contract
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This article has been written by Preeti Bhandari, pursuing the Diploma Programme in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

contract is a document executed between two or more parties and is legally binding on all the parties. It governs the relation between the parties to an agreement and defines their rights and responsibilities. Therefore, it is very important and prime responsibility of the parties to correctly incorporate the terms between them and not leave any scope for ambiguity. 

However, it is not always so and many times due to time constraints, undue pressure, the vague language the contract fails to correctly define the right and responsibilities between the parties. It may as well happen that there are more than two interpretations of the clause in the agreement or contract. The courts in case of such ambiguity follow the rules and principles of interpretation. 

Meaning of Interpretation

Interpretation stands for the process which the courts follow to ascertain the meaning of the contract through the words in which it is expressed. The aim of interpretation of a contract is to ascertain and discover the intention of the parties with which they had entered into the contract or agreement.  While interpreting it is considered important to give the meanings to words as near to the intention of the parties to the contract and the law governing the same.

Comparison between Contractual Interpretation and Statutory Interpretation:

Statutory Interpretation

Statutory Obligation operates in rem meaning thereby against the public at large and not to any individual party. Interpretation of statutes is done if there is any ambiguity in the language of the statute. The interpretation of the same is done on the basis of legislative decisions, the preamble of the act, parliamentary discussions. 

Contractual Interpretation

Contractual Obligation arises as a result of an agreement or contract between the parties and the rights and duties arising as a result of entering into such contract or agreement. The need for interpretation arises either in case when the contract is being entered into or in case where the dispute arises on the terms and conditions of the contract. The same governs the rights of the parties only who have entered into a contract.

Rules of Interpretation of Contractual Interpretation

Rule of Reasonable Construction

It is advisable to understand the words in their natural, ordinary or popular sense. The words are to be understood and construed in their grammatical meaning unless it leads to more ambiguity or absurdity. In interpreting the terms of the contract, the ordinary sense of the words is to be construed unless it  leads to absurdity with the rest of the contract and the purpose of entering of the contract or agreement. 

While interpreting the contract, efforts should be made to give meaning to each and every word and to be read as a whole. 

Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] laid down that in an agreement or contract instead of looking into the meaning of words the intent of parties entering into an agreement or contract should be looked into. 

Lord Hoffman laid five principles for Interpretation of Contracts:

The document is to be interpreted in a manner which is understood by a reasonable person.

Anything discussed or decided between the parties prior to entering into an agreement or contract is to be excluded.

The word or expression should not be contrary to the general common sense.

The words should be construed in general sense and not literal. The words should be assigned meaning which is generally assigned to them.

The words should depend on and be interpreted according to the intent of the parties. While interpreting the words or contract it is advisable to consider the background and the knowledge available on the basis of which the contract is entered into by the parties. 

Whole Contract is to be considered

Lord Halsbury, in Glynn v Margetson [1893] A.C. 351, said:

“Looking at the whole of the instrument and seeing what one must regard…as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract.”

The contract should be read as a whole, and the interpretation should be based on all the clauses read together. It is important to understand the intent of the parties. 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.

The Bombay High Court also relied on M.O.H. Uduman and Ors. v. M.O.H. Aslum, AIR 1991 SC 1020, wherein it was held:

“It is settled canon of construction that a contract of partnership must be read as a whole and the intention of the parties must be gathered from the language used in the contract by adopting harmonious construction of all the clauses contained therein. The cardinal principle is to ascertain the intention of the parties to the contract through the words they have used, which are key to open the mind of the makers. It is seldom that any technical or pedantic rule of construction can be brought to bear on their construction. The guiding rule really is to ascertain the natural and ordinary sensible meaning to the language through which the parties have expressed themselves, unless the meaning leads to absurdity.”

Commercial Object

The commercial object or function of the clause in question and its relationship to the contract as a whole will be relevant in resolving any ambiguity in the wording.

Ejusdem Generis

Ejusdem Generis means of the same kind or species. When particular words pertaining to a class, category or genus are followed by general words, general words are construed as limited to things of the same kind as those specified. In other words, general expression is to be read as comprehending only things of the same kind as that designated by the preceding particular expressions, unless there is something to show that a wider sense was intended

Aids of Interpretation

A contract may apart from the rules, be interpreted based on the parts of the contract like title, recital, definitions.

Title

Every contract entered into has a title which gives out the purpose of the contract just by going through it. The title of a contract is used to interpret the nature of the contract at first glance.

Recital

Recital defines the object and purpose of the contract. It is an introduction to an agreement/contract and gives the basis of coming together of the parties. If there is conflict in the clauses of the contract, the recital gives an idea as to coming together of the parties and can be decided on that basis.

Definitions

Definitions in a contract assign meaning to the words being used in the contract and help in eliminating the ambiguity in the contract. Definitions are preamble to the clause. The definition can be used in construing the clauses but only where there is ambiguity in the clause. However, they can not be used to assign a different meaning to the clauses which have clear intent and words.

Schedules

Documents which form annexures or schedules of the contract may be read to understand and interpret the words and the contract.

Pre-contractual Documents

Any documents executed before the entering or execution of the agreement or the contract will form the basis of intent of the parties in case of ambiguity.

It may happen before the execution of the final contract that draft agreements or contract were entered into between the parties and signed. Such documents may be used to explain some terms which were defined in detail in them and were not made part of the final draft in such detail. However, draft agreements which do not represent the final consensus of the parties, should not be taken into consideration for the purpose of interpreting a contract.

Court Orders

In case of disputes while defining the rights and obligations of the parties, courts rely on the decisions earlier decided on the similar basis.  It gives emphasis as to the judgements already decided and interpretation given in the judgment.

Factors which have been decided earlier basis of court judgements etc as well help in the interpretation of the clauses in the contract.

The courts as well while interpreting the contract sometimes rely on the particular kind of contracts. There are many contracts which have standard terms and are used universally in such contracts like rent agreement etc. In appropriate scenarios, the court will recognize the standard practice being followed in that field.

Conclusion

The above rules provide a broad view in which the words or contracts should be construed in case of dispute or ambiguity. These are guiding factors and the contract is to interpret basis facts and circumstances. When there is a dispute between the parties to the contract on the clause or words of the contract,  these tools can only provide a basis of resolving ambiguity however a detailed review of the contract will be required before reaching a decision. 

References

 

 

Judgements

  1. Nabha Power Limited (“NPL“) vs Punjab State Power Corporation Limited (“PSPCL“) & another
  2.  South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Limited) v. Oil India Limited

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