Supreme Court Lays Down Guidelines For Interpretation Of Deeds & Contracts

The Supreme Court observed that when the language of a deed is clear and unambiguous, there is no justification for judicial intervention to interpret it differently. It added that applying the literal rule of construction, the words must be given their plain and natural meaning, as they are presumed to convey the true intent of the parties.

“the court must look at the words used in the contract unless they are such that one may suspect that they do not covey the intention correctly. If the words are clear, there is very little the court can do about it. In constructing a deed, looking at the surrounding circumstances and subject matter is legitimate only if the words used are doubtful.”, the court observed upon placing reliance on the case of Provash Chandra Dalui and another v. Biswanath Banerjee and another, (1989) Suppl 1 SCC 487.

Holding thus, the bench comprising Justices Pankaj Mithal and SVN Bhatti laid down the guiding tools for the construction of contracts and deeds, which are:

1. The contract is first constructed in its plain, ordinary and literal meaning. This is also known as the literal rule of construction.

2. If there is an absurdity created by literally reading the contract, a shift from literal rule may be allowed. This construction is generally called the golden rule of construction.

3. Lastly, the contract may be purposively constructed in light of its object and context to determine the purpose of the contract. This approach must be used cautiously.

The case concerns a dispute arising from the interpretation of an agreement titled a “conducting agreement” for operating a hotel business, which the plaintiff claimed conferred tenancy or licence rights upon him, thereby entitling him to protection under the Bombay Rent Act, 1947 from dispossession.

The trial court ruled in favor of the plaintiff, holding that the arrangement was a leave and license agreement, making the plaintiff a deemed tenant. The appellate Court reversed the trial court's finding, holding that the agreement was for conducting business, not conferring tenancy rights.

The High Court upheld the same, following which an appeal was preferred by the tenant-plaintiff before the Supreme Court.

Affirming the impugned findings, the judgment authored by Justice Bhatti applied literal rule of construction noting that the key clauses in an agreement no where mentioned transfer of possession to the Appellant-plaintiff, and since the plaintiff had to pay royalty for running the hotel, it signified that it was a business conduction agreement, not a lease/license.

Further, relying on Sections 91 and 92 of the Indian Evidence Act, 1872, the Court reiterated that when an agreement is reduced to writing, oral evidence cannot be introduced to contradict its terms unless the case falls under specific exceptions such as fraud or mistake mentioned under proviso to Section 92 of the Evidence Act.

“Unless and until the case falls under one or the other exceptions enabling receipt of oral evidence on a written document, the court is precluded from entertaining oral evidence. The document or deed interpreted in a particular case is not relied upon, but the subject deed is construed on well-established principles. The law recognises both ownership and possession of an owner of a property. A lease recognises the outcome of a rightful separation of ownership and possession between lessor and lessee. Section 108 of The Transfer of Property Act, 1882 deals with the rights of the lessor and lessee. Under the said section, one of the conditions is that the lessor is bound by lessee's request to put lessee in possession of the property.”, the court observed.

“In the case on hand, admittedly, defendant no. 1 is in possession of the property from defendant no. 2. Whereas the Agreement of Conducting business does not deal with the possession so enjoyed by defendant no. 1 in favour of the plaintiff. The absence of such a crucial clause in the agreement dated 16.08.1967 is a vital circumstance in construing the subject matter of 18 the said agreement. This is an added circumstance to hold that what has been entrusted is to run the business in the plaint schedule but not occupying the plaint schedule under leave and licence. In the case on hand, the terms of the agreement dated 16.08.1967 are clear that the entrustment to the plaintiff is the ownership of the hotel business of the first defendant and not the tenancy right of the first defendant in favour of the plaintiff.”, the court added.

Thus, the Court held that the 'conducting agreement' was not a leave and license agreement but an agreement for operating a hotel.

Accordingly, the appeal was dismissed.

Also From Judgment: Supreme Court Flags Lenghty Pleadings & Use Of AI-Generated Statements, Asks Courts To Strike Out Unnecessary Pleadings In Civil Suits

Case Title: ANNAYA KOCHA SHETTY (DEAD) THROUGH LRS VERSUS LAXMIBAI NARAYAN SATOSE SINCE DECEASED THROUGH LRS & OTHERS

Citation : 2025 LiveLaw (SC) 411

Click here to read/download the judgment 

Appearance:

For Appellant(s) : Mr. B.H. Marlapalle, Sr. Adv. (Argued by) Mr. Kunal Cheema, AOR Mr. Raghav Deshpande, Adv.

For Respondent(s) : Mr. Chinmoy Khaladkar, Adv. (Argued by) Mr. Abhinay, AOR Ms. Parul Khurana, Adv. Mr. Rohan Batra, AOR Mr. Rishabh Bhargava, Adv. Mr. Vinay Navare, Sr. Adv. (Argued by) Mr. Aman Vachher, Adv. Mr. Yadunath Chaudhary, Adv. Mr. Dhiraj, Adv. M/S. Vachher And Agrud, AOR M/S. P.B.A. Legal, AOR