Introduction:
A contract has been defined under Section 2(h) of the Indian Contract Act, 1872 as an agreement that is enforceable by law of the land. A contract creates a relationship between the parties and governs their obligations. For a contract to be fairly understood and interpreted by each party concerned, it is especially important that the terms of the contract are clear and unambiguous. If the language is clear and unambiguous, no need for an interpretation of the same would arise.
Interpretation refers to a process of ascertaining the meaning of a contract, entered by parties. This is done with the help of words and language used in the contract. It helps to understand the intention behind the contract and the purpose of its formation. According to Salmond, Interpretation means a process using which the court seeks to ascertain the meaning of the legislature through the medium of authoritative forms in which it is expressed[1]. Construction refers to concluding from the ideas that lie beyond the direct meaning of texts. Thomas M. Cooley explained the difference between interpretation and construction[2]. While interpreting the contract meaning should be given to all the words and it should be read as a whole.
A Constitutional Bench held in the case of R.S. Nayak v A.R. Antulay[3] the court must give effect to the general meaning of the words of the clause. Construction applies only in the case of ambiguity of the words used in the provision. The interpretation of clauses has been discussed in the past in various cases, at length in India and foreign countries. The court in cases of multiple interpretations of a single contract follows a set of rules and principles particularly designed for this purpose.
Rules of Interpretation
Rule of Reasonable Construction
The rule of reasonable construction means that words should ideally be understood in their natural and general sense. The grammatical meaning of the words only must be taken into consideration.
Mischief Rule
This rule came after Heydon’s case[4] and stated four rules that have to be followed for a correct interpretation. These were:
- Knowledge of Common law that existed before the making of a subsequent act,
- Mischief due to which the new act was enacted,
- Remedy decided by the parliament to cure the said mischief,
- The very reason for the remedy.
The Golden Rule
The golden rule for the best interpretation of statutes is that the words must be understood by their natural meanings only. If a situation so demands, such as in the cases of ambiguity, the court can alter the meaning to the extent of such ambiguity to prevent adverse consequences of it.
Harmonious Construction
According to the rule of harmonious construction, in cases of conflict between two clauses of the same contract, the court should make efforts to harmonize the two in a way such that both the provisions remain effective. However, in cases where this is not feasible, the former clause shall prevail over the latter.
Intent of Parties Should be Given Importance Over Words of the Contract
In Investors Compensation Scheme Ltd v West Bromwich Building Society[5], it was held that instead of the words of the contract, the intent of the parties to the contract should be of importance.
Lord Hoffman gave 5 principles of interpretation of contracts. These were:
a) View of a reasonable man: The contract should be interpreted in a manner such that it can be understood by a reasonable man.
b) Consensus ad idem: The golden rule is that the words should be interpreted according to the intent of the parties to a contract.
c) Uniformity of meaning: There should be uniformity in the meaning of words. This means that words should be assigned their general meanings only.
d) Decisions before entering the contract are excluded.
e) Should not be in opposition to the general ordinary understanding.
Document of a Written Contract Should be Read as an Entire Document and so far as Mutually Explanatory
The interpretation of a contract or agreement should be based on all its clauses, read along with each other. This is very important to understand the intent of the parties and the purpose of the contract. It further helps to interpret the contract in a better way.
B.P. Refinery (Westernport) Proprietary Limited v. The President Councilors and Ratepayers of the Shire of Hastings[6]
In this case, a test of 5 conditions to read an implied condition was laid.
It was held that such an implied term to a contract should be: Rational, fair, capable of clear expression, not contradicting any pre-existing term, such that it gives success to the business. The above provisions should be so obvious that if a bystander asked whether it was the common intention of the parties concerning the contract or a clause of the contract, the answer to his question would be a clear yes.
Investors Compensation Scheme Ltd. v. West Bromwich Building Society[7]
This case was decided in the late 1990s by the House of Lords and the above principles find a reference in this case as well.
Leading Cases
Southeast Asia Marine Engineering and Constructions Ltd. v. Oil India Limited[8]
In this case, the Supreme Court of India held that for the aim of providing a large interpretation, Clause 23 of the contract cannot be interpreted by the Arbitral Tribunal. This is because the thumb rule of interpretation is that the document forming a written contract should be read as an entire and as far as possible, as mutually explanatory.
M.O.H. Uduman and Ors. v. M.O.H. Aslum[9]
In this case, it had been held that a contract of partnership should be read as an entire document.
The cardinal rule here is that the intention of the parties to the contract should be interpreted using the language used in the contract by assuming harmonious construction of all the clauses contained therein.
Nabha Power Ltd. v. Punjab State Power Corporation[10]
In this case, the Supreme Court issued a message of caution for the commercial courts to not resort to implied terms in a contract. Unless the above-mentioned 5 tests can be applied, a literal approach needs to be adopted while interpreting a contract. By literal, it means an approach that resorts to grammar for the interpretation of the contracts. In this case, the Supreme Court agreed to the views of the tribunal to the extent that the contract needs to be interpreted taking into consideration all the terms of the contract. However, the Court held that the tribunal had been unsuccessful in considering a similar condition while interpreting clause 23 of the contract. The Court expressed that it is the thumb rule of interpretation that a document forming a written contract should be read as an entire so far as possible as mutually explanatory and this was ignored by the tribunal in its decision while interpreting clause 23.
Mohan Steels Limited v. Steel Authority of India[11]
In this case, it was held that since certain circulars weren’t included within the terms of the contract and were neither within the knowledge of the parties, they cannot be trusted for interpretation of the clauses of the contract.
Glynn v Margetson[12]
In this case, Lord Halsbury said that looking at the complete document and understanding the main objective of it, one should overlook words and provisions if they are not consistent with the main purpose of the document.
Conclusion
The rule that the document of a written contract should be read as an entire document and so far as possible as mutually explanatory throws light on a critical aspect of contract law which is extremely essential in understanding a contract. Liberal interpretation as in the case of Nabha Power stated that an implied term must not contradict any express term of the contract. The golden rule is that there should be an intention of parties to a contract regarding the interpretation of a clause. The contract should be read as a whole, and the interpretation should be based on all the clauses read together. The commercial objective of the clause and its relationship to the contract will be relevant in resolving any ambiguity in the wording. The clauses should be read together to get a clear picture of the purpose of the contract and to arrive at a decision as to its interpretation.
References:
[1] Salmond, Jurisprudence, 11th Edition, p. 152.
[2] Cooley, Constitutional Limitations, Vol. 1, p. 97.
[3] AIR 1984 SC 684.
[4] (1584) 76 ER 637.
[5] [1998] 1 W.L.R. 896 (19 June 1997).
[6] (1994) 180 CLR 266 (27 July 1977).
[7] [1997] UKHL 28, [1998] 1 WLR 896, [1998] 1 All ER 98.
[8] Civil Appeal No. 673 of 2012 and Civil Appeal No. 900 of 2012.
[9] (1989) 2 MLJ 172.
[10]Civil Appeal No.179 of 2017.
[11] O.M.P 488/2015.
[12] [1893] A.C. 351.
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