This article discusses drafting solutions to enable principals to rapidly recover compensation from their agents for losses caused by the agent’s negligence.
The article focuses on the importance of ensuring that the agency agreement defines the method of computing the compensation the agent would have to pay if he is found to be negligent.
Keywords: Agency Agreement, Negligence, Compensation
Reference: Indian Contract Act, Section 212, Illustration (a)
Section 212, Indian Contract Act
Section 212 of the Indian Contract Act provides the duty of care that an agent owes to his principal while conducting his business. The section states 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. An agent is not liable to compensate the principal for any remote or indirect losses.
Section 212, Illustration a
A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A’s account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been paid, according to the usual rate, and for any further direct losses, e.g., by variation of rate of exchange, but not further.
In the above illustration, A would not need to lead much evidence to prove that B was negligent. Likewise, B would not need to lead much evidence to defend the claim for compensation in lieu of A becoming insolvent.
However, A would need to lead substantial evidence to prove the date on which B ought to have remitted the money to A and, consequently, the date from which interest ought to be computed. A would also need to lead evidence to prove the rate of interest claimed.
Furthermore, in an actual dispute, the agent would also be likely to dispute the allegation of negligence itself.
A engaged B to manage his distributorship business. Per the agreement, B was to transfer to A the profits each month. However, there was no stipulated time within which B was to transfer the profits to A. B failed to transfer the sixth month’s profits to A for three weeks after the end of the month. As a result, A terminated the agency agreement and sued B for compensation for negligence.
A claimed that, as per accepted business practices, the amount became payable two working days after the end of the month and that B would be liable to pay interest at the rate of 15%.
B defended the suit, denying A’s claim that the accepted practice was to remit the profits within two working days and argued that the agreement did not specify any particular date by which he was to do so. B also argued that the rate of interest claimed by A was excessive and not in line with accepted business practices.
Interpretation and Analysis:
In the above example, the dispute arose because the contract was not clear about:
- What would constitute negligence by the agent
- The amount of compensation the agent would be liable to pay, and the method for computing the same.
Therefore, a judge or arbitrator would need to decide the case based on the parties’ evidence regarding the accepted business practices and the usual interest rate. This would likely render the dispute unsuitable for resolution using Online Dispute Resolution as the process of recording evidence in a trial is generally complicated and time-consuming.
However, if the following drafting solutions are incorporated into the agreement, the dispute can be resolved using Online Dispute Resolution:
Solution 1 – Makes It Easy For The Principal To Prove Misconduct Or Negligence
An agency agreement must set out the agent’s responsibilities exhaustively and in language that does not leave any room for interpretation. As far as possible, the agreement should avoid open-ended obligations such as ‘all things related to…’ or ‘all things necessary for…’.
Exhaustively defining the agent’s responsibilities allows the principal to prove negligence without leading substantial evidence, thereby enabling the principal to recover compensation for the negligence quickly.
It is also pertinent to mention that adequately defining the agent’s responsibilities also protects the agent from frivolous allegations by incompetent or unscrupulous principals.
In our example, the agreement ought to have placed a business management process that obligated the agent to remit the monthly profits to the principal within a fixed time after the end of the relevant month.
Solution 2 – Makes It Easy to Compute Compensation
It is not enough to merely draft the agreement so that it is easy for the adjudicator to arrive at a finding of breach. Most disputes drag on even when it is clear that one party is in breach of contract because the party in breach disputes the amount of compensation claimed. Therefore, it is essential that contracts also incorporate clauses that make it easy for the adjudicator to compute compensation in the event of breach by a party.
Agency agreements, like the one in our example, can be drafted so that a Judge or Arbitrator can quickly determine the amount of compensation payable in the event of negligence by the agent by incorporating the following factors are provided in the agreement:
- The date on which the agent becomes liable to pay compensation
- The heads of compensation payable in the vent of negligence by the agent
- The rate of interest applicable to the compensation amount till it is paid.
Solution 3 – 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.
Principals that engage agents to manage their businesses, or any part thereof, must ensure that the contracts properly define the agent’s obligations, as well as the factors determining the compensation payable in the event of negligence by the agent so that they can quickly recover compensation if the agent is negligent.
Simple Explainer for the Layman
Arvind engaged Bhaskar to manage his distributorship business. Per the agreement, Bhaskar was to remit each month’s profits to Arvind. However, the agreement did not provide a fixed time for Bhaskar to remit the profits to Arvind.
Bhaskar failed to remit the sixth month’s profits to Arvind for three weeks after the month. As a result, Arvind terminated the agency agreement and sued Bhaskar for compensation for negligence.
Arvind claimed that Bhaskar ought to have remitted the profits within two working days after the end of the month as per standard business practices. Arvind further claimed that Bhaskar would be liable to pay interest on the compensation computed at 15%.
Bhaskar defended the suit, arguing that the agreement did not specify any particular date by which he was to remit the month’s profits to Arvind and disputed Arvind’s claim that the amount ought to have been remitted within two working days from the end of the month. Bhaskar also argued that the 15% rate of interest was excessive and was no in line with accepted business practices.
As the agreement itself was silent on when Bhaskar ought to have remitted the monthly profits to Arvind, as well as the rate of interest payable n the vent of negligence, the trial was lengthy and expensive.
However, if the agreement had set out the following, the dispute could have been resolved quickly using Online Dispute Resolution:
- The period within which Bhaskar had to remit the profits to Arvind after the end of the month
- The heads of compensation under which Bhaskar would be liable to pay compensation in the event of negligence
- The rate of interest applicable to the compensation amount till it was paid.
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