This article is an illustrated rapid resolution example that is useful when lawyers draft construction contracts for clients who engage contractors for part or all of the construction work.
The article focuses on drafting solutions that enable injured parties to rapidly recover compensation from the contractors for losses, including loss of income caused by the contractor’s shoddy or substandard work.
Keywords: Breach of Contract, Compensation, Damages, Construction Contracts, Real Estate Development
Reference: The Contract Act: Section 73: Illustration (l)
Contract Act: Section 73:
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 violation of an agreement will be entitled to compensation. However, the section limits the breaching party’s liability to compensation for only those losses that arise naturally from the contract’s breach, and any losses that the parties knew, at the time the contract was signed, would be likely to result from the contract being breached.
The section is also equally applicable to cases where there is no contract, but the injury has occurred because of a party’s breach of 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 (l):
“A, a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the first of January, it falls down and has to be rebuilt by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. A must make compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C.”
In the above illustration, while the various heads of compensation are clear, A would have to prove the following:
- That the house collapsed because of B’s shoddy work
- The actual amount of money spent in reconstruction
- That B knew A was going to let the house on rent
- The amount of compensation paid to C
- The rent a would have earned from C
While it would be relatively easy for A to prove the compensation paid to C and the amount of rent he would have earned, it would be much more challenging to prove that the house collapsed due to B’s shoddy construction as B would undoubtedly contend that the house collapsed due to external factors.
A, a builder, engaged B, an interior works firm, to do the interiors for A’s new residential complex. B did the work and handed over the building to A, who began selling the apartments. However, within six months of B handing over the site, the paint in several apartments started peeling off.
A had already sold some apartments, so it was forced to compensate the owners who had repainted their flats. A was also forced to repaint several unsold apartments. The delay caused due to having to repaint the apartments resulted in A losing out on several sales. A did eventually manage to sell these unsold flats. However, the flats sold at a much lower rate as the project had gained a bad reputation in the market. Therefore, it did not attract the kind of purchasers for whom the building was constructed.
A sued B to recover the compensation paid to the flat owners, the cost of repainting the unsold flats, and the difference between the original sale price of the unsold flats that A was forced to repaint and the price at which they were actually sold.
In our example, as was the case in the illustration, B would dispute A’s claims by arguing that its work was not shoddy, and the paint in the flats peeling off was due to external factors. It would cite the fact that the paint did not peel off in all, or even the majority, of the flats as proof of its defense.
B would also dispute the claim for compensation regarding the difference in the original sale price of the flats and the price at which they were sold, arguing that the loss of income was not a direct consequence of any alleged breach of contract by B.
The dispute would require both parties to lead substantial evidence and, therefore, would not be suitable for resolution using a rapid resolution tool like Online Dispute Resolution. However, if the drafting solutions discussed below are incorporated into the agreement, a dispute can be ODR friendly.
Solution 1 – Makes it Easy to Determine Breach And Quantify Compensation
In a construction contract, where a contractor is engaged for some work, it is essential to set out, in the agreement itself, the quality standards that the contractor’s work is required to meet. These quality standards should be drafted so that a Judge or Arbitrator should be able to determine whether the work was performed to the required standards without the parties being required to lead much evidence.
In our example, the best way to set quality standards would be for the contract to set the expected lifespan of the paint and make the contractor liable to either pay compensation or repaint the flats at its expense if the number of flats requiring repainting before the lifespan of the paint expired exceeds a specific number.
To protect the contractor from being liable to repaint flats where the paint has peeled off due to the flat owner’s negligence, the agreement could provide that, before liability is assigned to the contractor in respect of an occupied flat, an independent expert would inspect the flat to assess the cause of the paint peeling off.
Furthermore, the agreement should acknowledge that if the contractor’s work is substandard, it would likely cause the flats’ price to go down, thereby causing loss to the builder. Therefore, the contractor would also be liable to pay the difference in the flats’ market rate and the actual sale price.
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.
Disputes arising from construction contracts where a contractor has been engaged for some of the work can be made rapid resolution friendly provided the required quality standards of the work are unambiguously provided in the contract, along with the consequences if the contractor fails to conform to the said standards.
An explainer for the Layman:
Anand Builders engaged Bharat Interiors to do the interiors for Anand Builder’s new high-end residential complex. Bharat Interiors did the work and handed over the apartments to Anand Builders, who began selling the flats. However, within six months of Bharat Interiors handing over the site, the paint in several apartments started peeling off.
As Anand Builders had already sold some apartments, it was forced to compensate the owners of those apartments who had repainted their flats. Anand Builders was also forced to repaint several unsold apartments. The delay caused due to having to repaint the apartments resulted in Anand Builders losing out on several sales. While Anand Builders did eventually manage to sell unsold flats, they were sold for a much lower rate as the project had gained a bad reputation in the market, and therefore did not attract the kind of purchasers for whom the building was constructed.
Anand Builders sued Bharat Interiors for compensation towards:
- The compensation paid to the flat owners who repainted their flats;
- The cost of repainting the unsold flats; and
- The difference between the original sale price of the unsold flats that Anand Builders was forced to repaint and the price at which they were actually sold.
Bharat Interiors disputed the claims, arguing that its work was not shoddy, and the paint in the flats peeling off was due to external factors. It cited that the paint did not peel off in all, or even the majority, of the flats as proof of its defense.
Bharat Builders also disputed the claim for compensation in respect of the difference in the original sale price of the flats and the price at which they were sold, arguing that the loss of income was not a direct consequence of any alleged breach of contract by Bharat Builders.
As it was not possible for the Court to decide the dispute based on a reading of the contract, both parties led substantial evidence, resulting in a length and expensive trial.
However, the dispute could have been quickly resolved using Online Dispute Resolution if the agreement contained the following:
- A clause recognizing the lifespan of the paint and making Bharat Interiors liable to either pay compensation or repaint the flats if the number of flats requiring repainting before the lifespan of the paint expired exceeded a certain number.
- A clause acknowledging that substandard work by Bharat Interiors would likely cause the price of the flats to go down, thereby causing loss to the Anand Builders. Therefore, Bharat Interiors would also be liable to pay the difference in the flats’ market rate and the actual sale price.
- A clause giving Bharat Interiors the right to demand inspection of any flat where the paint was peeling off by an independent expert.
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. Rapid 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.