Contractual Silence In Arbitration: Interplay Of Business Efficacy And Commercial Common Sense

Accuracy in the preparation of dispute resolution clauses in the hurly-burly world of business contracts is not only desirable but becomes a necessity. Arbitration, as a preferred mechanism for the resolution of commercial disputes, promises efficiency, confidentiality, and finality. But even the most advanced contracts can be marred by drafting oversights, leaving one to wonder whether the parties ever really meant to arbitrate. Can scattered references to arbitration, spread throughout an agreement, constitute a binding arbitration clause? How do courts weigh the sanctity of written contract against the commercial realities of intent?Courts have evolved interpretative principles to resolve such conundrums, in particular the “business efficacy test” and the “doctrine of business common sense”. These principles allow judges to imply terms into contracts when it is necessary to preserve their commercial soundness. The foundation of the business efficacy test is found in the ancient English case of The Moorcock (1889) 14 PD 64, where Bowen LJ stated that courts could imply terms in a contract so that it would be commercially effective and prevent commercial absurdity. In the United Kingdom, it has repeatedly been held by courts that interpreting contracts is not so much adhering to the words in letter as it requires wider examination of commercial intent, background of the contract, and common sense of commerce. In Antaios Compania Naviera SA v. Salen Rederierna AB, [1983] EWCA Civ J0708-1, the House of Lords ruled that where a literal textual meaning will give rise to a commercially absurd result, the meaning must give way to commercial sense. Where two interpretations are available, the court is to select the one that conforms to the contract's overall commercial purpose.This rule was subsequently followed by the Supreme Court of India in the matter of Satya Jain v. Anis Ahmed Rushdie, Arising out of SLP (C) No.1891 of 2012. The Court held that a provision can only be implied if it is required to give the contract business efficacy in order to prevent a failure of consideration that the parties could not have reasonably contemplated. But in order to accomplish this, only the most restrictive term—the absolute minimum—should be inferred. In the matter of Nabha Power v. Punjab State Power Corporation, Civil Appeal No. 2425 of 2023, the Supreme Court of India offered an orderly approach to apply the commercial efficacy test. To determine whether an implied term will be justified, the Court developed a five-pronged approach known as the "penta test":The implied term should be aimed at ensuring fairness and justice between parties;The implied term should not be inconsistent with any express term of the contract;The implied term must be able to be clearly expressed without leading to further uncertainty;In the absence of the implied term, the agreement would either be unworkable or commercially ridiculous;The implied term must be so obvious that an officious bystander would find it self-evident. By preserving the parties' intentions and guaranteeing the integrity of written agreements, these tests prevent contracts from breaking down due to minor drafting errors.The test of business efficacy, is usually supplemented by the doctrine of business common sense. This doctrine acknowledges that contracts should be interpreted in a way that is compatible with commercial realities, and not strictly in accordance with a literal approach that defeats the intention of the contract. In the case of Enercon India Ltd. v. Enercon GMBH, Civil Appeal No. 2086 of 2014, the Supreme Court of India cited Lord Diplock's comments in Antaios Cia Navieara SA v. Salen Rederierna AB, [1985] AC 191, where it was held that business common sense should take precedence over a meticulous, semantic interpretation of a commercial contract when it leads to an absurd consequence. In other words, the courts can intervene to reestablish business sense where implementing a term makes the contract financially unfeasible or unworkable.The doctrine of business efficacy and common sense combine to prevent contracts from becoming tools of injustice or malfunction. They enable the courts to achieve a balance — maintaining the literal word where feasible but intervening where required to protect the genuine commercial intention of the parties. The Supreme Court in the matter of Maharashtra State Electricity Distribution Company Limited v. Ratnagiri Gas and Power Private Limited & Ors, Civil Appeal No. 1922 of 2023, addressed the situations in which the doctrine of business efficacy can be applied. The conflict resulted from a Power Purchase Agreement (PPA, hereinafter) between the Purchaser Maharashtra State Electricity Distribution Company Ltd. and the Seller Ratnagiri Gas and Power Private Ltd. The PPA, which was meant to extend for 25 years, came under strain owing to an unexpected shortage of domestic gas across the country, leading the Seller to...

Contractual Silence In Arbitration: Interplay Of Business Efficacy And Commercial Common Sense

Chetna Alagh

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