Commercial Courts Should Normally Look Into Express Terms Of A Contract And Not Into The Implied Terms: SC [Read Judgment]

The Supreme Court, on Thursday, cautioned Commercial Courts against looking into the implied terms of a contract, opining that a contract should be read as it is, as per its express terms.

The Bench comprising Justice R.F. Nariman and Justice S.K. Kaul observed, “We may, however, in the end, extend a word of caution. It should certainly not be an endeavour of commercial courts to look to implied terms of contract. In the current day and age, making of contracts is a matter of high technical expertise with legal brains from all sides involved in the process of drafting a contract. It is even preceded by opportunities of seeking clarifications and doubts so that the parties know what they are getting into. Thus, normally a contract should be read as it reads, as per its express terms.”

The Court was concerned with the interpretation of a commercial contract between Punjab State Power Corporation Limited (PSPCL) and Nabha Power Limited (NPL), an entity owned by L&T Power Development Limited. The dispute pertained to certain costs payable under a 25 year Power Purchase Agreement between the parties.

Making reference to the law laid down in this regard, the Court took note of the ‘five condition test’ for an implied condition to be read into the contract. The test requires the following conditions to be satisfied: (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3) it goes without saying, i.e., The Officious Bystander Test; (4) capable of clear expression; and (5) must not contradict any express term of the contract.

The Bench, however, noted that these principles “would not be to substitute this Court’s own view of the presumed understanding of commercial terms by the parties if the terms are explicit in their expression”. It opined that the explicit terms of a contract are always the final word with regard to the intention of the parties.

The Court, thereafter, partially allowed the Appeal, observing, “In the present case, we have really only read the contract in the manner it reads. We have not really read into it any ‘implied term’ but from the collection of clauses, come to a conclusion as to what the contract says.”