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Section 91 and 92 and interpretation of contracts

Supreme Court of India

Roop Kumar vs Mohan Thedani on 2 April, 2003

it would be proper to deal with the plea relating to scope and ambit of Sections 91 and 92 of the Evidence Act.

Section 91 relates to evidence of terms of contract, grants and other disposition of properties reduced to form of document. This section merely forbids proving the contents of a writing otherwise than by writing itself; it is covered by the ordinary rule of law of evidence, applicable not merely to solemn writings of the sort named but to others known some times as the "best evidence rule". It is in reality declaring a doctrine of the substantive law, namely, in the case of a written contract, that of all proceedings and contemporaneous oral expressions of the thing are merged in the writing or displaced by it. (See Thayer's Preliminary Law on Evidence p.397 and p.398; Phipson Evidence 7th Edn. P.546; Wigmore's Evidence p.2406.) It has been best described by Wigmore stating that the rule is in no sense a rule of evidence but a rule of substantive law. It does not exclude certain data because they are for one or another reason untrustworthy or undesirable means of evidencing some fact to be proved. It does not concern a probative mental process - the process of believing one fact on the faith of another. What the rule does is to declare that certain kinds of facts are legally ineffective in the substantive law; and this of course (like any other ruling of substantive law) results in forbidding the fact to be proved at all. But this prohibition of proving it is merely that dramatic aspect of the process of applying the rule of substantive law. When a thing is not to be proved at all the rule of prohibition does not become a rule of evidence merely because it comes into play when the counsel offers to "prove" it or "give evidence" of it; otherwise, any rule of law whatever might reduced to a rule of evidence. It would become the legitimate progeny of the law of evidence. For the purpose of specific varieties of jural effects - sale, contract etc. there are specific requirements varying according to the subject. On contrary there are also certain fundamental elements common to all and capable of being generalised. Every jural act may have the following four elements:

(a) the enaction or creation of the act.

(b) its integration or embodiment in a single memorial when desired;

(c) its solemnization or fulfillment of the prescribed forms, if any; and

(d) the interpretation or application of the act to the external objects affected by it.

The first and fourth are necessarily involved in every jural act, and second and third may or may not become practically important, but are always possible elements.

The enaction or creation of an act is concerned with the question whether any jural act of the alleged tenor has been consummated; or, if consummated, whether the circumstances attending its creation authorise its avoidance or annulment. The integration of the act consists in embodying it in a single utterance or memorial commonly, of course, a written one. This process of integration may be required by law, or it may be adopted voluntarily by the actor or actors and in the latter case, either wholly or partially. Thus, the question in its usual form is whether the particular document was intended by the parties to cover certain subjects of transaction between them and, therefore, to deprive of legal effect all other utterances.

The practical consequence of integration is that its scattered parts, in their former and incohate shape, have no longer any jural effect; they are replaced by a single embodiment of the act. In other words, when a jural act is embodied in a single memorial all other utterances of the parties on the topic are legally immaterial for the purpose of determining what are the terms of their act. This rule is based upon an assumed intention on the part of the contracting parties, evidenced by the existence of the written contract, to place themselves above the uncertainties of oral evidence and on a disinclination of the Courts to defeat this object. When persons express their agreements in writing, it is for the express purpose of getting rid of any indefiniteness and to put their ideas in such shape that there can be no misunderstanding, which so often occurs when reliance is placed upon oral statements. Written contracts presume deliberation on the part of the contracting parties and it is natural they should be treated with careful consideration by the Courts and with a disinclination to disturb the conditions of matters as embodied in them by the act of the parties. (See Mc Kelvey's Evidence p.294). As observed in Greenleaf's Evidence page 563, one of the most common and important of the concrete rules presumed under the general notion that the best evidence must be produced and that one with which the phrase "best evidence" is now exclusively associated is the rule that when the contents of a writing are to be proved, the writing itself must be produced before the Court or its absence accounted for before testimony to its contents is admitted.

It is likewise a general and most inflexible rule that wherever written instruments are appointed, either by the requirement of law, or by the contract of the parties, to be the repositories and memorials of truth, any other evidence is excluded from being used either as a substitute for such instruments, or to contradict or alter them. This is a matter both of principle and policy. It is of principle because such instruments are in their own nature and origin, entitled to a much higher degree of credit than parol evidence. It is of policy because it would be attended with great mischief if those instruments, upon which men's rights depended, were liable to be impeached by loose collateral evidence. (See Starkie on Evidence p. 648) In Section 92 the legislature has prevented oral evidence being adduced for the purpose of varying the contract as between the parties to the contract; but, no such limitations are imposed under Section 91. Having regard to the jural position of Sections 91 and 92 and the deliberation omission from Section 91 of such words of limitation, it must be taken note of that even a third party if he wants to establish a particular contract between certain others, either when such contract has been reduced to in a document or where under the law such contract has to be in writing, can only prove such contract by the production of such writing.

Sections 91 and 92 apply only when the document on the face of it contains or appears to contain all the terms of the contract. Section 91 is concerned solely with the mode of proof of a document which limitation improved by Section 92 relates only to the parties to the document. If after the document has been produced to prove its terms under Section 91, provisions of Section 92 come into operation for the purpose of excluding evidence of any oral agreement or statement for the purpose of contradicting, varying, adding or subtracting from its terms. Sections 91 and 92 in effect supplement each other. Section 91 would be inoperative without the aid of Section 92, and similarly Section 92 would be inoperative without the aid of Section 91.

The two sections are, however, differ in some material particulars. Section 91 applies to all documents, whether they purport to dispose of rights or not, whereas Section 92 applies to documents which can be described as dispositive. Section 91 applies to documents which are both bilateral and unilateral, unlike Section 92 the application of which is confined to only to bilateral documents. (See: Bai Hira Devi and Ors. vs. Official Assignee of Bombay AIR 1958 SC 448). Both these provisions are based on "best evidence rule". In Bacon's Maxim Regulation 23, Lord Bacon said "The law will not couple and mingle matters of speciality, which is of the higher account, with matter of averment which is of inferior account in law". It would be inconvenient that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of parties should be controlled by averment of the parties to be proved by the uncertain testimony of slippery memory.

The grounds of exclusion of extrinsic evidence are (i) to admit inferior evidence when law requires superior would amount to nullifying the law, (ii) when parties have deliberately put their agreement into writing, it is conclusively presumed, between themselves and their privies, that they intended the writing to form a full and final statement of their intentions, and one which should be placed beyond the reach of future controversy, bad faith and treacherous memory.

Apex Court in Smt. Gangabai v. Smt. Chhabubai (AIR 1982 SC 20) and Ishwar Dass Jain (dead) thr.Lrs. v. Sohan Lal (dead) by Lrs.(AIR 2000 SC 426) with reference to Section 92(1) held that it is permissible to a party to a deed to contend that the deed was not intended to be acted upon, but was only a sham document. The bar arises only when the document is relied upon and its terms are sought to be varied and contradicted. Oral evidence is admissible to show that document executed was never intended to operate as an agreement but that some other agreement altogether, not recorded in the document, was entered into between the parties. But the question is whether on the facts of the present case, the reasons given by the defendant-appellant in his evidence for claiming the agreement as sham document can be accepted.

In Parvinder Singh vs. Renu Gautam [2004 (4) SCC 794], this Court observed :-

"The rule as to exclusion of oral by documentary evidence governs the parties to the deed in writing. A stranger to the document is not bound by the terms of the document and is, therefore, not excluded from demonstrating the untrue or collusive nature of the document or the fraudulent or illegal purpose for which it was brought into being. An enquiry into reality of transaction is not excluded merely by availability of writing reciting the transaction.

Supreme Court of India

R. Janakiraman vs State Of Tamil Nadu, Through Cbi, ... on 4 January, 2006

"We may cull out the principles relating to section 92 of the Evidence Act, thus :-

i) Section 92 is supplementary to section 91 and corollary to the rule contained in section 91.

ii) The rule contained in section 92 will apply only to the parties to the instrument or their successors-in-interest. Strangers to the contract (which would include the prosecution in a criminal proceeding) are not barred from establishing a contemporaneous oral agreement contradicting or varying the terms of the instrument. On the other hand, section 91 may apply to strangers also.

iii) The bar under section 92 would apply when a party to the instrument, relying on the instrument, seeks to prove that the terms of the transaction covered by the instrument are different from what is contained in the instrument. It will not apply where anyone, including a party to the instrument, seeks to establish that the transaction itself is different from what it purports to be. To put it differently, the bar is to oral evidence to disprove the terms of a contract, and not to disprove the contract itself, or to prove that the document was not intended to be acted upon and that intention was totally different.

Applying the aforesaid principles, it is clear that the bar with section 92 will apply to a proceeding inter-parties to a document and not to a criminal proceeding, where the prosecution is trying to prove that a particular document or set of documents are fictitious documents created to offer an explanation for disproportionate wealth. Oral evidence can always be led to show that a transaction under a particular document or set of documents is sham or fictitious or nominal, not intended to be acted upon."

Supreme Court of India

Ishwar Dass Jain (Dead) Thr. Lrs vs Sohan Lal (Dead)By Lrs on 29 November, 1999

The point here is whether oral evidence is admissible under Section 92(1) of the Evidence Act to prove that a document though executed was a sham document and whether that would amount to varying or contradicting the terms of the document. The plea of the defendant in the written statement was that mortgage deed though true was a sham document not intended to be acted upon and that it was executed only as a collateral security. It was pleaded that the plaintiff demanded that a mortgage deed be executed by defendant as "collateral security in order to guarantee that the shop will be vacated by the defendant whenever demanded by the plaintiff" and that this was done to circumvent the rent control law. It was said that the alleged transaction of mortgage was a sham transaction, executed only with aforesaid object. The consideration of Rs.1000/- "was only in the nature of a collateral security or 'pagri'."

The plaintiff was and is a rich man and there was no occasion for him to mortgage his property. It was further pleaded "The plaintiff thus demanded Rs.1000/- from the defendant by way of security and asked the defendant to thumbmark some writing to arm the plaintiff with a right to get the shop vacated according to his sweet will. The defendant who was in dire necessity of the shop, had to agree on the said condition put forward by the plaintiff".

This Court has held in Gangabai Vs. Chhabubai (1982 (1) SCC 4) that in spite of Section 92(1) of the Evidence Act, it is permissible for a party to a deed to contend that the deed was not intended to be acted upon but was only a sham document. The bar arises only when the document is relied upon and its terms are sought to be varied and contradicted. In the above case, it was observed by D.A. Desai J as follows:

"the bar imposed by Section 92(1) applies only when a party seeks to rely upon the document embodying the terms of the transaction and not when the case of a party is that the transaction recorded in the document was never intended to be acted upon at all between the parties and that the document is a sham. Such a question arises when the party asserts that there was a different transaction altogether and what is recorded in the document was intended to be of no consequence whatever. For that purpose, oral evidence is admissible to show that the document executed was never intended to operate as an agreement but that some other agreement altogether, not recorded in the document, was entered into between the parties".

Now under Section 34 of the Evidence Act, entries in "account books" regularly kept in the course of business are admissible though they by themselves cannot create any liability. Section 34 reads as follows:

"Section 34: Entries in books of account when relevant - Entries in books of account, regularly kept in the course of business, are relevant whenever they refer to a matter into which the Court has to inquire, but such statements shall not alone be sufficient evidence to charge any person with liability".

It will be noticed that sanctity is attached in the law of evidence to books of account if the books are indeed "account books i.e. in original and if they show, on their face, that they are kept in the "regular course of business". Such sanctity, in our opinion, cannot attach to private extracts of alleged account books where the original accounts are not filed into Court. This is because, from the extracts, it cannot be discovered whether the accounts are kept in the regular course of business or if there are any interpolations or whether the interpolations are in a different ink or whether the accounts are in the form of a book with continuous page-numbering. Hence, if the original books have not been produced, it is not possible to know whether the entries relating to payment of rent are entries made in the regular course of business.

It is only in the case of Bankers' Books Evidence Act, 1891 that certified copies are allowed or the case must come under Section 65(f) or (g) of the Evidence Act. Private extracts of accounts in other cases can only be secondary evidence and unless a proper foundation is laid for adducing such secondary evidence under Section 65 or other provisions of the Evidence Act, the privately handwritten copies of alleged account books cannot by themselves be treated as secondary evidence.

In the recent judgment of this Court in Central Bureau of Investigation Vs. V.C. Shukla ( 1998(3) SCC 410), it has been laid down that for purposes of Section 34, 'Book' ordinarily means a collection of sheets of paper or other material, blank, written or printed, fastened or bound together so as to form a material whole. Loose sheets of paper or scraps of paper cannot be termed as 'book' for they can be easily detached and replaced. It has also been held that the rationale behind admissibility of parties' books of account as evidence is that the regularity of habit, the difficulty of falsification and the fair certainty of ultimate detection give them in a sufficient degree, a probability of trustworthiness." When that is the legal position, extracts of alleged account books, in our view, were wrongly treated as admissible by the courts below though the original books were not produced for comparison nor their non-production was explained nor the person who had prepared the extracts was examined. Therefore, the private extracts of alleged account books like Exs.D2 to D5 are not admissible. The principal evidence relating to the alleged payment of rent disappears and the foundation for the alternative plea of tenancy crumbles. This is one reason why the finding relating to tenancy is vitiated being based on inadmissible evidence. We shall next refer to the vital evidence or facts relating to the mortgage which have not been considered by the Courts below. The defendant admitted in his evidence as DW2 that the mortgage deed was executed by him. The endorsement of the Sub-Registrar shows that the money of Rs.1000/- was paid as mortgage money. There is a presumption of the correctness of the endorsement made by the Sub-Registrar under Section 58 of the Registration Act (vide Baidyanath Singh vs. Jamal Bros. AIR 1924 PC 48), it can be rebutted only by strong evidence to the contrary.


It is to be stated that even though it is the common contention of the learned counsel for the parties that dominant intention of the parties is to be gathered from the document, yet all throughout the question had remained a vexed one, having no easy solution and precise mathematical tests. Because ultimately `intention of the parties' is to be inferred. For this purpose, we would first refer to the tests laid down by this Court in the case of Associated Hotels of India Ltd. v. R.N. Kapoor, [1960] 1 SCR 368 which are relied upon in subsequent decisions. In minority judgment rendered by Subba Rao, J, the Court held that there is a clear distinction between lease and license: the dividing line is clear, though sometimes it becomes very thin or even blurred and observed that for such determination following propositions may be taken as well established ;

(1) To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form;

(2) The real test is the intention of the parties-Whether they intended to create a lease or a licence;

(3) If the document creates an interest in the property, it is a lease; but if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence; and

(4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negatived the intention to create a lease."

Before laying down the aforesaid proposition, the Court held as under-

"At one time it was thought that the test of exclusive possession was infallible and if a person Was given exclusive possession of a premises, it would conclusively establish that he was a lessee. But there was a change and recent trend of judicial opinion is reflected in Errington v. Errington, wherein Lord Denying reviewing the case law on the subject summarizes the result of his discussion thus at p. 155;

"The result of all these cases is that, although a person who is let into exclusive possession is, prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy."

The Court of Appeal again in Cobb v. Lane considered the legal position and laid down that the intention of the parties was the real test for ascertaining the character of a document. At p. 1201, Somervell, L. J., stated :

"... the solution that would seem to have been found is, as one would expect, that it must depend on the intention of the parties."

Denning, L.J., said much to the same effect at p. 1202, "The question in all these cases is one of intention : Did the circumstances and the conduct of the parties show that all that was intended was that the occupier should have a personal privilege with no interest in the land?" At this stage, it would be worthwhile to quote some more instructive discussion from the case of Cobb and Another V. Lane, (1952) 1 All. E.R, 1199 rendered by three learned Judges in their judgments given separately :-

Somervell, L,J, observed ;

"Certainly under the old cases (and I doubt if this has been affected by the modem authorities), if all one finds is that somebody has been in occupation for an indefinite period with no special evidence of how he got there or of any arrangement being made when he went into occupation, it may be that the court will find a tenancy at will. I am assuming that there is no document, or clear evidence as to terms. The modern cases establish that, ft there is evidence of the circumstances in which the person claiming to be a tenant at will went into occupation those circumstances must be considered in deciding what the intention of the parties was. "

The learned judge further observed :

"No doubt, in former days, except for the question of the statute, the distinction between a tenancy, whether at will or for a period, and a licence was not so important as it has become since the Rent Restrictions Acts came into operation. In many cases under those Acts it has a special importance. That fact has led to an examination of the distinction, and the solution that -would seem to have been found is, as one -would expect, that it must depend on the intention of the parties."

Penning, L.J, further observed to the same effect as under :

"Under the old cases there would have been some colour for saying that the brother was a tenant at will, but the old cases can no longer be relied on. Owing to the impact of the Rent Acts, the courts have had to define more precisely the difference between a tenant and a licensee.". ...The question in all these cases is one of intention: Did the circumstances and the conduct of the parties show that all that was intended was that the occupier should have a personal privilege with no interest in the land?"

Delivering concurring judgment, Romer. LJ, further considered the facts and observed :

"She was not a tenant at will, and unless she was, she could not create the tenancy on which the defendant relies. In the absence of a sufficient title or interest in her to carve out or to create a similar tenancy in the defendant, his claim. I say, fails in limine."

Further, in his judgment, Lord Denning, 1. referred to an earlier decision in the case of Errington V. Errington, (1952) 1 AII.E.R. 149 wherein the Court held that the test of exclusive possession is by no means decisive. For determining what was the intention of the parties the Court relied upon following observations from the decision in the case of Booker v. Palmer, (1942) AH England Law reporter 677 wherein Lord Greene, M.R. held :.-

"To suggest there is an intention there to create a relationship of landlord and tenant appears to me to be quite impossible. There is one golden rule which is of very general application, namely, that the law does not impute intention to enter into legal relationship where the circumstances and the conduct of the parties negative any intention of the kind. "

Alongwith other cases, the aforesaid case was referred to and relied upon in the case of Rajbir Kaur and Another v. Ms,. S, Chokesiri and Co., [1989] 1 SCO 19, this Court considered and held that ultimately the question whether a transaction is a lease or licence "turns on the operative intention of the parties and there is no single, simple litmus test to distinguish one from the other."

The relevant discussion in paragraph 22 is as under : -

"22. It is essential to the creation of a tenancy that the tenant be granted the right to the enjoyment of the property and that, further, the grant be for consideration. While the definition of `lease' in Section 105 of the Transfer of Property Act, 1882, envisages the transfer of a right to enjoy the property, on the other hand the definition of a `licence' under section 52 of the Indian Easements Act, 1882, consistently with the above, excludes from its pale any transaction which otherwise, amounts of an "easement" or involves a transfer of an interest in the property, which is usually involved in the case of a transfer of right to enjoy it. These two rights viz. Easements and lease in their very nature, are appurtenant to the property. Oh the other hand, the grant only for the right to use the premises without being entitled to the exclusive possession thereof operates merely as a licence. But the converse implications of this proposition need not necessarily and always be true. Wherever there is exclusive possession, the idea of a licence is not necessarily ruled out. English law contemplates what are called `Possessory Licences' which confer a right of exclusive possession, marking them off from the more usual type of licences which serve to authorise acts which would otherwise be trespassess Thus exclusive possession itself is not decisive in favour of a lease and against a mere licence, for, even the grant of exclusive possession might turn out to be only a licence and not a lease `where the grantor himself has no power to grant the lease. In the last analysis the question whether a transaction is a lease or a licence "turns on the operative intention of the parties" and that there is no single, simple litmus test to distinguish one from the other. The "solution that would seem to have been found is as one would expect, that it must depend on the intention of the parties. " (Emphasis added) Dealing with the contention that intention of the parties is to be determined upon a proper construction of the deed entered into between the parties, and that alone is a decisive matter, the Court dealt with the said contention in paragraph 32 and observed as under : -

"Indeed learned counsel placed strong reliance on the following observations by this Court in Mrs. M.N. Clubwalq V. Fida Hussain "Whether an agreement creates between the parties the relationship of landlord and tenant or merely that of licensor and licensee the decisive consideration is the intention of the parties. This intention has to be ascertained on a consideration of all the relevant provisions in the agreement. " (Emphasis supplied) The proposition of Dr. Chitale as to the conclusiveness of What emanates from the construction of the documents has, in this case, its own limitations. The import, significance and conclusiveness of such documents making, or evidencing, the grants fall to be examined in two distinct contexts. The dispute may arise between the very parties to the written instrument, where on the construction of the deed one party contends that the transaction is a `licence' and the other that it is a `lease'. The intention to be gathered from the document read as a whole has, quite obviously, a direct bearing. But in cases where, as here, the landlord alleges that the tenant has sublet the premises and where the tenant, in support of his own defence sets up the plea of a mere licensee and relies upon a deed entered into, inter se, between himself and the alleged licensee, the landlord who is not a party to the deed is not bount by emanates from the construction of the deed. At best, it is a piece of evidence, the weight to be accorded to which will necessarily depend upon all the other circumstances of the erase; The tenant arid the subtenant, who jointly set up a plea of licence against the landlord may choose to camouflage the truth and substance of the transaction behind a facade of a self-serving and conveniently drafted instrument."

Apex Court in the case of Sohan Lal Naraindas v: Laxmidas Raghunath Gadit, [1971] 1 SCC 276, (paras 6 &. 9) wherein the Court has observed as under :


"6. An attempt was deliberately made to camouflage the true nature of the agreement, by reciting in several clauses that the agreement was for lease and licence and it emphasise the pretence, it was also recited that the defendant was not to have any right as tenant or sub-tenant in respect of the loft.

9. Intention of the parties to an instrument must be gathered from the terms of the agreement examined in the light of the surrounding circumstances. The description given by the parties may be evidence of the intention but is not decisive. Mere use of the words appropriate to the creation of a lease will not preclude the agreement operates as a licence. A recital that the agreement does not create a tenancy is also not decisive. The crucial test in each case is whether the instrument is intended to create or not to create an interest in the property the subject-matter of the agreement. If it is in fact intended to create an interest in the property it is a lease, if it does not, it is a licence. In determining whether the agreement creates a lease or a licence the test of exclusive possession, though not decisive, is of significance," (Emphasis added) From the aforesaid discussion what emerges is :-

(1) To find Out whether the document creates lease or license real test is to find out `the intention of the parties'; keeping in mind that in cases where exclusive possession is given, the line between lease and licence is very thin.

(2) The intention of the parties is to be gathered from the document itself; Mainly, intention is to be gathered from the meaning and the words used in the document except where it is alleged and proved that document is a camouflage. If the terms of the document evidencing the agreement between the parties are not clear, the surrounding circumstances and the conduct of the parties have also to be borne in mind for ascertaining the real relationship between the parties.

(3) In the absence of a written document and when somebody is in exclusive possession with no special evidence how he got in, the intention is to be gathered from the other evidence which may be available on record, and in such cases exclusive possession of the property would be most relevant circumstance to arrive at the conclusion that the intention of the parties was to create a lease.

(4) If the dispute arises between the very parties to the written instrument, the intention is to be gathered from the document read as a whole. But in cases where me landlord alleges that the tenant has sublet the premises and where the tenant in support of his own defence sets up the plea of a mere licensee and relies upon a deed enter into inter se, between himself and the alleged licensee, the landlord who is not a party to the deed is not bound by what emanates from the construction of the deed; the tenant and the sub-tenant may jointly set up the plea of a license against the landlord which is a camouflage. In such cases, the mask is to be removed or veil is to be lifted and the true intention behind a facade of a self-serving conveniently drafted instrument is to be gathered from all the relevant circumstances. Same would be the position where the owner of the premises and the person in need of the premises executes a deed labelling it as a licence deed to avoid the operation of rent legislation.

(5) Prima facie, in absence of a sufficient title or interest to carve out or to create a sim i lar tenancy by the sitting tenant, in favour of a third person, the person in possession to whom the possession is handed over cannot claim that the sub-tenancy was created in his favour; because a person having no right cannot confer any title of tenancy or sub-tenancy. A tenant protected under statutory provisions with regard to occupation of the premises having no right to sublet Or transfer the premises, cannot confer any better title. But, this question is not required to be finally determined in this matter.

(6) Further lease or licence is a matter of contract between the parties. Section 107 of the Transfer of Property Act inter alia provides that leases of immoveable property may be made either by registered instrument or by oral agreement accompanied by delivery of possession; if it is a registered instrument, it shall be executed by both the lessee and the lessor. This contract between the parties is to be Interpreted or construed on the well laid principles for construction of contractual terms, viz, for the purpose of construction of contracts, the intention of the parties is the meaning of the words they have used and there can be no intention independent of that meaning; when the terms of the contract are vague or haying double intendment one which is lawful should be preferred; and the construction may be put on the instrument perfectly consistent with his doing only what he had a right to do.

Supreme Court of India

Rajasthan State I.D.I.Corpn. ... vs Diamond & Gem Dev. Corpn. Ltd. & Anr on 12 February, 2013

"There can be no dispute to the settled legal proposition that matters/disputes relating to contract cannot be agitated nor terms of the contract can be enforced through writ jurisdiction under Article 226 of the Constitution. Thus, writ court cannot be a forum to seek any relief based on terms and conditions incorporated in the agreement by the parties. It is evident from the above, that generally the court should not exercise its writ jurisdiction to enforce the contractual obligation. The primary purpose of a writ of mandamus, is to protect and establish rights and to impose a corresponding imperative duty existing in law. It is designed to promote justice (ex debito justiceiae). The grant or refusal of the writ is at the discretion of the court. The writ cannot be granted unless it is established that there is an existing legal right of the applicant, or an existing duty of the respondent. Thus, the writ does not lie to create or to establish a legal right, but to enforce one that is already established. While dealing with a writ petition, the court must exercise discretion, taking into consideration a wide variety of circumstances, inter-alia, the facts of the case, the exigency that warrants such exercise of discretion, the consequences of grant or refusal of the writ, and the nature and extent of injury that is likely to ensue by such grant or refusal.

Interpretation of terms of contract

A party cannot claim anything more than what is covered by the terms of contract, for the reason that contract is a transaction between the two parties and has been entered into with open eyes and understanding the nature of contract. Thus, contract being a creature of an agreement between two or more parties, has to be interpreted giving literal meanings unless, there is some ambiguity therein. The contract is to be interpreted giving the actual meaning to the words contained in the contract and it is not permissible for the court to make a new contract, however is reasonable, if the parties have not made it themselves. It is to be interpreted in such a way that its terms may not be varied. The contract has to be interpreted without giving any outside aid. The terms of the contract have to be construed strictly without altering the nature of the contract, as it may affect the interest of either of the parties adversely. (Vide: United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal, AIR 2004 SC 4794; Polymat India P. Ltd. & Anr. v. National Insurance Co. Ltd. & Ors., AIR 2005 SC 286).

In DLF Universal Ltd. & Anr. v. Director, T. and C. Planning Department Haryana & Ors., AIR 2011 SC 1463, this court held:

“It is a settled principle in law that a contract is interpreted according to its purpose. The purpose of a contract is the interests, objectives, values, policy that the contract is designed to actualise. ?It comprises joint intent of the parties. Every such contract expresses the autonomy of the contractual parties’ private will. It creates reasonable, legally protected expectations between the parties and reliance on its results. Consistent with the character of purposive interpretation, the court is required to determine the ultimate purpose of a contract primarily by the joint intent of the parties at the time the contract so formed. It is not the intent of a single party; it is the joint intent of both parties and the joint intent of the parties is to be discovered from the entirety of the contract and the circumstances surrounding its formation. As is stated in Anson's Law of Contract, "a basic principle of the Common Law of Contract is that the parties are free to determine for themselves what primary obligations they will accept...Today, the position is seen in a different light. Freedom of contract is generally regarded as a reasonable, social, ideal only to the extent that equality of bargaining power between the contracting parties can be assumed and no injury is done to the interests of the community at large."

The Court assumes "that the parties to the contract are reasonable persons who seek to achieve reasonable results, fairness and efficiency...In a contract between the joint intent of the parties and the intent of the reasonable person, joint intent trumps, and the Judge should interpret the contract accordingly.”

V. “As-is-where-is” – means

The phrase, “as is-where-is”, has been explained by Apex Court in Punjab Urban Planning & Development Authority & Ors. v. Raghu Nath Gupta & Ors., (2012) 8 SCC 197, holding as under:

“We notice that the respondents had accepted the commercial plots with open eyes, subject to the abovementioned conditions. Evidently, the commercial plots were allotted on “as-is-where-is” basis. The allottees would have ascertained the facilities available at the time of auction and after having accepted the commercial plots on “as-is- where-is” basis, they cannot be heard to contend that PUDA had not provided the basic amenities like parking, lights, roads, water, sewerage, etc. If the allottees were not interested in taking the commercial plots on “as-is-where-

is” basis, they should not have accepted the allotment and after having accepted the allotment on “as-is-where-is” basis, they are estopped from contending that the basic amenities like parking, lights, roads, water, sewerage, etc. were not provided by PUDA when the plots were allotted…” (See also: UT Chandigarh Admn. & Anr. v. Amarjeet Singh & Ors., (2009) 4 SCC 660).

VI. “As if” – means

. The expression “as if”, is used to make one applicable in respect of the other. The words "as if" create a legal fiction. By it, when a person is "deemed to be" something, the only meaning possible is that, while in reality he is not that something, but for the purposes of the Act of legislature he is required to be treated that something, and not otherwise. It is a well settled rule of interpretation that, in construing the scope of a legal fiction, it would be proper and even necessary, to assume all those facts on the basis of which alone, such fiction can operate. The words “as if”, in fact show the distinction between two things and, such words must be used only for a limited purpose. They further show that a legal fiction must be limited to the purpose for which it was created. (Vide: Radhakissen Chamria & Ors. v. Durga Prasad Chamria & Anr., AIR 1940 PC 167; Commr. of Income-tax, Delhi v. S. Teja Singh, AIR 1959 SC 352; Ram Kishore Sen & Ors. v. Union of India & Ors., AIR 1966 SC 644; Sher Singh v. Union of India & Ors., AIR 1984 SC 200; State of Maharashtra v. Laljit Rajshi Shah & Ors, AIR 2000 SC 937; Paramjeet Singh Patheja v. ICDS Ltd. AIR 2007 SC 168; and Commissioner of Income Tax v. Willamson Financial Services & Ors. (2008) 2 SCC 202).

In East End Dwelling Co. Ltd. v. Finsbury Borough Council, 1952 AC 109, this Court approved the approach which stood adopted and followed persistently. It set out as under:

“The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs".

In Industrial Supplies Pvt. Ltd. & Anr. v. Union of India & Ors., AIR 1980 SC 1858, this Court observed as follows:-

"It is now axiomatic that when a legal fiction is incorporated in a statute, the court has to ascertain for what purpose the fiction is created. After ascertaining the purpose, full effect must be given to the statutory fiction and it should be carried to its logical conclusion. The court has to assume all the facts and consequences which are incidental or inevitable corollaries to giving effect to the fiction. The legal effect of the words 'as if he were' in the definition of owner in Section 3(n) of the Nationalisation Act read with Section 2(1) of the Mines Act is that although the petitioners were not the owners, they being the contractors for the working of the mine in question, were to be treated as such though, in fact, they were not so."

(Emphasis added)

Hence, discretion must be exercised by the court on grounds of public policy, public interest and public good. The writ is equitable in nature and thus, its issuance is governed by equitable principles. Refusal of relief must be for reasons which would lead to injustice. The prime consideration for the issuance of the said writ is, whether or not substantial justice will be promoted. Furthermore, while granting such a writ, the court must make every effort to ensure from the averments of the writ petition, whether there exist proper pleadings. In order to maintain the writ of mandamus, the first and foremost requirement is that the petition must not be frivolous, and must be filed in good faith. Additionally, the applicant must make a demand which is clear, plain and unambiguous. It must be made to an officer having the requisite authority to perform the act demanded. Furthermore, the authority against whom mandamus is issued, should have rejected the demand earlier. Therefore, a demand and its subsequent refusal, either by words, or by conduct, are necessary to satisfy the court that the opposite party is determined to ignore the demand of the applicant with respect to the enforcement of his legal right. However, a demand may not be necessary when the same is manifest from the facts of the case, that is, when it is an empty formality, or when it is obvious that the opposite party would not consider the demand."

Interpretation of the Contracts" by Kim Lewispn, Q.C. as under :

1.03 for the purpose of the construction of contracts; the intention' of the parties is the meaning of the words they have used. There is no intention independent of that meaning.

6.09 Where the words of a contract are capable of two meanings, one of which is lawful and the other unlawful, the former construction should be preferred.

Sir Edward Coke [Co. Lift 42a] expressed the proposition thus :

"It is a general rule, that whosoever the words of a deed, or of one bf the parties without deed, may have a double intendment and the one standeth with law and right, and the other is wrongful and against law the intendment that standeth with law shall be taken."

In more modern times that statement was approved by the Privy Council in Rodger v. Comptoir D `Escomple de Paris, (1869) L.R.. 2 P.C. 393, in which Sir JosephNapier delivering the adviceof the Board said :

"The rule that words shall be construed most strongly against him how uses them gives place to a higher rule; higher because it has a moral dementi that the construction shall not be such as to work a wrong." Similarly, in Fausset v. Carpenter (1831)2 Dow. & CI. 232, the House of Lords accepted the submission of counsel that the Court :

"... in judging of the design and object of a deed, will not presume that a party executing the deed, meant to do and did what he was wrong in doing, when a construction may be put on the instrument perfectly consistent with his doing only what he had a right to do,' However, the question of construction should hot be approached with a leaning in one direction or another. Thus although the law frowns upon covenants in restraint of trade, nevertheless such a covenant should not be approached on the basis that it is prima facie illegal. "You are to construe the contract, and then see whether it is legal. "


1. A bond was conditioned to assign all offices. It was held that it should be construed as limited to those offices which it was lawful to assign, Harrington v, Kloprogge, (1785) 2B & B 678 n.(a).

2. A contract for the assignment of a lease provided that if licence to assign was delayed beyond a certain date, the purchaser would pay the purchase price to the vendor and the vendor would "thereupon allow the purchaser to enter into occupation pending completion" and the purchaser would pay the rent and other outgoings. It was held that "allow," menat, "lawfully", and consequently did not cover entry into occupation in breach of covenant. Cantor Art Services Ltd v, Kenneth Bieber Photography Ltd., (1969) 1 W.L-.R. 1226, C.A."

Lord Hoffman’s Five Principles for Interpretation of Contracts:

Investors Compensation Scheme Ltd vs. West Bromwich Building Society, [1998] 1 All ER 98-

1.the right meaning is what the document conveys to a reasonable person;

2.this includes everything in the “matrix of fact”, or relevant background circumstances;

3.prior negotiations are excluded from this (a point which has been much criticised since);

4.the meaning of words is not a literal meaning, but the one reasonably understood from the context, and

5.the meaning should not contradict a common sense view of what a contract required.

In Society of Lloyd's v Robinson [1999] 1 All ER (Comm) 545, 551 it was held as follows:

"Loyalty to the text of a commercial contract, instrument, or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language".

The Supreme Court of India in The Union of India v. D.N. Revri & Co., AIR 1976 SC 2257 at 2262 held as follows:

"It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a commonsense approach and it must not be allowed to be thwarted by a narrow pedantic and legalistic interpretation."

The Supreme Court of India, in Citibank N.A. v. TLC Marketing PLC, (2008) 1 SCC 481 : 2007 AIR SCW 6263, has held as follows:

"Commercial contract must be broadly construed with a view to give efficacy to such contract rather than to invalidate it. Clauses of the contract must be liberally interpreted. Narrow and technical approach should be avoided.

Importance of ‘Context’ in Interpretation of Contracts (Novartis Vaccines and Diagnostics Inc. vs. Aventis Pharma Limited, 2010(2) Bom CR 317)-

Ordinary Meaning: There is a presumption that the words to be construed should be construed in their ordinary and popular sense, since the parties to the contract must be taken to have intended, as reasonable men, to use words and phrases in their commonly understood and accepted sense. The object of the inquiry is not necessarily to probe the ‘real’ intention of the parties, but to ascertain what the language they used in the document would signify to a properly informed observer.

Businesslike Interpretation: It is an accepted canon of construction that a commercial document should be construed in accordance with sound commercial principles and good business sense, so that its provisions receive a fair and sensible application. If a detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.

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.

Construction to avoid unreasonable results: If the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, the reasonable interpretation should be adopted. It is to be presumed that the parties, as reasonable men, would have intended to include reasonable stipulation in their contract.

Lindley & Banks on the Law Partnership (18th Edition), Para 10-91 states as follows:

"10-91 Each partner will normally agree not only that he will devote his whole time to the partnership business but also that he will not engage in any other business, whether or not competing with the firm's business"

The purpose and object of Partnership and/or Joint Venture is quite clear and as elaborated in the following words:

1. A Joint Venture to produce and market a particular product is in the nature of partnership. (New Horizons Limited vs. Union of India 1995 (1) SCC 478 at page 494.

2. A Joint Venture partner cannot engage in any operation harmful to the business in which partners are engaged as the relationship of joint venture partner is a relationship of trust and confidence and subject to the duty of good faith and loyalty from partners. Corpus Juris Secundum paragraph 22.

3. Basis of the relationship. "Ordinary partnerships are presumed by the law to be based on the mutual trust and confidence of each partner in the integrity of every other partner. The utmost good faith is requisite in the relations between partners." See Halsbury on Partnership Vol. 35 paragraph 94, page 52.

A Joint Venture being in the nature of a partnership, a partner has a duty of carrying on business to the greatest common advantage, to be just and faithful to each other as in the case of a commercial partnership. This is reflected in Section 9 of the Indian Partnership Act, 1932 and in standard text books on Law of Partnership.

4. "A partner cannot without the consent of a his co-partners lawfully carry on for his own benefit either openly or secretly any business in rivalry with the firm to which he belongs".

"This is an obligation which implied in any partnership and anything contrary could never be contemplated by the partners."

Documents which serve for interpretation of contracts:


Antecedent Agreements and Pre-contractual Documents

Documents which are supplemented to the main contract. (Annexure, schedules, price lists, job order, etc.)

Documents forming part of the same transaction (e.g. long term construction contracts)

Deleted (crossed out) Words.

In Bihar State Electricity Board, Patna and Ors. v. Green Rubber Industries and Ors., the Hon’ble Apex Court held that –“---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 endeavouring to collect the intention of the parties,even though the immediate object of enquiry is the meaning of an isolated clause...”It is also a well-recognized principle of construction of a contract that it must be read as a whole in order to ascertain the true meaning of its several clauses and the words of each clause should be interpreted so as to bring them into harmony with the other provisions if that interpretation does no violence to the meaning of which they are naturally susceptible.Another principle applied by the Courts is that of ‘Verba chartarum fortius accipinntur contra proferentem’, which means that ambiguous words in a writtendocument are construed more forcibly against the party which used them.

Applying this principle, the Hon’ble Apex Court in Bank of India and Ors. v. K. Mohandas and Ors held that –“..The fundamental position is that it is the banks who were responsible for formulation of the terms in the contractual scheme that the optees of voluntary retirement underthat scheme will be eligible to pension under Pension Regulations, 1995, and, therefore, they bear the risk of lack of clarity, if any. It is a well-known principle of construction of contract that if the terms applied by one party are unclear, an interpretation against that party is preferred.

The Courts also rely on the following tools of interpretation, if there is ambiguity with respect to any terms in a contract:1.Expressio unius est exclusive alterius,which means that where an express intention has been made in the instrument in respect of a certain thing, this will exclude any other thing of a similar nature. For example –In Swastik Gases Pvt. Ltd. v. Indian Oil Corporation Ltd., it was held that by making a provision that the agreement is subject to the jurisdiction of the courts at Kolkata, the parties have impliedly excluded the jurisdiction of other courts. Hence, it was held that where the contract specifies the jurisdiction of the courts at a particular place and such courts have jurisdiction to deal with the matter, an inference may be drawn that parties intended to exclude all other courts

.Ejusdem Generis, which means that where a class or genus of words/things is followed by general wording that is not itself expansive, the general wording is usually restricted to the class or genus of the words/things preceding it. For example, in M/s. Siddheshwari Cotton Mills Pvt. Ltd. v. Union of India, the Supreme Court observed that the expressions ‘bleaching, mercerizing, dyeing, printing, water-proofing, rubberising, shrink-proofing, organdie processing’, which precede the expression ‘or any other process’, in Section. 2(f)(v) of the Central Excises and Salt Act 1944, contemplate processes which import a change of a lasting character to the fabric by either the addition of some chemical into the fabric or otherwise. Hence, the term ‘or any other process’ was interpreted ejusdem generis to the preceding words.

3.Noscitur a Socii, which means that the meaning of an unclear or ambiguous word should be determined by considering the words immediately surrounding it. For example -in the case of Commissioner of IncomeTax v. Bharti Cellular it was held that since the term ‘technical services’ used in section 194J of the Income Tax Act is unclear, the said word would take colour from the words ‘managerial’ & ‘consultancy’ between which it is sandwiched. These terms ‘managerial services’ & ‘consultancy services’ necessarily involve a human intervention. Therefore, applyingnoscitur a sociis,the word ‘technical’ would also have to be construed as involving a human element. Thus, it was held that since interconnection & port access services rendered by the assessee do not involve any human interface, they cannot be regarded as technical services u/s 194J of the Income Tax Act.

4.Reddendo Singula Singulis, which means that where there are general words of description, following an enumeration of particular things, such general words are to be construed distributively and if the general words will apply to some things and not to others, the general words are to be applied to those things to which they will, and not to those to which they will not apply. For example -The term ‘I devise and bequeath all my real and personal property to A’ will be construed reddendo singula singulis by applying 'devise' to 'real' property and 'bequeath' to 'personal' property.

However, in commercial contracts apart from the ones mentioned above, the Courts tread carefully before implying any terms into the contract.

The Hon’ble Apex Court in Khardah Company Ltd. v. Raymon and Co. (India) Private Ltd. held that –“ We agree that when a contract has been reduced to writing we must look only to that writing for ascertaining the terms of the agreement between the parties but it does not follow from this that it is only what is set out expressly and in so many words in the document that can constitute a term of the contract between the parties. If on a reading of the document as a whole, it can fairly be deduced from the words actually used therein that the parties had agreed on a particular term, there is nothing in law which prevents them from setting up that term. The terms of a contract can be expressed or implied from what has been expressed. It is in the ultimate analysis a question of construction of the contract and it is well established that in construing a contract it would be legitimate to take into account surrounding circumstances...”

(Hence, the Court does reserve its discretion to imply terms into a contract in order to give full effect to the underlining intention of the parties. It could be said that this discretion is exercised in the realm of equity and in situations of interpretational deadlock, wherein the Court feels the need to depart from the express wordings of a contract. This could be in situations where a term is capable of having multiple interpretations and when the interpretation of such a term can substantially affect the rights of the contracting parties.)

In Nabha Power Ltd. (NPL) v. Punjab State Power Corporation Ltd. (PSPCL) and Ors. the Hon’ble Apex Court analysed international and domestic jurisprudence on the concept of implied terms and concluded that the following conditions must be satisfied to imply terms into a contract, namely: (1) it must be reasonable and equitable to imply terms; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.


Supreme Court of India

Energy Watchdog vs Central Electricity Regulatory ... on 11 April, 2017

Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. Sections 32 and 56 are set out herein:

“32. Enforcement of Contracts contingent on an event happening - Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.

56. Agreement to do impossible act - An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.”

Prior to the decision in Taylor vs. Caldwell, (1861-73) All ER Rep 24, the law in England was extremely rigid. A contract had to be performed, notwithstanding the fact that it had become impossible of performance, owing to some unforeseen event, after it was made, which was not the fault of either of the parties to the contract. This rigidity of the common law in which the absolute sanctity of contract was upheld was loosened somewhat by the decision in Taylor vs. Caldwell in which it was held that if some unforeseen event occurs during the performance of a contract which makes it impossible of performance, in the sense that the fundamental basis of the contract goes, it need not be further performed, as insisting upon such performance would be unjust.

The law in India has been laid down in the seminal decision of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310. The second paragraph of Section 56 has been adverted to, and it was stated that this is exhaustive of the law as it stands in India. What was held was that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

In M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793, this Court, after setting out Section 56 of the Contract Act, held that the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made. It is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.

Similarly, in Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821, this Court went into the English law on frustration in some detail, and then cited the celebrated judgment of Satyabrata Ghose v. Mugneeram Bangur & Co. Ultimately, this Court concluded that a contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.

It has also been held that applying the doctrine of frustration must always be within narrow limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1961 (2) All ER 179, despite the closure of the Suez canal, and despite the fact that the customary route for shipping the goods was only through the Suez canal, it was held that the contract of sale of groundnuts in that case was not frustrated, even though it would have to be performed by an alternative mode of performance which was much more expensive, namely, that the ship would now have to go around the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight for such journey was also double. Despite this, the House of Lords held that even though the contract had become more onerous to perform, it was not fundamentally altered. Where performance is otherwise possible, it is clear that a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance.

This view of the law has been echoed in ‘Chitty on Contracts’, 31st edition. In paragraph 14-151 a rise in cost or expense has been stated not to frustrate a contract. Similarly, in ‘Treitel on Frustration and Force Majeure’, 3rd edition, the learned author has opined, at paragraph 12-034, that the cases provide many illustrations of the principle that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. It is clear that a more onerous method of performance by itself would not amount to an frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration. (See paragraph 15-158)

Indeed, in England, in the celebrated Sea Angel case, 2013 (1) Lloyds Law Report 569, the modern approach to frustration is well put, and the same reads as under:

“111. In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”

It is clear from the above that the doctrine of frustration cannot apply to these cases as the fundamental basis of the PPAs remains unaltered. Nowhere do the PPAs state that coal is to be procured only from Indonesia at a particular price. In fact, it is clear on a reading of the PPA as a whole that the price payable for the supply of coal is entirely for the person who sets up the power plant to bear. The fact that the fuel supply agreement has to be appended to the PPA is only to indicate that the raw material for the working of the plant is there and is in order. It is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took. We are of the view that the mere fact that the bid may be non-escalable does not mean that the respondents are precluded from raising the plea of frustration, if otherwise it is available in law and can be pleaded by them. But the fact that a non-escalable tariff has been paid for, for example, in the Adani case, is a factor which may be taken into account only to show that the risk of supplying electricity at the tariff indicated was upon the generating company.

Coming to the PPAs themselves, we find that the force majeure clause contained in all of them is in a standard form and is as follows : “12.3 Force Majeure ‘Force Majeure’ means any event or circumstance or combination of events and circumstances including those stated below that wholly or partly prevents or unavoidably delays an Affected Party in the performance of its obligations under this Agreement, but only if and to the extent that such events or circumstances are not within the reasonable control, directly or indirectly, of the Affected Party and could not have been avoided if the Affected Party had taken reasonable care or complied with Prudent Utility Practices:

i. Natural Force Majeure Events:

act of God, including, but not limited to lightning, drought, fire and explosion (to the extent originating from a source external to the Site), earthquake, volcanic eruption, landslide, food, cyclone, typhoon, tornado, or exceptionally adverse weather conditions which are in excess of the statistical measures for the last hundred (100) years,

ii. Non-Natural Force Majeure Events:

Direct Non-Natural Force Majeure Events Nationalization or compulsory acquisition by any Indian Government Instrumentality or any material assets or rights of the Seller or the Seller’s contractors; or The unlawful, unreasonable or discriminatory revocation of, or refusal to renew, any Consent required by the Seller or any of the Seller’s contractors to perform their obligations under the Project Documents or any unlawful, unreasonable or discriminatory refusal to grant any other consent required for the development/ operation of the Project, provided that an appropriate court of law declares the revocation or refusal to be unlawful, unreasonable and discriminatory and strikes the same down; or Any other unlawful, unreasonable or discriminatory action on the part of an Indian Government Instrumentality which is directed against the Project, provided that an appropriate court of law declares the revocation or refusal to be unlawful, unreasonable and discriminatory and strikes the same down.

Indirect Non – Natural Force Majeure Events Any act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo, revolution, riot, insurrection, terrorist or military action; or Radio active contamination or ionising radiation originating from a source in India or resulting from another Indirect Non Natural Force Majeure Event excluding circumstances where the source or cause of contamination or radiation is brought or has been brought into or near the site by the affected party or those employed or engaged by the affected party; or Industry wide strikes and labor disturbances having a nationwide impact in India.


Supreme Court of India

Sushilaben Indravadan Gandhi vs The New India Assurance Company ... on 15 April, 2020

Even otherwise, it is well-settled that exemption of liability clauses in insurance contracts are to be construed in the case of ambiguity contra proferentum.

Thus, in General Assurance Society Ltd. v.Chandumull Jain (1966) 3 SCR 500, this Court held:

“A contract of insurance is a species of commercial transactions and there is a well-established commercial practice to send cover notes even prior to the completion of a proper proposal or while the proposal is being considered or a policy is in preparation for delivery…In other respects there is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a requirement of uberrima fides i.e. good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the company in case of ambiguity or doubt.”

This judgment has been cited with approval in United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694 as follows:

“6. The only point that arises for consideration is whether the word “impact” contained in clause 5 of the insurance policy covers the damage caused to the building and machinery due to driving of the bulldozer on the road close to the building. It is evident from the terms of the insurance policy that the property was insured as against destruction or damage to whole or part. The appellant Company agreed to pay towards destruction or damage to the property insured to the extent of its liability on account of various happenings. In the present case both the parties relied on clause 5 of the insurance policy. Clause 5 is also subject to exclusions contained in the insurance policy. That a damage caused to the building or machinery on account of driving of vehicle on the road close to the building is not excluded. Clause 5 speaks of “impact” by any rail/road vehicle or animal. If the appellant Company wanted to exclude any damage or destruction caused on account of driving of vehicle on the road close to the building, it could have expressly excluded it. The insured possibly did not understand and expect that the destruction and damage to the building and machinery is confined only to a direct collision by vehicle moving on the road with the building or machinery. In the ordinary course, the question of a vehicle directly dashing into the building or the machinery inside the building does not arise. Further, “impact” by road vehicle found in the company of other words in the same clause 5 normally indicates that damage caused to the building on account of vibration by driving of vehicle close to the road is also included. In order to interpret this clause, it is also necessary to gather the intention of the parties from the words used in the policy. If the word “impact” is interpreted narrowly, the question of impact by any rail would not arise as the question of a rail forcibly coming to the contact of a building or machinery would not arise. In the absence of specific exclusion and the word “impact” having more meanings in the context, it cannot be confined to forcible contact alone when it includes the meanings “to drive close”, “effective action of one thing upon another” and “the effect of such action”, it is reasonable and fair to hold in the context that the word “impact” contained in clause 5 of the insurance policy covers the case of the respondent to say that damage caused to the building and machinery on account of the bulldozer moving closely on the road was on account of its “impact”. It is also settled position in law that if there is any ambiguity or a term is capable of two possible interpretations, one beneficial to the insured should be accepted consistent with the purpose for which the policy is taken, namely, to cover the risk on the happening of certain event. Although there is no ambiguity in the expression “impact”, even otherwise applying the rule of contra preferentem, the use of the word “impact” in clause 5 in the instant policy must be construed against the appellant. Where the words of a document are ambiguous, they shall be construed against the party who prepared the document. This rule applies to contracts of insurance and clause 5 of the insurance policy even after reading the entire policy in the present case should be construed against the insurer. A Constitution Bench of this Court in General Assurance Society Ltd. v. Chandmull Jain [AIR 1966 SC 1644 : (1966) 3 SCR 500] has expressed that (AIR p. 1649, para 11) “in a contract of insurance there is requirement of uberrima fides i.e. good faith on the part of the assured and the contract is likely to be construed contra proferentem, that is, against the company in case of ambiguity or doubt””.

Likewise, in Export Credit Guarantee Corpn. of India Ltd. v. Garg Sons International (2014) 1 SCC 686, this Court held:

“11. The insured cannot claim anything more than what is covered by the insurance policy. “The terms of the contract have to be construed strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely.” The clauses of an insurance policy have to be read as they are. Consequently, the terms of the insurance policy, that fix the responsibility of the insurance company must also be read strictly. The contract must be read as a whole and every attempt should be made to harmonise the terms thereof, keeping in mind that the rule of contra proferentem does not apply in case of commercial contract, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon. (Vide Oriental Insurance Co. Ltd. v. Sony Cheriyan [(1999) 6 SCC 451] , Polymat India (P) Ltd. v. National Insurance Co. Ltd. [(2005) 9 SCC 174 : AIR 2005 SC 286] , Sumitomo Heavy Industries Ltd. v. ONGC Ltd. [(2010) 11 SCC 296 :

(2010) 4 SCC (Civ) 459 : AIR 2010 SC 3400] and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran [(2012) 5 SCC 306 : AIR 2012 SC 2829] .)” Likewise, in BHS Industries v. Export Credit Guarantee Corpn. Ltd.

(2015) 9 SCC 414, this Court held:

“31. As has been held in Chandumull Jain [AIR 1966 SC 1644 : (1966) 3 SCR 500] by the Constitution Bench that in a contract of insurance, there is a requirement of good faith on the part of the insured and in case of ambiguity, it has to be construed against the company. As per other authorities, the insurance policy has to be strictly construed and it has to be read as a whole and nothing should be added or subtracted. That apart, as has been held in Polymat India (P) Ltd. [(2005) 9 SCC 174] , it is the duty of the Court to interpret the document as is understood between the parties and regard being had to the reference to the stipulations contained in it.

xxx xxx xxx

35. The terms of the policy are to be strictly construed. There can be no cavil about the proposition of law that in case of ambiguity, the construction has to be made in favour of the insured”

32. In United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd.

(2016) 3 SCC 49, this Court quoted Halsbury’s Laws of England as follows:

“37. In Halsbury's Laws of England (5th Edn., Vol. 60, Para 105) principle of contra proferentem rule is stated thus:

“Contra proferentem rule.—Where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application.””

33. In Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New India Assurance Co. Ltd. (2016) 15 SCC 315, this Court referred to the contra proferentum rule as follows:

“10. We proceed to deal with the submission made by the counsel for the appellant regarding the rule of contra proferentem. The Common Law rule of construction “verba chartarum fortius accipiuntur contra proferentem” means that ambiguity in the wording of the policy is to be resolved against the party who prepared it. MacGillivray on Insurance Law [ Legh-Jones, Longmore et al (Eds.), MacGillivray on Insurance Law (9th Edn., Sweet and Maxwell, London 1997) at p. 280.] deals with the rule of contra proferentem as follows:

“The contra proferentem rule of construction arises only where there is a wording employed by those drafting the clause which leaves the court unable to decide by ordinary principles of interpretation which of two meanings is the right one. ‘One must not use the rule to create the ambiguity — one must find the ambiguity first.’ The words should receive their ordinary and natural meaning unless that is displaced by a real ambiguity either appearing on the face of the policy or, possibly, by extrinsic evidence of surrounding circumstances.” (footnotes omitted)

11.Colinvaux's Law of Insurance [ Robert and Merkin (Eds.), Colinvaux's Law of Insurance (6th Edn., 1990) at p. 42.] propounds the contra proferentem rule as under:

“Quite apart from contradictory clauses in policies, ambiguities are common in them and it is often very uncertain what the parties to them mean. In such cases the rule is that the policy, being drafted in language chosen by the insurers, must be taken most strongly against them. It is construed contra proferentem, against those who offer it. In a doubtful case the turn of the scale ought to be given against the speaker, because he has not clearly and fully expressed himself. Nothing is easier than for the insurers to express themselves in plain terms. The assured cannot put his own meaning upon a policy, but, where it is ambiguous, it is to be construed in the sense in which he might reasonably have understood it. If the insurers wish to escape liability under given circumstances, they must use words admitting of no possible doubt.

But a clause is only to be contra proferentem in cases of real ambiguity. One must not use the rule to create an ambiguity. One must find the ambiguity first. Even where a clause by itself is ambiguous if, by looking at the whole policy, its meaning becomes clear, there is no room for the application of the doctrine. So also where if one meaning is given to a clause, the rest of the policy becomes clear, the policy should be construed accordingly.” (footnotes omitted)”

Supreme Court of India

Rashtriya Ispat Nigam Ltd vs M/S Dewan Chand Ram Saran on 25 April, 2012

It is a well-known principle of construction of a contract that if the terms applied by one party are unclear, an interpretation against that party is preferred (verba chartarum fortius accipiuntur contra proferentem).”

principles for setting aside arbitral awards

i) In a case where an arbitrator travels beyond the contract, the award would be without jurisdiction and would amount to legal misconduct and because of which the award would become amenable for being set aside by a court.

ii) An error relatable to interpretation of the contract by an arbitrator is an error within his jurisdiction and such error is not amenable to correction by courts as such error is not an error on the face of the award.

iii) If a specific question of law is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law does not make the award bad on its face.

iv) An award contrary to substantive provision of law or against the terms of contract would be patently illegal.”

v) Where the parties have deliberately specified the amount of compensation in express terms, the party who has suffered by such breach can only claim the sum specified in the contract and not in excess thereof. In other words, no award of compensation in case of breach of contract, if named or specified in the contract, could be awarded in excess thereof.

vi) If the conclusion of the arbitrator is based on a possible view of the matter, the court should not interfere with the award

In the case of ONGC Vs. Western Geco International Ltd., the Supreme Court explained the meaning of ‘fundamental policy of India’ and in the course of explanation, laid down three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law.

(i) The Court or authority concerned is bound to adopt a ‘judicial approach’.

(ii) A Court or a quasi-judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice.

(iii) Perversity or irrationality tested based on Wednesbury’s Principle of Reasonableness.

After Western Geco came the Division Bench judgment in the case of Associate Builders Vs. Delhi Development Authority wherein Justice R.F. Nariman in his judgement, had elaborated on the concepts of ‘fundamental policy of Indian law’; ‘interest of India’; ‘justice or morality’; and ‘patent illegality’. Firstly, in explaining the concept of ‘fundamental policy of Indian law’, the following four basic principles were laid down:

(i) disregarding orders of superior courts;

(ii) fair, reasonable and objective, as against an arbitrary or whimsical approach;

(iii) principles of natural justice; and

(iv) perversity and irrationality by the standards of a reasonable person who would have arrived at the decision.

Secondly, the concept of ‘interest of India’ was very briefly explained to be something that is relevant to India as a member of the world community in its relations with other foreign nations. Thirdly, for the concepts of ‘justice and morality’, the Justice R.F. Nariman explained that an award could be said to be against justice and morality if it shocks the conscience of the Courts. Finally, it was explained that the concept of ‘patent illegality’ would include three subheads:

(i) contravention of a substantive law of India, the illegality of which should go to the root of the matter and cannot be trivial in nature;

(ii) contravention of the Arbitration and Conciliation Act, itself;

(iii) contravention of Section 28(3) of the Act.

The relevant portion of the judgement is given below

“An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do.”

Arbitration and Conciliation (Amendment) Act, 2016.

In an attempt to put to rest the interpretations given to the concepts of ‘public policy of India’ and ‘patent illegality’, certain changes were suggested by the 246th Report of the Law Commission to amend the law. After taking into consideration the changes suggested by the Law Commission, the Parliament had enacted the Arbitration and Conciliation (Amendment) Act, 2016. Section 18 of the Amendment Act, 2016 introduced Explanation 1 to Section 34(2)(b), to explain when an award is in conflict with the public policy of India, and also included a new sub-section (2A) to statutorily include patent illegality as one of the grounds on which an arbitral award could be challenged under Section 34 of the Act.

Explanation to Section 34(2)(b) reads as under:

“Explanation 1. – For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,--


(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.--For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.”

The newly inserted sub-section (2A) reads as under:

“An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.”

Ssangyong Engineering

The most recent judgment interpreting the concept of ‘arbitral award that would be in conflict with the public policy of India’, notably after the Amendment of 2016, is in the case of Ssangyong Engineering and Construction Co. Ltd. Vs. National Highways Authority of India which was interestingly, again authored by his Justice R.F. Nariman. In light of the amendments introduced by the Amendment Act, 2016, Justice R.F. Nariman has done away with certain aspects of his own judgment in the case of Associate Builders while upholding and maintaining certain other positions as mentioned in the earlier case.

The position of law in so far as ‘public policy of India’ and ‘patent illegality’ could be summarised in a nutshell as below:

(i) Interpretation of ‘public policy of India’ would now be constricted to ‘fundamental policy of Indian law’, ‘basic notions of justice or morality’, as were interpreted in Associated Builders.

(ii) The ground of mere ‘contravention of a substantive law of India’ would no longer be a factor in testing whether or not an arbitral award would be in contravention of the public policy of India, as held in Associate Builders.

(iii) ‘Patent illegality’ would not include:

(a) a contravention of a statute not linked to public policy or public interest; or

(b) reappreciation of evidence, which what an appellate court would do.

(iv) ‘Patent illegality’ would include:

(a) An arbitral award not being reasoned and in contravention of Section 31(3) of the Act; or

(b) a finding based on no evidence at all or an award which ignores vital evidence; or

(c) the arbitrator commits an error of jurisdiction.

Applicability of the Amendment Act

It is important to bear in mind that the Hon’ble Supreme Court in the case of BCCI Vs. Kochi Cricket Pvt. Ltd. as well as in the Ssangyong case, has held that the Amendment Act, 2016 would apply to only those petitions filed under Section 34 of the Act, made after 23.10.2015, i.e., the date on which the Amendment Act came into effect.

Patel Engineering vs. North Eastern Electric Power Corporation

A three-judge bench of the Hon’ble Supreme Court in the case of Patel Engineering vs. North Eastern Electric Power Corporation vide its judgment dated 22.05.2020 has reiterated the position of law in relation to ‘patent illegality’ by stating that ‘patent illegality’ is a ground available under the statute for setting aside a domestic award if:

(i) the arbitral award is found to be perverse, or, so irrational that no reasonable person would have arrived at the same; or,

(ii) the construction of the contract is such that no fair or reasonable person would take; or

(iii) the view of the arbitrator is not even a possible view.

. Section 91 and 92 and interpretatio


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