This article discusses drafting solutions to enable a reseller or distributor to get quick compensation from his manufacturer or vendor when the vendor incorrectly warrants goods to be of a certain quality, and the reseller suffers losses on account of him warranting the quality of the goods to his customers.
The article focuses on solutions that do away with the injured party’s need to lead substantial evidence to prove that the goods were not of the warranted quality.
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. Section 73 of the Act also applies 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.
However, the section limits compensation to only those 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 at the time of signing the contract.
Section 73, Illustration (d)
Illustration (d) to section 73 deals with a situation where a reseller has purchased goods which the vendor has warranted to be of a certain quality and has, in turn, warranted the quality of the goods to his customers. However, the goods are not of the stated quality, and the reseller has to compensate his customers.
The illustration is as follows:
A sells certain merchandise to B, warranting it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimbursed this sum by A.
In a dispute like the one in the illustration, the vendor would likely take the defence that the goods were of the warranted quality. Our example deals with such a situation.
A owned a hardware business. A entered into an agreement with B for the supply of specific tools. B warranted to A that the tools would last a minimum of 6 months. Relying on this warranty, A sold the tools to his customers.
However, several customers returned the tools they had bought within three months, and A was forced to either give them refunds or replace the tools, as he had provided the customers with six-month warranties.
A sued B alleging that the goods B sold to A were not of the quality they were warranted to be and sought a refund of the purchase price of the goods and compensation for the refunds and exchanges he was forced to give his customers.
B defended the suit, arguing that, since most of the goods were not returned, it was clear that they were of the warranted quality.
Interpretation and Analysis:
In the above example, A would be required to lead evidence, oral and documentary, to prove that the goods were not of the warranted quality. To do this, A would need to show that the percentage of returned goods was higher than the industry-accepted levels. A trial where parties need to lead substantial evidence is not suitable for resolution using Online Dispute Resolution
However, if the agreement itself, among other solutions discussed below, provided for an acceptable return rate, beyond which the goods would be deemed to be substandard, then the dispute can be resolved using Online Dispute Resolution.
The Drafting Solutions:
Solution 1 – Makes It Easy To Prove Breach Of Contract
When a reseller purchases goods based on the vendor’s warranting that they are of a certain standard, the agreement must define what is an acceptable percentage of goods that can be returned by the reseller’s customers before it is deemed that the goods are not of the warranted quality.
Further, the agreement must also provide for an easy-to-follow process so that, in the event of a dispute, it is easy for an adjudicator to verify the number of goods returned and exchanges and refunds by the reseller. If this process is incorporated in the agreement, it does away with the injured party’s need to lead substantial evidence to prove its compensation claims.
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.
Agreements between manufacturers/distributors and resellers, where the manufacturer warrants that the goods are of a certain quality, must incorporate clauses and processes that make it easy for an adjudicator to decide disputes arising from allegations the goods are substandard rapidly.
Simple Explainer for the Layman:
Arun Kumar owned a hardware business. Arun entered into an agreement with Max Hardware Manufacturers for the supply of specific tools. Max hardware warranted to Arun that the tools would last a minimum of 6 months. Relying on this warranty, Arun sold the tools to his customers.
However, within three months, 10% of Arun’s customers returned the tools they had bought, and Arun was forced to either give them refunds or replace the tools, as he had provided the customers with six-month warranties.
Arun sued Max Hardware, alleging that the goods sold to him were not of the quality they were warranted to be. He sought a refund of the purchase price of the goods, as well as compensation for the refunds and exchanges he was forced to give his customers.
Max Hardware defended the suit, arguing that, since most of the goods were not returned, it was clear that they were of the warranted quality.
Arun had to lead substantial oral and documentary evidence to prove that the goods were not of the warranted quality. He had to show that order to show that the percentage of returned goods was higher than the industry-accepted levels. He also had to lead evidence to prove his claims for compensation
However, if the agreement between Arun and Max Hardware provided for an acceptable return rate, beyond which the goods would be deemed to be substandard, along with a process to verify the number of exchanges and refunds Arun had to give his customers, then the dispute could have been quickly resolved 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.