INTERPRETATION OF THE CONTRACT
- kanvigupta63862
- May 2, 2023
- 3 min read
Written by Kanvi Gupta, student.
Introduction
Interpretation of contract refers to a process in which the Courts determine the meaning of the Contract through the words with which it is expressed. The main focus is to find out the intention of the parties with which they made the Contract. In India, many Contracts are neither drafted nor reviewed by the Attorney, because of which the Contract is unclear about certain details.
The ambiguity in terms of the Contract, language, and definitions may lead to the filing of a lawsuit to have the Court review for determining such terms.
There are Statutory Interpretation and Contractual Interpretation. Statutory interpretation refers to the interpretation of statutes when there is any ambiguity in the language of statutes. The meaning of statutes is determined according to the whole public and not against any individual. The parties get some rights and are bound by some duties after entering into an agreement or a contract. The need for contractual interpretation occurs when there is a dispute between parties in which terms and conditions have to be determined by interpreting Contract.
The Courts have an object to determine and find out the real intention of parties before entering into such a Contract. The subjective intention of parties is not considered. Courts consider how an ordinary person having background knowledge as the parties have should, at the time of formation of a contract, have considered and understood the terms of the Contract. The goal is to determine a suitable definition that will suit the intention of the parties.
Procedure of Interpretation
The procedure of interpretation depends on a case-to-case basis. Depending on the nature and circumstances of the case, the Court will determine the procedure to interpret the terms and definitions of the Contract. If the language of the Contract is clear and definitions are proper, then the interpretation will be controlled by the language. In a case where the language is not clear and ambiguous, then external evidence shall be used to determine and interpret.
The literal rule is that if any word which is used in Contract is not defined in the same, then it should be interpreted in its ordinary, plain, and literal meaning. It should be read as about expressed terms until the strict necessity for implied terms is used.
The golden rule is that when the literal rule creates absurdity or overall content of document demands then the shift to the golden rule is allowed.
Purposive interpretation is to clearly understand the clear intention of the party through the language of the contract.
Indian law has scope for both purposive and literal interpretation. Indian law leans on objects for which the Contract is formed. Often Indian Courts consider the account the drafter of the Contract when multiple plausible interpretations are there to provide the benefit of the doubt to the non-drafting party. Because of this, many commercial contracts in India contain the explicit provision that no regard is considered on which party drafted the Contract or which party proposed the particular clause.
Lord Hoffman, in the case of Investors Compensation Scheme Ltd vs. West Bromwich Building Society [1998] (1), it was laid down that despite looking into the meaning of every word mentioned in the Contract, the intention of both the parties entering into the Contract or agreement should be looked into. Lord Hoffman, in this case, laid five principles for the Interpretation of Contracts:
The interpretation should be made in a manner that is understood by a reasonable common person.
Anything which was decided among the parties before entering into the Contract is to be excluded.
The expression or word should not be contrary to the general meaning of the word. The words must be constructed in the general sense and not in the literal sense. The meaning assigned to them should be general. The intention of the parties should be considered. The background and knowledge available to both parties should be considered.
In Glynn v Margetson [1893] (2), Lord Halsbury said that considering the whole instrument and main purpose of the Contract, the words which are inconsistent with the purpose and intention should be rejected. The clauses of the Contract should be interpreted as a whole to have a clear picture of the purpose of the Contract.
Conclusion
The above rules are used while interpreting the Contract if it has ambiguity. Whenever there is any dispute between the parties and the terms are ambiguous, the Courts consider these rules and precedents in reaching the decision. These just help in taking the decision and Courts rely on the detailed review of the contract depending on the circumstances of the case.
References
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