Contractors Must Be Compensated If Customers Do Not Give Sufficient Support Required To Deliver Goods Or Services. Drafting Such Agreements For Rapid Enforcement — Primer For Lawyers
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.
Summary:
This article is an illustrated example that helps lawyers protect their service provider clients’ interests when the services’ purported receivers do not provide the necessary facilities or information required for the suppliers to deliver the services.
Keywords: Services Contracts, Opportunity Costs, Promisee’s Neglect, Promisee’s Failure, Breach of Contract
Reference: The Indian Contract Act: Section 67
Indian Contract Act, Section 67:
Section 67 of the Indian Contract deals with a situation where the promisor is ready and willing to perform his obligations under the contract, but cannot do so because the promisee fails or neglects to provide the facilities required to do so. In such a case, the promisor is excused from the performance of his obligations under the agreement. In effect, the promisee’s neglect renders the contract void.
However, the section does not define the term ‘facilities’ as the facilities that a promisee would need to provide a promisor will vary depending on the nature of the agreement and can include locations, information, tools, or funds.
Section 67, Illustration:
A contracts with B to repair B’s house. B neglects or refuses to point out to A the places in which his house requires repair. A is excused for the non-performance of the contract if it is caused by such neglect or refusal.
In this illustration, the ‘facilities’ that the promisee has failed to provide is information, namely, where and what kind of repairs are required.
Furthermore, the illustration does not deal with another critical issue, compensation for expenses, and opportunity losses. In the illustration, it is quite likely that B would have organised for material and labour to carry out the repairs. A would also be liable to compensate B for the expenses incurred towards material and labour, and for opportunity losses, i.e., for losses caused since he could not use his resources for other clients.
Our modern-day example also deals with a situation where the ‘facilities’ in question is information and deals with the dispute’s compensation aspect.
Modern-day Illustration:
A, a med-tech startup, engaged B, a marketing firm, as a marketing partner. Under the Agreement, A was required to provide B with collateral so B could approach doctors and hospital administrators to market A’s products. The agreement provided for certain customer acquisition and sales targets that B would be required to meet. However, the agreement was silent on the nature of the collateral that A would provide to B. A provided B with some material, and B began it’s marketing activities. However, many hospital administrators and doctors requested more information about certain aspects of the products. B conveyed this to A, but A did not provide any additional information or collateral. As A failed to provide the required information, B did not meet it’s targets.
As B failed to meet the contractually mandated performance targets, A refused to pay B it’s the fee, and eventually terminated the agreement alleging non-performance. B sued A for compensation for the time and resources it spent marketing A’s products.
In Court, B argued that, as A had failed to provide the information and collateral required to fulfil it’s obligations under the agreement, it was excused from meeting the targets. B further argued that, as it was A’s neglecting to provide B with the required information, B was entitled to be compensated for the expenses it had incurred and the opportunity losses it had suffered.
Interpretation and Scenarios:
In the above example, a dispute would arise regarding two issues:
- Whether A had neglected to provide B with any information or collateral necessary for B to market A’s products effectively
- Whether A would be liable to pay compensation to B and, if so, how much.
In proceedings in Court or before an Arbitrator, B would argue that, despite requests, A did not provide information or collateral that was necessary for it to market A’s products.
A, on the other hand, would contend that it had provided B with sufficient information to perform it’s marketing obligations.
The decision would likely come down to the nature of the additional information that the doctors and hospitals requested. If the same were available in the material already provided by A to B, B’s case would be dismissed.
Making The Dispute Rapid-Resolution Friendly — Strategy
In order for a dispute like the one mentioned in the example, or even in the illustration to section 67, to be rapid resolution friendly, the agreement should be clear about the nature of the ‘facilities’ that the promisee is required to provide to the promisor. Furthermore, the agreement should also pre-decide either the quantum or the computation method of the damages the promisee would be liable to pay if he fails to do so.
Drafting Solutions:
Solution 1 — (Removes Ambiguity) Makes It Easy To Prove The Promisee’s Neglect
A promisor always requires some assistance (facilities under section 67) from the promisee to perform his obligations. The nature of the assistance required must be set out in the agreement and, ideally, should form part of the promisee’s obligations under the agreement. Doing this would make it easier for a judge or arbitrator to arrive at a finding concerning whether or not the promisee has neglected to provide the facilities the promisor requires him to do.
In our illustration, the agreement should have spelled out what information and marketing material A would provide to B. The agreement should also have had a clause providing a process for B to request and receive additional information and material based on feedback it received from doctors and hospitals administrators, and for A to either provide the same or, if it could not do so, inform the same to B, who would then be allowed to renegotiate the sales targets.
Solution 2 — Makes It Easy To Claim Compensation
In cases where one party has sued the other for breach of contract, whether the breach is a result of the party doing something, it was not permitted to do under the contract, failing to perform one or more obligations under the agreement, or any other reasons, invariably contain a claim for compensation and damages. In many cases, parties must lead substantial evidence to prove their claims, making them unsuitable for resolution through rapid resolution methods like ODR.
However, if the contract contains a clause or clauses that either pre-decides the compensation, one party would be liable to pay the other if it breaches the contract or provides an easy-to-apply formula compute the compensation, then the dispute becomes suitable for rapid resolution methods.
In our example, the agreement could contain a clause specifying the average cost B would incur per pitch to a doctor or hospital administrator. These costs would include the cost incurred in respect of person-hours spent, travel, food, accommodation, and other agreed heads of expenses. To determine the compensation payable to B, this figure would have to be multiplied with the number of pitches made.
Additionally, the agreement ought to provide for a method to compute the opportunity losses. In our illustration, the formula could be B’s average profit per person-hour multiplied by the number of person-hours spent on marketing B’s products.
However, in order for an arbitrator or judge to easily apply the computation formulae, the agreement must also incorporate a simple process for A and B to confirm the number of targets that B has pitched to and the number of person-hours spent. In the absence of this process, A would be able to dispute B’s claims about the number of person-hours spent, thereby defeating the purpose of incorporating easy to apply computation methods.
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.
Simple Explainer For The Layman:
HealthLife Technology Private Limited, a med-tech startup, engaged Crest Marketing Private Limited as it’s marketing partner. Under the Agreement, HealthLife was required to provide Crest Marketing with collateral so it could approach doctors and hospital administrators to market HealthLife’s products. The agreement provided for certain customer acquisition and sales targets that Crest Marketing would be required to meet. However, the agreement was silent on the exact nature of the collateral that HealthLife would provide. HealthLife provided Crest Marketing with some material, and Crest Marketing began setting up meetings with doctors and hospitals administrators. However, many hospital administrators and doctors requested more information about certain aspects of the products. Crest Marketing conveyed this to HealthLife, but HealthLife did not provide any additional information or collateral. As HelathLife failed to provide the required information, Crest Marketing did not meet it’s the agreed targets.
As Crest Marketing failed to meet the contractually mandated performance targets, HealthLife refused to pay Crest Marketing’s fee, and eventually terminated the agreement alleging non-performance. Crest Marketing sued HealthLife for compensation for time and resources it spent marketing HealthLife’s products.
In Court, Crest Marketing argued that, as HealthLife had failed to provide the information and collateral it required to fulfil it’s obligations under the agreement, it was excused from meeting the targets. Crest Life’s lawyers further argued that, as it was HealthLife’s neglecting to provide Crest Marketing with the required information, Crest Marketing was entitled to be compensated for the expenses it had incurred, as well as the opportunity losses it had suffered.
To prove it’s case Crest Marketing had to lead substantial evidence to show that it could not reach the sales targets due to HealthLife’s failure, as well as to provide it’s claims for compensation and damages.
Had the agreement contained the following clauses, the dispute could have been resolved rapidly and inexpensively:
- A clause specifying the information HealthLife had to provide to Crest Marketing, as well as a process for Crest Marketing to request and get any additional information it may require
- A clause providing an easy to use method to compute the compensation for expenses incurred and for opportunity losses.
- A rapid-resolution friendly dispute resolution clause.
About the Author:
Dushyant Krishnan is a Mumbai based lawyer and the co-founder of House Court, an online dispute resolution platform.
