided for a method to calculate the compensation payable in the even Gluten Zero breached the contract, which took into account additional expenses Karan would incur in identifying a new supplier and opportunity losses, caused by Gluten Zero’s breach 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 illustration 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.