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

In a judgment delivered on Monday, the Supreme Court reiterated the principles for interpretation of a contract."In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean.", the bench of Justices L. Nageswara Rao and Vineet Saran observed.The Court observed thus while dismissing an appeal against a judgment of the Appellate Tribunal for Electricity at Delhi by which the order passed by the Karnataka Electricity Regulatory Commission (KERC) was reversed. KERC had dismissed the petitions filed against the reduction of the tariff payable by Bangalore Electricity Supply Company Limited (BESCOM) from Rs. 6.10/kWh to Rs. 4.36/kWh and imposition of damages of Rs. 20,00,000/- for delay in commissioning the plan.While dismissing the appeal, the bench noted in Para 16 as follows:The duty of the Court is not to delve deep into the intricies of human mind to explore the undisclosed intention, but only to take the meaning of words used i.e. to say expressed intentions (Smt. Kamala Devi vs. Seth Takhatmal & Anr ). In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean. It can happen that in doing so one is driven to the conclusion that clause is ambiguous, and that it has two possible meanings. In those circumstances, the Court has to prefer one above the other in accordance with the settled principles. If one meaning is more in accord with what the Court considers to the underlined purpose and intent of the contract, or part of it, than the other, then the court will choose former or rather than the later. (Ashville Investment v. Elmer Contractors.)The intention of the parties must be understood from the language they have used, considered in the light of the surrounding circumstances and object of the contract. [Bank of India and Anr. v. K. MohanDas and Ors]Every contract is to be considered with reference to its object and the whole of its terms and accordingly the whole context must be considered in endeavoring to collect the intention of the parties, even though the immediate object of inquiry is the meaning of an isolated clause. Bihar State Electricity Board, Patna and Ors. v. M/s. Green Rubber Industries and Ors).The Court also reproduced the observations made by Lord Hoffmann in Investors Compensation Scheme Limited vs. West Bromwich Building Society in on the broad principles of interpretation of contractInterpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (See : Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945. The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the...

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

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