Contractual Expressions Must Be Understood As Intended By The Parties To The Contract : Supreme Court

The Supreme Court observed that scope of contractual expressions must be understood as intended by the parties to the contract.

The process of interpretation, though the exclusive domain of the Court, inheres the duty to decipher the meaning attributed to contractual terms by the parties to the contract, the bench of Justices A S Bopanna and P S Narasimha observed.

In this case, in a contract entered between the Food Corporation of India and transport contractors, there was a clause to recover damages, losses, charges, costs and other expenses suffered due to the contractors' negligence from the sums payable to them. The issue in this appeal filed by FCI was whether the demurrages imposed on the Corporation by the Railways can be, in turn, recovered by the Corporation from the contractors as "charges" recoverable under this clause. In other words, does contractors' liability for "charges", if any, include demurrages? In the impugned judgment, the High Court of Tripura  held that demurrages cannot be recovered as a charge by the Corporation.

The court noted that the dictionary meaning of "charges" is "any consideration that one must pay for goods and services provided". The court said:

"Therefore, the scope of the expression "charges" must be understood as intended by the parties to the contract. The process of interpretation, though the exclusive domain of the Court, inheres the duty to decipher the meaning attributed to contractual terms by the parties to the contract. It is with this purpose that we shall now proceed to understand the meaning of the expression "charges"."

The bench said that the Interpretation of contracts concerns the discernment of the true and correct intention of the parties to it.

"Words and expressions used in the contract are principal tools to ascertain such intention. While interpreting the words, courts look at the expressions falling for interpretation in the context of other provisions of the contract and also in the context of the contract as a whole. These are intrinsic tools for interpreting a contract. As a principle of interpretation, courts do not resort to materials external to the contract for construing the intention of the parties. There are, however, certain exceptions to the rule excluding reference or reliance on external sources to interpret a contract. One such exception is in the case of a latent ambiguity, which cannot be resolved without reference to extrinsic evidence. Latent ambiguity exists when words in a contract appear to be free from ambiguity; however, when they are sought to be applied to a particular context or question, they are amenable to multiple outcomes.. Extrinsic evidence, in cases of latent ambiguity, is admissible both to ascertain where necessary, the meaning of the words used, and to identify the objects to which they are to be applied.", the court said.

The bench also compared this contract with other contracts entered by FCI with. It noted that in the present contract with Transport Contractors, the FCI has chosen not to include the power to recover demurrages and therefore as such the expression "charges" cannot be interpreted to include demurrages.

Demurrage is undoubtedly a charge, however, such a textual understanding would not help us decipher the true and correct intention of the parties to the present contract, the court said while dismissing the appeals.

Case details

Food Corporation of India vs Abhijith Paul | 2022 LiveLaw (SC) 975 | CA 8572­-8573/2022 | 18 Nov 2022 | Justices A S Bopanna and P S Narasimha

For Petitioner(s) Mr. Ajit Pudussery, AOR Mr. Vijaya N.K., Adv. Mr. Piyush Dwivedi, AOR

For Respondent(s) Mr. Sanjay Parikh, Adv. Mr. Prashant Shukla, Adv. Mr. Suyash Srivastava, Adv. Mr. Shoeb Alam, Adv. Mr. Ujjwal Singh, Adv. Mr. Prakhar Srivastava, Adv. Mr. Gunjeet Singh, Adv. Mr. Satwik Parikh, Adv. Mr. S.P. Tanti, Adv. Mr. Abhijeet, Adv. Mr. Satyajeet Kumar, AOR Mr. Abhay Kumar, AOR Mr. Shagun Ruhil, Adv. 

Headnotes

Interpretation Of Contract - Scope of contractual expressions must be understood as intended by the parties to the contract - The process of interpretation, though the exclusive domain of the Court, inheres the duty to decipher the meaning attributed to contractual terms by the parties to the contract - Words and expressions used in the contract are principal tools to ascertain such intention. While interpreting the words, courts look at the expressions falling for interpretation in the context of other provisions of the contract and also in the context of the contract as a whole. These are intrinsic tools for interpreting a contract. As a principle of interpretation, courts do not resort to materials external to the contract for construing the intention of the parties. There are, however, certain exceptions to the rule excluding reference or reliance on external sources to interpret a contract. One such exception is in the case of a latent ambiguity, which cannot be resolved without reference to extrinsic evidence. Latent ambiguity exists when words in a contract appear to be free from ambiguity; however, when they are sought to be applied to a particular context or question, they are amenable to multiple outcomes - Extrinsic evidence, in cases of latent ambiguity, is admissible both to ascertain where necessary, the meaning of the words used, and to identify the objects to which they are to be applied. (Para 17, 27)

Summary - Contract between FCI and transport contractors - Whether the demurrages imposed on the Corporation by the Railways can be, in turn, recovered by the Corporation from the contractors as "charges" recoverable under this clause? The Corporation in the present contract has chosen not to include the power to recover demurrages and as such the expression "charges" cannot be interpreted to include demurrages - Demurrage is undoubtedly a charge, however, such a textual understanding would not help us decipher the true and correct intention of the parties to the present contract -

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