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This article is written by Madhurita Tiwari, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Prashant Baviskar(Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

Introduction

When entering into a contract, many preliminary communications transpire between the parties before a definite offer is made. One party may simply ask, or respond to the request of information, or he may invite the other to make an offer. These communications can be in the form of e-mails, letters, or even in-person negotiations. All such communications are termed as extrinsic evidence to a contract, and there are rules for their admissibility in the court of law. 

The terms of a contract have to fulfil the precondition of being ambiguous for any extrinsic evidence to be admissible with respect to those terms.

Latent ambiguity

Caveat emptor is a fundamental principle in commerce and contractual relationships between a buyer and a seller. In simple terms, it means when a person is buying goods, he should examine them thoroughly as the seller is under no obligation to disclose the whole truth about the goods. Hence, contracts with patent ambiguity are mostly void ab initio, and courts do not allow evidence with respect to the same.

Again, when the language used in the contract is plain and applies accurately to the existing facts, one shouldn’t produce evidence to show that it was not meant to apply to such facts. {Section 94 of Indian Evidence Act (hereinafter referred to as “IEA”)}.

Lord Atkin observed in Pakala Narayana Swami vs. Emperor, “when the meaning of words is plain, it is not the duty of the courts to busy themselves with supposed intention”.

Thus, it is necessary that there is some kind of latent ambiguity in the contract, i.e. when the contract is plain on the face but doesn’t apply accurately or produces absurdity when applied to facts (Section 95 of the IEA), in order for the courts to allow extrinsic evidence. However, such evidence should not contradict, vary, add to, or subtract from the terms of a written contract. (Section 92 IEA).

For example, where the language used might have meant to apply to only one of many things that are each prone to the same description used (Section 96 IEA), or where the language could apply partially to two sets of existing facts but does not apply correctly to either (Section 97 IEA).

In Anglo American Metallurgical Coal Pty Ltd. vs. MMTC Ltd., Hon’ble Supreme Court observed that the IEA is not applicable to proceedings before an arbitrator. The application of Section 94 of the IEA as to extrinsic evidence being inadmissible in cases of “patent ambiguity”, is fundamental to Indian jurisprudence. 

The Court held that all the documents exchanged between the parties in the performance of a contract must be read as a whole, connecting each particular document to the existing facts, including how particular words are used in a particular sense.

While applying the proviso (6) to Section 92 of the IEA, the adjudicating authority must first ascertain whether the plain language of a particular document applies accurately to existing facts. If, however, it is ambiguous or unmeaning in reference to existing facts, evidence may then be provided to show that the words were used in a sense that would make them meaningful in the context of the entirety of the correspondence between the parties.

Rule of best evidence

The parol evidence rule is a common-law rule that governs what kinds of evidence parties to a contract dispute can introduce when trying to determine the specific terms of a contract. It prevents a party to a written contract from presenting extrinsic evidence (usually oral) since parties who have reduced a contract to writing should be bound by it alone.

Over time, this aspect of the parol evidence rule has become more confined and only extrinsic evidence that will  ‘add to, subtract from, vary or contradict’ the written contract is excluded and all other evidence can be adduced to prove the terms of the contract.

One of the cardinal principles in the IEA is the rule of best evidence. Under this rule, courts prefer primary evidence over secondary and documentary evidence over oral, wherever possible. 

When a particular matter is required to be documented by law, oral evidence cannot be given in its place at all. In such cases, documentary evidence excludes oral evidence. 

In the case of Roop Kumar v. Mohan Thedani, the Hon’ble Supreme Court said that when the parties have deliberately put their agreement into writing, it is conclusively presumed that they intended the writing to form the final statement of their intentions so as to avoid any future controversy and keep it beyond the reach of treacherous memory.

In Taburi Sahai v. Jhunjhunwala, the court held that a deed of adoption of a child is not a contract, therefore the fact of adoption can be proved by any evidence apart from the deed. The rule of exclusion of oral evidence applies only to the terms of contract, grant or disposition of property. If any other fact, apart from its terms, happens to be mentioned in the contract, the same can be proved by any other evidence, besides producing the document.

What is oral evidence?

The proviso to Section 92 of the IEA, especially, permits oral evidence where there is:

  1. Any vitiating factor such as fraud or illegality; 
  2. A separate oral agreement that is not inconsistent with the terms of the written contract; 
  3. A separate oral agreement creating a condition precedent to the contract; 
  4. A distinct subsequent oral agreement to rescind or modify the written contract;
  5. Any usage or custom not expressly mentioned in the contract (not being inconsistent with its terms), which is  usually annexed to such contracts; and 
  6. Any fact which shows the manner in which the language used is connected to the existing facts. 

Section 92 of the IEA bars to give oral evidence of communications between parties to the contract with respect to the contents of a written document. However, when the contract is silent with respect to some relevant terms, the parties may provide oral evidence of their negotiations to help interpret or supplement the contract which would show how the language of the document is related to the existing facts. However, the oral evidence must not be inconsistent with the written contract.

As was held in the case of Bal Ram v. Ramesh Chandra, the prerequisites of the proviso to Section 92 IEA are that the document must be silent on a matter related to which a separate oral agreement already exists. Such oral agreement must not be inconsistent with the terms of the document.

The main Section of Section 92 uses the phrase “as between the parties”, hence, the Section doesn’t bar oral evidence related to communications between a  third party and a party to the contract. Again, Section 99 allows oral evidence by a third party, whose interests are affected by a subsequent oral agreement between the parties, to vary the terms of the contract.

In Bai Hira Devi v. Official Assignee of Bombay, it was observed that this Section lays down that a person who is not a party to a document nor a representative-in-interest of a party to a document may give evidence of any facts tending to show contemporaneous agreement varying the terms of the document. Under Section 92 only a party to a contract is excluded from producing evidence subtracting from or adding to the terms of a contract, implying that a person who is not a party to a contract could lead to oral evidence varying the terms of a contract. This Section, therefore, only emphasises this aspect of Section 92. Section 92 speaks of only contracts, grants or other disposition of property whereas this Section deals with all documents, contracts or not. However, this Section speaks only of varying the terms of a document.

In Placido Francisco Pinto (D) by LRs & Anr vs Jose Francisco Pinto & Anr. the Court observed that oral evidence is admissible under Section 92 of the IEA to show that the document is a sham deed. The Supreme Court, however, held that the proviso 6 to Section 92 of the IEA will not apply if a document is straightforward, without any ambiguity in meaning.

In Mangala Waman Karandikar (D) TR. LRS vs. Prakash Damodar Ranad it was observed by the Apex Court that where the terms of the document are ambiguous, the proviso to Section 92 may be resorted to. However, when the document is straightforward and presents no such difficulty, the proviso doesn’t apply. If oral evidence is allowed to show that the terms of the document are different from what is expressed, it would amount to contradicting or varying those terms which Section 92 specifically prohibits. It would enlarge the ambit of proviso beyond the main Section. The legislature wouldn’t have intended to nullify the object of Section 92 by enacting exceptions to that Section.

Recently, in the case of Bangalore Electricity Supply Company Limited (BESCOM) vs. E.S. Solar Power Pvt. Ltd. [CA 9273 of 2019], Supreme Court reproduced the observations made by Lord Hoffmann in Investors Compensation Scheme Limited vs. West Bromwich Building Society on the broad principles of interpretation of a contract. It was observed that since legal interpretation differs from the interpretation of the way we interpret the words used in daily life, prior negotiations of the parties and declarations of their subjective intent are admissible only for rectification for reasons of practical policy. 

The Court also relied on Smt. Kamala Devi vs. Seth Takhatmal & Anr, to observe that the duty of the Court is not to delve deep into the intricacies of the human mind to explore the undisclosed intention, but only to take the meaning of words used i.e. to say expressed intentions.

Conclusion

Pre-contractual negotiations or prior negotiations between the parties while entering into an agreement are  not admissible, generally, unless the terms of the contract are later found to be ambiguous or absurd when applied to facts. It is important that the ambiguity should not be so obvious and on its face so as to bring the intention of the party into question. 

Again, when the terms of the contract are plain and straightforward, producing evidence to show that they mean something different than what is expressed therein is prohibited. Hence, Courts admit evidence only when there is latent ambiguity found in a contract. 

The rule of best evidence guides admissibility of evidence, hence, where negotiations have been documented, the courts would prefer such documentary evidence over oral evidence. However, when it is required by the law to mandatorily have something in a documentary form, producing oral evidence is strictly prohibited in such circumstances.

However, where the negotiations are in the form of oral statements only, they shall comply with Section 92 IEA before the court can allow their admission. It is important that they are not varying the written contract unless the oral evidence is being produced by a third party to the contract.

References

  1. D’Costa, Venancio, Goel, Gauri and Ojha, Astha , “India: Best Evidence Rule: Cardinal Principle Of Indian Evidence Act”, Mondaq, 27 April 2020, https://www.mondaq.com/india/court-procedure/924124/best-evidence-rule-cardinal-principle-of-indian-evidence-act
  2. GOH, Yihan. Contractual Interpretation in Indian Evidence Act Jurisdictions: Compatibility with Modern Contextual Approach. (2013). Oxford University Commonwealth Law Journal. 13, (1), 17-48. Research Collection School Of Law. https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=3338&context=sol_research
  3. Lal Batuk, The Law of Evidence, 22nd Edition (2018), Central Law Agency.
  4. Obhan, Ashima and Bhutani, Seerat, “The Supreme Court on Rules of Contract Interpretation: Parol Evidence Rule, Obhan & Associates, Accessed: 27 October 2021 https://www.obhanandassociates.com/blog/the-supreme-court-on-rules-of-contract-interpretation-parol-evidence-rule/
  5. Singhania, Krrishan and Singhania, Srishti, “India: Entire Agreement Clause: Founders Be Aware!”, Mondaq, 23 May 2019 https://www.mondaq.com/india/contracts-and-commercial-law/808320/entire-agreement-clause-founders-be-aware
  6. Singh, Kanika, “Arbitration Court Reckoner: November & December 2020”, LiveLaw, 24 Jan 2021  https://www.livelaw.in/know-the-law/arbitration-court-reckoner-november-december-2020-168837#_ftnref27
  7. The Indian Evidence Act, 1872. 
  8. Veerabathran, Ramyaa, “‘Without Prejudice After Oceanbulk Shipping: A Comparison Between The English And Indian Positions Of Law”, NLIU Law Review, 225-239, National Law Institute University, Bhopal https://nliulawreview.nliu.ac.in/wp-content/uploads/2021/02/Vol-III-Issue-I-225-239.pdf

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