Draft Your Contracts To Ensure Rapid Compensation For Supplier’s Failure To Deliver
This article is an illustrated example that discusses drafting solutions that lawyers can adopt to enable rapid contract enforcement for their clients when their clients’ suppliers fail to deliver goods or services.
The article focuses on the importance of ensuring that consequences of breach by a supplier or service provider, especially the compensation payable, are incorporated in the agreement.
Keywords: Breach of Contract, Reciprocal Promises, Goods and Services, Supplier Contracts
Reference: Indian Contract Act, Section 54, Illustration d
Indian Contract Act, Section 54:
Section 54 of the Indian Contract Act deals with agreements that contain reciprocal promises. The Section provides that where the reciprocal promises are of such a nature that one cannot be performed, or its performance claimed, till the other promise is performed, then the party that fails to perform the first promise cannot enforce performance of the reciprocal promise.
Section 54 further states that the party that has failed to perform its promise is also liable to pay compensation to the other party.
Section 54, Illustration (d)
A promises B to sell him one hundred bales of merchandise, to be delivered the next day, and B promises A to pay for them within a month. A does not deliver according to his promise. B’s promise to pay need not be performed, and A must make compensation.
In the above illustration, it would be easy for the adjudicator to arrive at a finding that A has breached the agreement. However, the real dispute would lie in the amount of compensation A would have to pay to B, especially if B claimed compensation in lieu of opportunity costs.
Modern-day example:
X and Y entered into an agreement whereby Y would supply raw material for X’s carpet manufacturing business. Under the agreement, Y was to deliver the first shipment within one week of signing the contract. However, Y failed to deliver, and X had to source the material from another supplier at a higher price. The delay also cost X a vital contract to provide the carpeting for a new five-star hotel.
X sued Y for compensation for;
- The difference between the price at which X was to buy the material from Y and the price at which it bought the material
- The amount X would have earned from the contract with the five-star hotel
Y disputed the claim, arguing that it could not be made to pay compensation for the loss of the contract with the five-star hotel, as the agreement did not specify that time was the essence of the agreement or that X wold likely lost the contract if Y delayed or defaulted on its obligations.
Interpretation and Analysis:
In the above example, it would be easy for the adjudicator to arrive at a finding that Y breached the agreement and was liable to compensate X.
However, determining the quantum of the compensation would not be a straightforward task, as the agreement was silent on the fact that time was the essence of the agreement or that X’s contract with the five-star hotel was dependent on Y delivering the material on time.
X would need to lead evidence to prove his compensation claims, and even then would not be assured of succeeding, at least concerning the claim for opportunity losses.
However, if the agreement incorporated the drafting solutions discussed below, X could quickly and inexpensively enforce the agreement using Online Dispute Resolution.
Drafting Solutions:
Solution 1 — Makes It Easy To Compute Compensation
All agreements in which compensation is a consequence of breach should either quantify the compensation payable in the agreement itself or, if that is not possible, incorporate an easy to apply formula to compute the compensation.
Disputes that require parties to lead substantial evidence or requiring multiple oral hearings are not suitable for Online Dispute Resolution. However, if the agreement either quantifies the compensation payable to a party that breaches the agreement or provides a method for the adjudicator to calculate the compensation, it dramatically reduces the need for a party to lead evidence to prove it’s claims. This will make the dispute suitable for rapid resolution using Online Dispute Resolution.
It is also pertinent to add that agreements must exhaustively define all factors that affect the agreement’s performance.
In our example, the agreement ought to have specified that X’s contract with the five-star hotel was dependant on Y delivering the raw material on time and, if Y failed to deliver the material on time, it would have to compensate X for the revenue it would have earned from the agreement with the hotel, in the event X lost the contract.
Furthermore, since X would have already known the revenue it would earn from the contract with the hotel, it’s agreement with Y ought to have incorporated the amount.
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.
Conclusion:
The businesses must be able to quickly enforce contracts when goods suppliers and service providers breach their agreements because, very often, these failures cost the businesses significant amounts in opportunity losses. Ensuring that their suppliers and service providers’ agreements are rapid resolution friendly will allow businesses to quickly and inexpensively recover compensation from their suppliers and service providers for their failure to deliver, thereby mitigating or altogether eliminating these losses.
Simple Explainer for the Layman:
A-One Carpets and Karan Textiles entered into an agreement whereby Karan Textiles would supply raw material for A-One’s carpet manufacturing business. Under the agreement, Karan Textiles was to deliver the first shipment within one week of signing the contract. However, Karan Textiles failed to deliver, and A-One Carpets had to source the material from another supplier at a higher price. The delay also cost A-One a vital contract to provide the carpeting for a new five-star hotel.
A-One Carpets sued Karan Textiles for compensation for;
- The difference between the price at which it was to buy the material from Karan Textiles and the price at which he bought it
- The amount he would have earned from the contract with the five-star hotel
Karan Textiles disputed the claim, arguing that it could not be made to pay compensation for the loss of the contract with the five-star hotel, as the agreement did not specify that time was the essence of the agreement or that A-One would lose the contract if the raw material was delayed or did not arrive.
In the ensuing trial, it was easy for the judge to arrive at a finding that Karan Textiles breached the agreement and was liable to compensate A-One Carpets.
However, determining the quantum of compensation was a straightforward task. A-One Carpets had to lead substantial evidence to prove its claims for compensation for the revenue it would have earned from the contract with the five-star hotel.
However, the dispute could have been rapidly resolved using Online Dispute Resolution if the agreement had specified that:
- A-One Carpets would likely lose the contract with the five-star hotel if Karan Textiles delayed the supply of the raw material or failed to deliver altogether
- In the event, Karan Textiles failed to deliver the raw material as per the agreement, and A-One Carpets lost the contract with the five-star hotel, Karan Textile should be liable to compensate A-One for the lost revenue.
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.
