This article discusses clauses that suppliers of goods and services should incorporate into their contracts to rapidly recover compensation when the purchasers of the goods and services breach the contract by refusing to accept delivery.
The article stresses the importance of suppliers’ need to ensure that their agreements give specific delivery times or schedules so that purchasers cannot use ‘delays’ as an excuse to refuse delivery.
Keywords: Goods and Services, Compensation, Breach of Contract
Reference: Indian Contract Act, Section 73, Illustration a
Section 73, Indian Contract Act:
Section 73 of the Indian Contract Act, 1872, deals with one of the various remedies available to an injured party for breach of contract. This section provides that a party injured by a breach of a contract will be entitled to compensation. However, the section limits the quantum of compensation to:
a. losses which arise naturally from the breach of the contract; and
b. losses that the parties knew would be likely to result from the contract being breached at the time of signing the contract.
The section specifically states that the injured party is not liable to be compensated for remote or indirect losses caused to the injured party by the other party’s breach of the agreement.
Section 73 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.
Finally, the section also obligates an injured party to take reasonable steps to mitigate it’s loss. It does this by mandating 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 considered. The Courts have also consistently ruled that an injured party in such situations has to take all reasonable measures to mitigate the losses caused by a contract’s breach.
Section 73, Illustration a
A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation, the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.
Here, while A is liable to pay compensation for breach of contract, in an actual case, A would most likely take up the defence that, even though the agreement did not fix a time for delivery, the nature of the contract was such that time was the essence of the agreement. The court would then have to arrive at a finding based on:
a. The wording of the agreement itself
b. The evidence led by the parties regarding their intention when they signed the agreement.
c. Accepted industry practices.
X, a medical products vendor in Mumbai, entered an agreed with Y, a manufacturer in Raigad, for the supply of a particular medicine. While the agreement did not provide a fixed time for delivery of the material, both parties were aware that Raigad’s deliveries to Mumbai usually took three days. However, on the second day after the contract was signed, X informed Y that it would not accept delivery. As the medicine that X had ordered had a shelf life of only 15 days, Y was forced to sell the batch of medicine ordered by X at a discount.
Y sued X for compensation for breach of contract. X took the defence that since the medicine ordered had such a short shelf-life, it was apparent from the contract’s nature that time was the essence of the agreement. X’s defence meant that Y was forced to lead evidence to prove that the accepted delivery time was three days, even for the type of medicine that was the agreement’s subject.
Y should have incorporated the clauses discussed below to avoid having to go through a lengthy trial.
Clause 1 – Delivery Times or Schedules:
Contracts for the supply of goods and services should always specify delivery dates or schedules. These timelines must be unambiguous and provide the supplier or service provider with sufficient time to deliver the goods or services.
If the contract does not provide a precise delivery date or schedule, the purchaser may try to take advantage of the ambiguity to repudiate the contract or refuse delivery unlawfully. In such cases, even though, by law, the supplier is entitled to compensation for breach of contract, the time, money, and effort involved in enforcing the agreement makes the legal remedy practically nonexistent. Most businesses tend to write-off such losses unless the amounts involved are incredibly high.
Clause 2 – Computation of Compensation
To make an agreement rapid-resolution friendly, it must contain a clause that makes it easy for the arbitrator to determine the compensation and damages to which a party, injured by the other party’s breach of contract, would be entitled. Depending on the agreement’s nature, the clause could either be one that pre-decides the compensation amount or one that provides an easy-to-apply formula to compute the compensation.
Incorporating such a clause does away with the need for the supplier to lead voluminous evidence to prove the quantification of the compensation and damages claimed.
Clause 3 – Dispute Resolution/Arbitration
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.
Suppliers and service providers must protect themselves from lengthy and expensive trials if the purchaser unlawfully refuses to accept delivery of the goods or services. To do so, they must ensure that their contracts incorporate the well-defined delivery schedules, methods for computation of compensation, and rapid resolution friendly arbitration clauses.
Explainer For the Layman:
Kumar Medicals, a medical products vendor in Mumbai, entered an agreement with Amar Chemicals, a manufacturer in Raigad, for the supply of a particular medicine. While the agreement did not provide a fixed time for delivery of the material, both parties were aware that Raigad’s deliveries to Mumbai usually took three days. However, on the second day after the contract was signed, Kumar Medicals informed Amar Chemicals that it would not accept delivery. As the medicine that Kumar Medicals had ordered had a shelf life of only 15 days, Amar Medicals was forced to sell the batch of medicine ordered by Kumar Medicals at a discount.
Amar Chemicals sued Kumar Medicals for compensation for breach of contract. Kumar Medicals took the defence that since the medicine ordered had such a short shelf life, it was apparent from the nature of the contract that time was the essence of the agreement. Kumar Medicals’ defence meant that Amar Chemicals was forced to lead evidence to prove that the accepted delivery time was three days, even for the type of medicine that was the subject of the agreement.
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.