Contract Terms and their Interpretation: The Indian Perspective (2024)

I. Introduction

Parties are bound by the terms of the contract that they have signed. This fundamental principle is found in section 37 of the Indian Contract Act 1872 (‘ICA’), which provides that parties must perform or offer to perform their respective promises. Terms agreed by parties get incorporated into writing—formal or informal. Their expression reflects their intention at the time of making the contract. If they disagree later about the meaning of their writing, or about an aspect on which their contract is silent, they have a dispute that can come up for resolution before a court or arbitral tribunal. The court or arbitral tribunal must ascertain the meaning of that written expression and its effect, or supply (or not supply) the aspect not provided in the contract. This chapter deals with the approaches of the Indian courts in this exercise of interpretation, and implying terms.

A party cannot escape his obligations because he did not read his contract or it was in a language that he did not understand.1 But each party has an opportunity to state that the contract does not contain all terms agreed, or to explain the meaning of its words. In a suit on his contract, such party can lead evidence to explain the meaning of the words used, and the context in which these were used, or can plead the existence of implied terms.

The ICA states the general law of contract applicable in India. There are also special provisions for some specific contracts. The Sale of Goods Act 1930 (‘SGA’) states the law applicable to contracts for the sale of goods. The Indian Evidence Act 1872 (‘IEA’) states the rules on the proof of facts, and the extent to which evidence can be admitted to prove facts. The role of these laws in relation to contract terms is discussed in section II of this chapter. Although parties may have attempted to express their promises in clear and plain language, they may later disagree about the meaning. The language used by them reflects their shared intention at the time of making their contract. When disputes arise, the court must find their intention. It has to do this task a considerable time after the contract was made. Rules of interpretation assist the court in this task. Section III of this chapter discusses the principles and approach of Indian law to the interpretation of contracts. A contract in writing might appear to contain all the terms agreed, yet parties may have left out some terms because they are too obvious, or because they made an informal contract, or forgot to include all the essential terms that would make their agreement completely effective. If a statute does not fill these gaps, courts must imply terms in certain circ*mstances. Section IV of this chapter examines the circ*mstances in which and the extent to which terms are implied in statutes, or are implied by courts. The chapter ends with a conclusion in section V.

II. Indian Laws of Contract and Evidence

The ICA states the general principles for all contracts in relation to formation, proposals and acceptances, essential conditions of validity, performance, discharge or release from performance, impossibility, effect of rescission,2 and the remedy of compensation. It draws heavily upon the English law at the time it was enacted. The ICA is not a complete code, and does not cover the whole field of contract law.3 It does not state rules for interpreting contracts or for implying terms.

The Indian Evidence Act 1872 contains provisions on the admissibility of facts and of evidence. Sections 91 and 92 set out the parol evidence rule.4 Provisos to section 92, and sections 93–99 of the IEA state the extent to which extrinsic evidence can be given. In general, if the language of the document is plain and unambiguous, extrinsic evidence cannot be admitted. However, evidence can be admitted to explain facts or to show how the language of an instrument relates to existing facts.5

To the extent that the ICA, or any statute affecting particular contracts, does not cover a situation, courts will enunciate principles with reference to the English law, but are not bound to follow it. Many principles discussed in this chapter are derived from principles laid down in English cases.

Even when India was under British rule, the Indian law was cast in a manner suitable for Indian conditions. Many provisions of the ICA have departed from the English law.6 Historically, English judges also departed from essential English law principles in response to the special conditions in India.7 Thus, the Privy Council opined as far back as 1856 that deeds and documents from India must be liberally construed.8

III. Interpretation of Contracts

The principles of interpretation in Indian law are similar to those in English law and other Commonwealth jurisdictions, being drawn by English judges from English cases. Principles, rules, or canons of interpretation are stated by the Privy Council, the Supreme Court, and the High Courts while interpreting contracts and deeds before them. Courts have also referred to treatises on the subject.9 The provisions on admissible evidence in interpretation are stated in sections 91–100 of the IEA as the parol evidence rule and its exceptions. In this way, the ICA allows parties to attempt to give certainty to a contract that may otherwise be void for vagueness or uncertainty.10

Interpretation and construction of written terms are tasks for the judge, arbitrator, or tribunal. In an arbitration, construction of terms is primarily for the arbitrator to decide;11if an arbitrator has stated a plausible interpretation, such an award will not be set aside merely because another interpretation is possible.12

The purpose of interpretation is to ascertain the intention of parties at the time the contract was made. Since parties cannot give direct evidence of the intention they had at that time, their intention is determined objectively. Their expression in stating the terms may not be exact. Their understanding may differ from that of the party, lawyer, or scribe, who has drafted the contract. The real object of interpretation is therefore to ascertain the presumed intention of parties, assuming that both of them are reasonable.13

1. Contextual Approach in Indian Law

The literal or textualist approach restricts interpretation to the words used in a contract. A court will not consider the context or the factual matrix in which the words are used, unless there is first a finding of ambiguity. In contrast, the contextualist approach looks at a contract in the context in which it was made, without the need to first find ambiguity. Ascertaining intention requires a court to look beyond the usual import of the words used by parties to the context in which they made their contract. Such a contextual approach to interpretation was restated in the English law in 1998 by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society.14

Indian courts have been following the contextual, rather than literal, approach to interpretation since 1856. In Hunoomanpersaud v Babooee,15 the Privy Council was called upon to interpret a word used in a deed in local language (which meant a ‘proprietor’), and to decide whether the word conferred full ownership or only the powers of management. Knight Bruce J observed that if one were to adhere to the letter, the word would be construed to mean ‘ownership’, ‘but they ought not to be so construed unless they were so intended … the acts … cannot be reasonably viewed otherwise than as acts on behalf of another’, and held that the person was a manager. The Privy Council considered the context and made this oft-quoted observation:

and proceeded to look at the context:

This liberal approach was appropriate because many documents were executed in the mofussil, ie the provincial rural areas,18 where parties or their lawyers would be less exposed to the English drafting techniques, the legal significance of accurate expression, and the niceties of interpretation. This approach allows a court to look at surrounding circ*mstances while giving meaning to the words used.

2. The Language of the Document

Nevertheless, the task of interpretation begins with the primary rule of interpretation: that the meaning of the document, or of any particular part of it, must be sought from the document itself. Intention must be gathered firstly from the words used by the parties themselves. Hence, the inquiry first proceeds to find not what the parties may have intended, but the meaning of the words which they have used.19 The court must look at interpretation objectively. Oral evidence of the intention of parties cannot be given.20 If the words are clear in the context of the surrounding circ*mstances, the court cannot rely on such oral evidence ‘to attribute to the author an intention contrary to the plain meaning of the words used in the document’.21 The duty of the court ‘is not to delve deep into the intricacies of the human mind to ascertain one’s undisclosed intention, but only to take the meaning of the words used by him, that is to say his expressed intention’.22

This is supported by the parol evidence rule, stated in sections 91, 92, and 94 of the IEA:

In Maganlal v Rupam,23 a total assignment of copyright made in 1973 stated that the assignor had assigned rights of exploitation in a film. The assignee sued to restrain the assignor from transferring satellite rights to a third party. The assignor contended that exploitation through satellite broadcast was not known at the time, and hence not intended to be assigned. The Bombay High Court held that the term ‘exploit’ included assignment of ‘satellite rights’. In Manindra v Durga,24 M granted mining rights to B at a time when the only railway from the mine to Kolkata was provided by one railway company, but another railway company was planning to set up a new route from the mine to Kolkata. The payment terms specified a rate of royalty for coal despatched, but if the other railway line commenced operation and the freight on coal was reduced by 2 annas or more per ton, then ‘all coals despatched in the aforesaid manner would be paid’ at a specified higher rate of royalty. M claimed a higher rate of royalty for all coal despatched by rail, irrespective of the railway company. B alleged that the higher rate of royalty applied only to the coal despatched by the other new company. The question arose whether the differential rate referred to the rate of the first company only or of all companies. The Court applied the literal rule, and held that the words ‘all coal’ referred to the coal despatched by all companies, and B was liable to pay the higher royalty rate for all coal despatched.

The court may refer to a dictionary. In Superintendence Company v Krishna,25 a post-employment restraint restricted an employee from serving a competitor ‘after you leave the company’. The question arose whether the restraint applied if his services were terminated. Referring to the dictionary, the Supreme Court held that the word ‘leave’ was intended to cover cases only where the employee chose to leave the employment, and did not apply to termination.

In some cases, the meaning may be so obvious that the court may not need to refer to dictionaries. In Oriental Insurance v Samayanallur Coop Bank,26 a burglary insurance policy excluded liability unless cash was kept in a ‘safe’. The question arose whether the insurer could refuse a claim when cash was kept in a cashier’s box. Holding that the box was not a ‘safe’, the Court observed:

The court can also presume an established meaning for a word, especially in local languages, unless surrounding circ*mstances or context qualify it.28 Section 98 of the IEA allows extrinsic evidence to be given to show the meaning of illegible or not commonly intelligible characters, of foreign, obsolete, technical, local, and provincial expressions, of abbreviations, and of words used in a peculiar sense.

In the hypothetical case about the sale of sharkmeat, A and B make a written contract in the English language which is not their native tongue, that A will sell ‘sharkmeat’ to B. Both parties erroneously believe that this word denotes the meat of whales; both intend to conclude a contract for the sale of whalemeat. A tenders whalemeat to B. Here, if B stands by his original intention that the contract was for meat of whales, he must accept the goods, or else be liable for compensation. If B insists on compliance with the written word, and rejects the goods, either party can seek remedies from a court, ie compensation for non-acceptance (A’s suit), or for breach of a condition or for non-delivery (B’s suit). The issue of interpretation will arise only if B insists that the contract was for sharkmeat. There is no ambiguity in this word. The language of the document is clear and unambiguous, and oral evidence of subjective intention cannot be given.29 Although A cannot be prevented from leading evidence to show context, viz that the native language of parties was not English, the parol evidence rule in section 92 of the IEA prevents A from contradicting the terms of the instrument, but A can give evidence of common mistake under proviso 1 of section 92, which provides that any fact may be proved which shows in what manner the language of a document is related to existing facts. He can prove what was written was not meant, only in a suit for rectification30 for correcting the mistake filed under section 25 of the Specific Relief Act 1963 which provides:

In another hypothetical relating to a mistake in the sale deed about the registered number of the plot, the purchaser can refuse to take possession of the plot offered to him (No A242). In India, such a sale-deed will be registered. If the purchaser does not wish to take possession of Plot A242, because that was not the intended plot, he must seek rectification of the instrument, because such a decree will put straight the registration record. Prior conduct of parties, viz the joint inspection, mistake of the lawyer, the market value of the plot that determined the price, and other communications can be proved to show the ‘real intention of the parties’ that the instrument has failed to express.

3. The Context

Even if the language in the document is plain, evidence is allowed under Proviso 6 to section 92 of the IEA to prove any fact which shows in what manner the language of a document relates to existing facts. For example, where the landlord agreed to let his showroom, garage, and ramps, and the tenant agreed to pay rent to use the property as a motor showroom and workshop, evidence was allowed to show that the intention was that the whole premises could be used as a workshop, and that no portion was earmarked for any particular purpose.31 In another case, evidence of facts was allowed to show that a document purporting to transfer property was truly intended to operate only as a security.32

This proviso has been described as ‘the despair of Judges and the joy of lawyers’.33 Chief Justice MacLeod describes the risk in allowing such evidence:

In the oft-quoted decision of 1899 in Balkishen v Legge,35 the Privy Council was required to decide whether an instrument was an outright sale (with conditions of repurchase) or a mortgage by conditional sale, and observed that the case must

The Supreme Court was also willing to look at the context to interpret words in the local language.37

In Bank of India v Rustom,38 the Bombay High Court had to decide whether the contract between a bank and an airline company created a charge or incumbrance on the property so that the property could be brought to sale, or stated a mere personal assurance or undertaking. The Court observed:

The context includes the background and capability of parties. In a contract of employment, the term ‘free of income tax’ in the case of a salary to be paid to an officer was held to mean ‘free of taxes on incomes’ and hence also free of super-tax (super-tax being additional income tax), because although the Income Tax Act 1961 made a distinction between the two, the wisdom to make this distinction could not be attributed to the parties.40 The strict rules of construction ordinarily applied to conveyances and other formal documents will not apply to a contract between two lay parties.41 But where the parties are companies, the ‘… making of contracts is a matter of high technical expertise with legal brains from all sides involved in the process of drafting a contract. It is even preceded by opportunities of seeking clarifications and doubts so that the parties know what they are getting into.’42 It can be presumed that the agreement was made with full understanding. Thus, where the commercial parties had expressly agreed in a leave and licence agreement that the document should not be construed as a tenancy agreement, a relationship of tenancy could not be inferred.43

The fact that the parties are business people or of a particular trade (ie the position of the parties, and their probable knowledge or ignorance of the words used to express their intention) is an important fact in the interpretation of a term. In one case, the Bombay High Court was persuaded by the fact that the parties (a banker and airline company, both represented by officers) were not ‘persons ignorant of legal phrases proper to express their intention or of legal steps necessary to carry them into effect’.44

The Court should consider a term from the same frame of mind as a reasonable person in the position of the parties, which would make it possible to understand ‘how commercial minds work’.45 In Punj Lloyd v India Cements,46 the Delhi High Court held that a bank guarantee given for ‘money that may become payable by our said client to you in relation to the said goods whether on account of security or of the price of the said goods as dispatched or delivered by you’ covered demand for sales tax and entry tax. The Court observed: ‘The clause is to be found in a commercial document and has to be read as ordinary men of prudence dealing in commercial matters would understand it to be.’47

In Hurnandrai v Pragdas,48 the Privy Council had to consider a term: ‘the … goods are to be taken delivery of as and when the same may be received from the Mills’. In deciding that the words ‘as and when’ could not be construed as ‘if and when’ and obliged the seller to procure goods and deliver, the Privy Council observed:

The question of whether a term imposes a condition precedent or an absolute obligation arose in many cases thereafter. In a case involving similar terms, the Supreme Court held that the words goods ‘prepared by the Mills’ described the goods, and the words ‘as soon as they are supplied to us by the said Mill’ indicated the process of delivery.50

In commercial transactions, a court will not defeat the efficacy of a document, will construe it broadly, strive to give full effect to its terms, and will avoid interpreting any term as meaningless.51

4. Other Surrounding Circ*mstances

Patent ambiguities in instruments cannot be corrected.52 But if the ambiguity is latent, the court can look at other circ*mstances. Such ambiguity may arise because the meaning of a term is obscure, or is capable of two interpretations, or is meaningless (the expression ‘unmeaning’ is used) in relation to existing facts.53 The proviso 6 to section 92 of the IEA also allows evidence of surrounding circ*mstances to find the ‘intended meaning of the words which have been actually employed’.54 Evidence of ‘surrounding circ*mstances’ can therefore be admitted and considered to explain the meaning of words,55 and also if the language has a latent ambiguity.56 Thus, in one case, parol evidence was admissible to show what was meant by the clause ‘certain conditions as agreed upon’.57

Illustrations to section 29 of the ICA58 also indicate that evidence can be led by parties in an attempt to ‘make certain’ terms that are uncertain. Thus, where A, who is a dealer in coconut oil only, agrees to sell to B ‘100 tons of oil’, the nature of A’s trade indicates that A has entered into a contract for the sale of 100 tons of coconut oil.59 Where A agrees to sell to B ‘my white horse for rupees five hundred or rupees one thousand’, the agreement is void and extrinsic evidence is not admissible to show which of the two prices was to be paid.60

Surrounding circ*mstances have been considered where the court has been called upon to decide the true nature of a transaction: eg whether it was a mortgage by conditional sale or a sale with agreement to repurchase,61 or a charge or personal assurance.62 Such evidence is not barred by the parol evidence rule in section 92 of the IEA, because ‘Section 92 merely prescribes a rule of evidence; it does not fetter the Court’s power to arrive at the true meaning and effect of a transaction in the light of all the surrounding circ*mstances.’63

(a) Parties’ conduct

Unlike English law, Indian courts are more willing to consider the conduct of the contracting parties before, during, and after the contract is made. However, such conduct is relevant only if there is latent ambiguity in the language or term used. Although prior negotiations, communications, or conduct cannot ordinarily be considered in interpreting terms, prior negotiations, statements, or agreements can be relied on to explain an ambiguity.64 Thus, the meaning of a term in an insurance policy was interpreted by reference to questions asked in the proposal and answers given by the insured.65 In Sumitomo v ONGC,66 the contract provided for compensation if the contractor was subjected to extra cost after the income tax law changed. The question arose whether reimbursem*nt of tax made by the contractor to his subcontractor arising from this change was recoverable from the employer. The Supreme Court upheld an arbitrator’s award that gave a wide interpretation after considering the prior negotiations. A formal antecedent contract leading to a conveyance cannot be looked at to interpret or control the terms of a conveyance;67 where they differ, the conveyance will prevail.68 However, an antecedent contract can be used to resolve an ambiguity in the conveyance.69

In the hypothetical case concerning whether the stated price based on a formula included or excluded value added tax (‘VAT’),70 the court must first decide whether the term is plain or ambiguous. The literal meaning of the word ‘price’ is the amount of money given in payment for something, which would be the entire or total amount paid for installation of water pipes. This amount can be proved. It will include VAT if it is ‘paid’ by A. However, if the court considers the word ‘price’ as ambiguous, because the words do not say whether the price includes tax or not, evidence of surrounding circ*mstances will be taken into account. Evidence of business practices in the jurisdiction will be admitted to prove business or trade usage.71 In the case of ambiguity, evidence of prior negotiations can also be given;72 the act of deleting a previous reference to VAT can be construed as compliance with business usage. Hence the relevant term can be construed as price exclusive of VAT.

Evidence of contemporaneous conduct,73 or of acts done shortly after making the instrument, are also admissible as a surrounding circ*mstance,74 but only in the case of ambiguity.75 It is strong evidence if the deed is ancient and the conduct has been followed for a substantial length of time.76 The court can also look at contemporaneous usage to resolve ambiguities in an ancient document.77

In Godhra v Gujarat,79 a question arose about when a licence commenced: on the date of its notification, or its publication in the Official Gazette. The Supreme Court held that the contents of a later amending document between the parties could be admitted where language is ambiguous, and observed:

(b) Other documents and precedents

A contract must be interpreted by itself and without reference to another contract, unless the expressions used, and the facts and surrounding circ*mstances in relation to both contracts, are the same or identical.81 This is because the other contract may be made in entirely different circ*mstances.82 Thus, in interpreting the terms and conditions of a contract of carriage by sea, reference to other bills of lading issued by the shipping company in connection with the same voyage could not be referred to.83 An earlier judgment is not binding authority even though the language of the contract in the decided case is similar to the one in question before the court.84

5. Other Rules of Interpretation

The name given to the document does not decide the true relationship between the parties, which must be determined from recitals and all the terms of the document,85 and in cases of ambiguity, from the surrounding circ*mstances.86

A document must be construed as a whole in order to ascertain the meaning of its clauses.87 Where an assignment of copyright was silent about its duration, but the negative covenant and payment of royalty was limited to 25 years, the assignment was held not to be for an unlimited period.88

In a case of inconsistency between the printed provisions and any matter in handwriting, the printed words cannot be directly discarded. The court must first attempt to derive the real contract from both the printed and the hand-written matter;89 in cases of inconsistency, the handwritten matter should be given greater weight,90 or must prevail.91 This is because:

If the literal construction of words leads to inconsistency, and another construction reconciles the inconsistency, the latter is to be preferred.93 Similarly, if one construction gives effect to all clauses, and the other renders one or more of them ineffective, the former should be adopted.94 However, if there is a conflict between two provisions, and it is not possible to give effect to both of them, then the earlier clause will prevail over the later clause.95

A court can correct incorrect grammar or spelling. It can also reject words that are meaningless, or are repugnant, or are obviously left in by mistake, or are immaterial and surplus.96

The principle of interpreting contra proferentem applies only in cases of ambiguity.97 This is based on the principle of fairness. The words of a document are construed against the party who prepared the document,98 or the party putting forth the document,99 or against the grantor and in favour of a grantee.100 But, if the provision is clear, it will bind a party to an exemption clause against him.101

Some contracts (or terms in contracts) will be strictly construed, viz agreement in restraint of trade,102 indemnity,103 power of attorney,104 surety bonds.105

IV. Implied Terms

Indian courts are willing to add terms to supplement the express terms of a contract. Terms are implied in order to give full effect to the presumed intention of the parties. Implying terms becomes necessary where the parties have not fully stated the terms, either because they have made their documents without a full understanding of their implications, or because they have overlooked the matter. Terms may be implied where the contract will not work without such implication. The Bombay High Court stated that:

A term may be implied to incorporate a custom or established usage. Terms are also implied by statutes.

Section 9 of the ICA permits implied promises,107 also referred to as inferred agreements.108 An offer109 or an acceptance can be inferred from the conduct of the offeror or offeree. An agreement may be implied if the conduct, when objectively viewed, would amount to acceptance, viz from the inaction of the offeree to a course of action adopted by the offeror,110 or because allegations or statements in correspondence go uncontradicted.111

The ICA does not provide for implication of terms to cover matters that parties have not expressly agreed. Yet, courts are willing to imply terms to give full effect to the parties’ agreement. Terms can be implied in all contracts, except those contracts to which the government (Union or State) is a party,112 which are excluded by Article 299 of the Constitution of India.113 The task of implying terms is different from that of interpretation or construction, though it may be necessary to construe the written term in order to imply or refuse to imply a term.114

Contracting parties are masters of their bargain. It is for them to decide the nature of their rights and liabilities. It is not for the court to make contracts for them. Hence a court will not supply a term into a contract that has clear express terms. Yet very often, a term must be devised so that the contract will survive. This is done to give effect to the obvious intentions of the parties. But the ‘[J]udges will supply the minimum necessary to save the contract’.115

The power to imply derives from principles of English law. Some implied terms find their source in the English common law. But an Indian court might imply these terms into a contract, not because any term is binding as a principle of English common law, but as one factor showing the intention of parties.116 This will allow evidence of facts to be pleaded that rule out such an implication. For example, where A does an act at the request of B that is not manifestly tortious, and such act injures a third party, A is entitled to an indemnity from B.117 This implication has been applied as one of the ‘widest general application’.118 Where a contract is silent as to the place of payment, the ‘debtor must seek the creditor’.119

The party relying on an implied term must specifically plead it,120 and can lead oral or documentary evidence to prove all facts from which such a term may be implied.121

1. Power to Imply is Confined

‘The general rule is that if the contract can be fulfilled as it stands and is effective, no terms or condition by implication should be imported into it simply because it may seem reasonable that there should have been such a term in the contract’,122 or because ‘it would render the contract rather more attractive in the eyes of reasonable men’.123 In Central Bank of India v Hartford Fire Insurance Co,124 a termination clause in a policy allowed the insurer to terminate it at will. The insured argued that such power could only be exercised if grounds for termination existed. The Court refused to imply a term that the power should be exercised reasonably. The Court observed:

While a court will imply a term that will support express terms, it will not ‘make a new contract for the parties’.

(a) No implication that conflicts with express terms

A term will not be implied if it conflicts, or is inconsistent, with the express terms of the contract. In Rashtriya Ispat v Dewan Chand,126 the contract provided: ‘The Contractor shall bear and pay all taxes, duties and other liabilities in connection with discharge of his obligations under this order.’ The contractor contended that he could pass on ‘service tax’, which under the applicable tax law was the primary liability of recipient of services. The Court held that such a provision could not be implied because of the express provision in the contract, and because the parties could have made provision in the contract for shifting the burden. In another case, a statutory corporation leased land on an ‘as is where is basis’. A term could not be implied requiring it to provide an approach road to the lessee.127

(b) No implication where parties intend to omit

A court will also not imply a term where the contracting parties were in a position to state their terms with sufficient clarity, but omitted to do so.128 In such cases, parties are assumed to be aware of the condition or state of things that would require such a term, but omitted to state it expressly. ‘If intended these words must have been expressed, but if not expressed they cannot be implied.’129 In a case before the Calcutta High Court, the defendant agreed to supply 6 wagons of coal dust to the plaintiff at Katrasgarh, price being fixed FOR (free on road) Katrasgarh. The defendant sought to rely on a term that the supply was dependent on the supply of wagons. It was held that since the dearth of railway wagons was present in the minds of the parties when they made the contract, such a term could not be implied.130

2. Terms Implied as a Fact or by Law

Terms may be implied in many ways:

These are discussed in the following sections.

(a) Implied into contracts

The express terms of a contract may not cover all aspects or matters necessary for its effective performance because of bad drafting, or sheer forgetfulness. At times, the parties might record the agreed terms in informal language or style. Their terms might be recorded in the native language of part of India that has its own legal culture. Where parties have left matters unsaid, the court is required to imply terms, either for the particular contract, or by reference to contracts of the type that is before the court. Such implication can be made by reference to the surrounding circ*mstances and to the parties who made them.131

Indian courts take a narrow approach when implying terms. Terms will be implied to give business efficacy to the transaction as must have been intended, or to remedy some obvious oversight or if it is something so obvious that it goes without saying.132

(b) The presumed intention of parties

In implying terms, the court will consider the presumed mutual intention of parties.

In Subhadrayyamma v Poosapati,133 the debtor agreed that he would not compromise or withdraw pending litigation without the consent of the creditor and, when it was compromised, would not only pay to the creditor the principal amount of loan with interest out of the movable and immovable properties obtained from the compromise, but also transfer a share in such properties. The creditor died before giving any consent. The debtor compromised the litigation. The creditor’s heirs sued for a charge on the properties obtained on the compromise. The debtor argued that the requirement of consent was a condition precedent for making a compromise, and the creditor having died without consenting, the compromise was ineffective. The Privy Council observed that having regard to the uncertainty of human life which the contracting parties when providing for possible future events must ‘be presumed to bear in mind’, they could not have intended that the creditor would have lived long enough to be able to consent and that if there were no consent, no compromise would proceed. On the other hand:

In United v Manubhai,135 a question arose whether a term could be implied into health insurance policies that an insurer shall give reasons for cancelling a policy. The Supreme Court stated:

There is no general implication of an obligation to perform in good faith. Thus, in a contract that provides for termination at will, the power of termination can be exercised without reference to any fault or default of the other party.137 However, in some circ*mstances, a term can be implied that parties shall cooperate with each other138 or exercise best efforts.139 Obligations to act in a reasonable, just, and fair manner, especially in the matter of termination, have been implied in statutory contracts of government or government entities.140 There is also implied in law an obligation to afford a promisor reasonable facilities for performance of his promise, otherwise the promisor is by such neglect or refusal excused for non-performance.141

(c) Supply business efficacy

The business efficacy test aims to achieve a result or consequence intended by the parties acting as prudent business persons. It means the power to produce intended results. Thus, a term will be implied if it is such as must have been clearly intended by the parties at the time of making of the agreement.142 In RV Narayanaswami Chetti v Soundararajan and Co,143 the Madras High Court held that although there is no obligation in each case of CIF (cost, insurance, and freight) contract that the seller must procure an import licence to enable the buyer to clear the goods from the port, such a term was necessary for the business efficacy of the transaction based on other express terms of the contract. In Koduri Krishnarao v State of Andhra Pradesh,144 where a lease required running ferry services with government-owned steamers for the convenience and safety of the passengers particularly when the river was flooded, a term could be implied that the lessor shall supply vessels in working order at the commencement of the lease. In Gulabchand Gambhirmal v Kudilal Govindram,145 two businessmen made a contract for the transfer of shares in a managing agency business after prolonged negotiations and a carefully scrutinized agreement with minute details. The contract was silent about the payment price. The Court held that the agreement was not void for uncertainty, and implied a term as to payment of the price146 observing that the parties were not likely to have left the question of the price undecided.147

The business efficacy test cannot be invoked where the express terms can be given full effect. In Nadiad Borough Municipality v Nadiad Electric Co Ltd,148 a long-term contract provided that ‘[w]hen the period reserved under this contract expires and if it is not renewed the licensee shall be entitled to remove the street lighting installation’. The question arose whether a covenant for renewal could be implied for reasons of business efficacy from the words ‘if it is not renewed’. The Court held that these words contemplated the possibility that the agreement might be renewed, but did not give the licensee the option to do so. They indicated that such renewal could occur with mutual agreement between the parties. The Gujarat High Court observed:

(d) Cure oversight

Time and again courts have been called upon to decide disputes relating to contracts the performance of which is contingent on the occurrence of an uncertain event. Thus, if a transaction of sale by X of his land to Y requires government permission, and their contract for sale is silent about this, the court has two options in a suit by Y to enforce such contract. Firstly, the court can hold that such an agreement is void because the transaction is forbidden, or because the contract is vague. Secondly, the court can imply a term dealing with such permission so as to give effect to the intention of parties. Courts have been called upon to imply terms in this manner in a wide variety of contracts involving different types of permission, which makes such an implication a matter of course in contracts of this type. For example, a term was implied that one party would use all reasonable efforts to secure the fulfilment of the condition or bring about the event, although without any absolute undertaking that the efforts would succeed.150 It has also been implied that the promisor must do this within a reasonable time.151 A decree of specific performance for the sale of land can be ordered directing the seller to apply for permission, and to make efforts to obtain it.152 It is also implied that such permission must be obtained first before the other party is called upon to pay the price.153 The duty to cooperate, or the duty not to obstruct, has been implied in other circ*mstances.154

(e) Supply the obvious

In other cases, courts will imply a term if it is so obvious that it would go without saying. A term

Thus, where a contract for lease was ‘to contain all usual covenants and provisions’, the agreement was not void for uncertainty. The term meant the stipulations for sale implied under the law and contained in the Transfer of Property Act.156 In a contract for the purchase of goods forming part of a lot of ‘approximately 244 tons’, a term can be implied that if the goods delivered are less or more, the price will be refunded or extra paid as appropriate.157 Where a contract is silent about price, a term can be implied that it shall be calculated on the basis of the parties’ previous course of dealings.158 If a lease deed contains a covenant of renewal without anything more, it is implied that the lease would be renewed on the same terms and conditions and for the same period as the original lease.159

3. Implication by Custom or Usage

Section 1 of the ICA preserves usages or customs that are not inconsistent with the contract provisions. Whatever is prescribed by that custom or usage becomes additional terms of the contract. Such terms are implied from a general interpretation of the transaction with reference to the usual understanding of persons entering like transactions in like circ*mstances.

Thus, a claim by an exhibitor of a film for recovery of the entire amount from the distributor immediately after completion of screening of the film was upheld on proof of usage to that effect by oral evidence, where the contract was silent about the time at which such amount was payable.160 In a contract for the sale of liquid molasses on terms FOR Gorakhpur and ready delivery, extrinsic evidence was allowed to prove custom or usage that the seller (mills) shall procure rail wagons into which they will load the goods.161

Courts are willing to accept as mercantile usages and practices provisions of codes affecting particular trades. In Mcdermott International Inc v Burn Standard Co Ltd,162 the Supreme Court upheld the award of an arbitrator based on measurement of work done under a subcontract applying the AISC Code163 as the industry standard. In another case, the Supreme Court indicated that the Uniform Customs and Practices for Documentary Credits formulated by the International Chamber of Commerce could be recognized as part of mercantile customs and practices164 even if the parties to a contract have not incorporated them into their contract.165

A term will not be implied from custom or usage if it is inconsistent with the express terms of the contract. Thus, where the contract contains a stipulation that a specified quality of goods shall be delivered for payment of a fixed sum, the seller could not rely on a custom that a buyer could not reject for difference in quality that was not excessive or unreasonable, and could be met by an allowance in price.166

Proviso 5 of section 92 of the IEA permits evidence of usage or custom. The party relying on custom or usage must prove it.167 In Juggomohun Ghose v Manickchund,168 the Privy Council observed that:

4. Implied by Statute

Statutes provide terms that will be implied into particular contracts. These are ‘default’ terms that attach to the contract where parties have not expressly provided for that aspect. They apply to all contracts in that category. Such implication is mandatory, and does not depend on the intention of parties, presumed or otherwise. Moreover, such a term will apply even if it is not pleaded or set up by the party that relies on such a term. Important examples of such terms are: (i) rights and liabilities of parties to transfers, (ii) lien over property, (iii) terms of contracts, especially of sale of goods. Such terms apply to all contracts of the type, unless it is shown that the parties have agreed otherwise. Provisions in statutes call such terms: an ‘implied condition’170 or an ‘implied warranty’,171 or an ‘implied contract’.172 A statute can also make its provisions applicable ‘unless a different intention appears’,173 ‘unless a contrary intention appears’,174 and the like.

Statutory provisions can exclude the need to imply terms. Thus, a landlord is liable to keep in repair the lift in a building occupied by tenants because a working lift is an essential facility for tenants.175 This obligation arises not from an implied term, but under the provisions of State rent control statutes that give protection to tenants in urban areas, that impose an obligation on a landlord not to cut off or withhold176 any essential supply or service enjoyed by the tenant.177 A similar obligation rests on a developer in relation to buildings containing flats or to the manager of an association formed by flat purchasers.178

V. Conclusion

The Indian law on the identification of terms, implied terms, and interpretation of terms closely follows the English law. Courts have found guidance from principles stated by the English courts and in treatises. Special circ*mstances that affect Indian parties and their drafting have called for special treatment. Contract documents are made in India in its many languages between persons who speak and use different languages, and are affected by customs and legal cultures that differ across regions. Hence, the Privy Council recognized the need for special rules of interpretation in 1856. Whether it be the task of implication or interpretation, the approach of the courts is to take into account the context: the local language in which the document is written, the understanding of parties, and the customs and usages of trade.

On the other hand, commercial contracts receive different treatment. The court’s aim is to promote business efficacy. References to the principles of codes applicable to particular trades, and to international conventions and documents for ascertaining the intention of parties, is a welcome trend. Ordinarily an arbitrator’s interpretation will be upheld if the award is challenged. These factors will assist certainty, particularly in international contracts.