No Scope For Adopting Either A Liberal Or A Narrow Approach In Construing Contractual Clause, Reiterates Supreme Court

In a judgment delivered on Monday, the Supreme Court reiterated the principles for interpretation of a contract.

"In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean.", the bench of Justices L. Nageswara Rao and Vineet Saran observed.

The Court observed thus while dismissing an appeal against a judgment of the Appellate Tribunal for Electricity at Delhi by which the order passed by the Karnataka Electricity Regulatory Commission (KERC) was reversed. KERC had dismissed the petitions filed against the reduction of the tariff payable by Bangalore Electricity Supply Company Limited (BESCOM) from Rs. 6.10/kWh to Rs. 4.36/kWh and imposition of damages of Rs. 20,00,000/- for delay in commissioning the plan.

While dismissing the appeal, the bench noted in Para 16 as follows:

1. The duty of the Court is not to delve deep into the intricies of human mind to explore the undisclosed intention, but only to take the meaning of words used i.e. to say expressed intentions (Smt. Kamala Devi vs. Seth Takhatmal & Anr  ).
2. In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean. It can happen that in doing so one is driven to the conclusion that clause is ambiguous, and that it has two possible meanings. In those circumstances, the Court has to prefer one above the other in accordance with the settled principles. If one meaning is more in accord with what the Court considers to the underlined purpose and intent of the contract, or part of it, than the other, then the court will choose former or rather than the later. (Ashville Investment v. Elmer Contractors.)
3. The intention of the parties must be understood from the language they have used, considered in the light of the surrounding circumstances and object of the contract. [Bank of India and Anr. v. K. MohanDas and Ors]
4. Every contract is to be considered with reference to its object and the whole of its terms and accordingly the whole context must be considered in endeavoring to collect the intention of the parties, even though the immediate object of inquiry is the meaning of an isolated clause. Bihar State Electricity Board, Patna and Ors. v. M/s. Green Rubber Industries and Ors).

The Court also reproduced the observations made by Lord Hoffmann in Investors Compensation Scheme Limited vs. West Bromwich Building Society in  on the broad principles of interpretation of contract

1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
2. The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
3. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
4. The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (See : Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945.
5.  The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB [1985] 1 AC 191, 201:
6. "... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."

Referring to the terms of Contract, the bench concluded that the Appellate Tribunal correctly interpreted the contract. The interpretation of 'month' was one of the main issues in this case which the court answered as follows:

"The crucial expression in the definition of 'Month' is "excluding the date of the event". If the date of the event i.e. 17.10.2016 is excluded, the Scheduled Commissioning Date would be 17.10.2017. We do not agree with the conclusion of the Commission that the definition of month is with reference only to one month and not more which is wrong a reading of the provision. The Commission applied 1.2.1 (m) which refers to a period commencing from a specified date to a specified day for the purpose of including the date of the event. In our view, the Commission has committed an error in applying 1.2.1 (m) when the provision that is applicable is 1.2.1 (k) read with the definition of month in Article 21.1. There is a specific mention of 'twelve months' in the definition of 'SCOD' and Article 1.2.1 (k) categorically provides that any reference to a 'Month' shall be a calendar month."

Case: Bangalore Electricity Supply Company Limited (BESCOM) vs. E.S. Solar Power Pvt. Ltd. [CA 9273 of 2019]
Citation: LL 2021 SC 242
Coram: Justices L. Nageswara Rao and Vineet Saran

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