The path and development of the law of contractual interpretation over the years has progressed from a stiff formulism to a strict rationalism.
The aforesaid was observed by a 3-Judge Bench of the Supreme Court comprising of hon'ble Chief Justice of India N.V. Ramana, hon'ble Justices Surya Kant and Aniruddha Bose in the matter of Mangala Waman Karandikar (D) TR. LRS. vs Prakash Damodar Ranade1, Civil Appeal No. 10827 of 2010 (Decided on 07.05.2021).2 Herein the hon'ble Supreme Court has answered on the applicability of Proviso 6 to Section 92 and Section 95 of the Indian Evidence Act, 1872 (hereinafter referred as "the Act") while interpreting the terms of a contract as well as on the usage of extrinsic evidence to understand the intention of the parties to a contract.
The case arose out of an agreement entered between Mangala Waman Karandikar (deceased and represented through legal heirs) (hereinafter referred as the Appellant) and Prakash Damodar Ranade (hereinafter to be referred as the Respondent).
The Appellant's husband was running a business of stationery in the name of "Karandikar Brothers" before his untimely demise in the year 1962. After the demise of the Appellant's husband, the Appellant continued the business for some time. However, after a while, the Appellant was unable to run the business and accordingly decided to let the Respondent run the business for some time. Therefore, the Appellant entered into an agreement dated 07.02.1963 (hereinafter referred as the Agreement) with the Respondent.
The Respondent had requested the Appellant to give the stationery shop (hereinafter referred as the "shop premises") belonging to Appellant for running the same and that accordingly the Appellant had agreed to do so. As per the terms of the Agreement, the shop premises by the name of "Karandikar Brothers" alongwith its stationery materials as well as the furniture etc., was to be taken by the Respondent for conducting by the Agreement for a period of two years beginning from 01.02.1963 to 31.01.1965.
Additionally, the Respondent was to pay a "royalty" amount of Rs. 90/- per month, which was to be paid before the 5th day of every month, for taking the shop premises for conducting the Agreement.
Thereafter, time after time, the Agreement was duly extended. However, in the 1980s, desiring to start her husband's business again, the Appellant issued a notice dated 20.12.1980 requesting the Respondent to vacate the shop premises by 31.01.1981. The Respondent replied to the aforesaid notice claiming that the sale of business was incidental rather the Agreement was a rent agreement.
Therefore, aggrieved by the Respondent's reply, the Appellant filed a civil suit before the Court of Joint Civil Judge, Junior Division, Pune, Maharashtra.
I. Decision of the Trial Court
The Trial Court decreed the suit in favour of the Appellant and held that the purpose of the Agreement was to create a transaction for sale of business rather than to rent the shop premises to the Respondent. The Trial Court while negating the contention of the Respondent, that the shop premises was given to Respondent on license basis and that by virtue of the insertion of Section 15(A) to the Bombay Rent Act, all the licensees have become tenants, held that there had been no intention to create the leave and license agreement in respect of the shop premises. That the Appellant had also excluded the word "rent" from the Agreement and specifically made the recital of imposing "royalty" on the Respondent. Furthermore, the Trial Court held that the Respondent had failed to prove that the shop premises was given to him on license basis.
Accordingly, the Trial Court ordered the Respondent to hand over the shop premises to the Appellant herein including the furniture and other articles.
Thereafter, aggrieved by the Trial Court judgment, the Respondent filed a First Appeal before the Court of Additional District Judge, Pune, Maharashtra. The Additional District Judge rendered a judgment dismissing the First Appeal filed by the Respondent. Therefore, aggrieved by the dismissal the Respondent herein filed a Second Appeal before the Bombay High Court.
II. Decision of the Bombay High Court
The Bombay High Court allowed the Second Appeal and set aside the decision of the Trial Court as well as the First Appellate Court and held that the Respondent had entered into a license agreement which is covered under Section 15A of the Bombay Rent Act. Furthermore, the Bombay High Court held that the Trial Court did not have the jurisdiction to try the cases under the Bombay Rent Act, and that the appropriate court should have been Small Causes Court established under the Provincial Small Causes Court Act.
On merits, the Bombay High Court held that the Trial Court as well as the First Appellate Court have incorrectly interpreted the Agreement and the surrounding circumstances, which indicate that the parties had in fact agreed that the shop premises were transferred to the Appellant on a leave and license basis. The Bombay High Court referred to Proviso 6 to Section 92 as well as Section 95 of the Act to interpret the terms of the Agreement. The High Court observed that even when the document itself is clear and unambiguous, the parties are at liberty to lead evidence in order to establish that the contents of the documents are "unmeaning" or not workable. Extrinsic evidence can certainly be therefore considered to interpret the document if some sense is to be made out of an unambiguous document."3
Therefore, aggrieved by the decision of the Bombay High Court, the Appellant filed a Civil Appeal in the Supreme Court.
Issue for consideration
As per the hon'ble Supreme Court, the questions of law that have arisen for consideration under the Civil Appeal was whether the Agreement was a license to conduct the business of the Appellant's husband in the shop premises; or was it a license to run the existing business which was being run by the Respondents in the shop premises. In other words, does the Agreement create an interest in the shop premises or in the business of the Appellant's husband?
Contentions of the parties
I. Contention of the Appellant
The Appellant contended that the judgment of the Bombay High Court erred in appreciating the language of the Agreement, which clearly points towards the intention of the parties to create a license for continuing existing business, which was run by late husband of the Appellant.
II. Contention of the Respondent
The Respondent supported the judgment of the Bombay High Court by stating that there is extrinsic evidence which shows that the Agreement entered into between the parties was a license to use the shop premises, which is covered under Bombay Rent Act and therefore the Trial Court lacked jurisdiction to adjudicate on the dispute. The Respondent drew support from Section 95 of the Act to state that the Agreement needs to be interpreted having regard to external evidence such as receipts of payment under the Agreement addressed as "rent" receipts etc.
Findings of the Hon'ble Supreme Court
- The hon'ble Supreme Court observed that contractual interpretation depends on the intentions expressed by the parties and that the first tool for interpreting the contract is to be read the same; and that it is ultimately the responsibility of the courts to decipher the meaning of the words used in a contract, having regards to a meaning reasonable in the line of trade as understood by the parties.
- The court also observed that it is clear from the reading of the Agreement in question that the parties had intended to transfer business from the Appellant to the Respondent and that the Agreement was not meant as a lease or license for the Respondent to conduct business.
- Referring to the Proviso 6 to Section 92 as well as Section 95 of the Act, which the Bombay High Court had referred while deciding the dispute in favour of the Respondent, the hon'ble court held that only in cases where the terms of the document in question are ambiguous, does one resort to Proviso 6 of Section 92 of the Act and that Section 95 only builds on the Proviso 6 of Section 92. The court observed, "If the contrary view is adopted as correct it would render Section 92 of the Evidence Act, otiose and also enlarge the ambit of proviso 6 beyond the main Section itself. Such interpretation, provided by the High Court violates basic tenets of legal interpretation. Section 92 specifically prohibits evidence of any oral agreement or statement which would contradict, vary, add to or subtract from its terms. If, as stated by the learned Judge, oral evidence could be received to show that the terms of the document were really different from those expressed therein, it would amount to according permission to give evidence to contradict or vary those terms and as such it comes within the inhibitions of Section 92. It could not be postulated that the legislature intended to nullify the object of Section 92 by enacting exceptions to that section".
- On merits, the hon'ble Supreme Court held that the Agreement mandated continuation of the business in the name of "Karandikar Brothers" by paying royalties of Rs. 90/- per month and that once the parties have accepted the recitals and the contract, the Respondent could not have adduced contrary extrinsic evidence, unless the Respondent is able to show ambiguity in the language of the Agreement.
- The court further held that the Bombay High Court erred in appreciating the ambit of Section 95 of Act and if the meaning provided by the Bombay High Court is accepted, then it would amount to courts substituting the bargain by the parties.
- The court rejected the reliance of the Respondent on the receipt of payment of royalty, which mentions the term 'rent received' as extrinsic evidence to support his case. The court held that in line with the clear unambiguous language of the Agreement, such evidence cannot be considered in the eyes of law.
- The hon'ble Supreme Court also rejected the contention of the Respondent that the dispute is covered by the Bombay Rent Act. It observed that once it is determined that the Agreement was a license for continuing business of the Appellant's husband, the Bombay Rent Act does not cover the issue and therefore, the Trial Court had rightly exercised jurisdiction to adjudicate upon the dispute.
Hence, the Supreme Court in light of its findings set aside the judgment of the Bombay High Court and restored the decree of the Trial Court.
The principles of contractual interpretation have time and again been addressed by the Indian courts to interpret a written instrument. The judgment of the hon'ble Supreme Court re-iterates the necessity to infer from the expressed terms of a contract in order to ascertain the intention of the parties to a contract, subject to its terms being clear and unambiguous. Furthermore, the judgment does address the reliance of extrinsic evidence as an aid for interpretation of a contract when the terms of the contract are unclear via Proviso 6 of Section 92 and Section 95 of the Act. It is therefore a court's obligation to construe a contract in a manner so as to identify the ad-idem of the parties to a contract by utilizing the rules for contractual interpretation, including, going beyond the written terms of a contract whenever required.
It is to be noted that the Respondent had relied upon extrinsic evidence pertaining to the subsequent conduct of the parties in order to show that the intention of the parties was to enter into a license agreement to run the shop premises of the Appellant and not to conduct or run the business of the Appellant's husband; for example, the Respondent's reliance on the receipts of monthly payment under the Agreement addressed as "rent" when the term of the Agreement clearly state "royalty" payment.
Furthermore, the Respondent was running the shop premises in the name of style of "Neelkanth Prakashan" although the parties agreed that the shop premises would be run in the name and style of "Karandikar Brothers". The Appellant was aware of the same since the Respondent had addressed letter(s) for renewal of the Agreement on the letter-head of "Neelkanth Parkashan" and admittedly, the Agreement was subsequently renewed. (This was highlighted in the judgment of the Bombay High Court, Second Appeal No. 537 of 1991, decided on 07.11.2009. The hon'ble Supreme Court, however, did not address this evidence in its judgment).
While the Supreme Court in its judgment held that such extrinsic evidence cannot be construed in the eyes of the law since the terms of the Agreement are clear and unambiguous, it would have been worth noting, if the hon'ble court would have addressed upon the admissibility of subsequent conduct or post-contractual conduct of the parties as extrinsic evidence for interpreting the terms of the Agreement.
Also, the Bombay High Court, in order to ascertain whether the Agreement was a license to create interest in the shop premises or run the business of the Appellant's husband, referred to the judgment of Sohanlal Naraindas versus Laxmidas Raghnath Gadit4, wherein the court had drawn a distinction between a lease and a license agreement and observed that while the intention of the parties is of paramount importance in deciding whether a transaction between them was a lease or a license, the said intention must relate to the elements which constitute a lease or a license respectively. Furthermore, the Bombay High Court also referred to the judgment in the case of Jainabi Yusuf Lambe & Ors. versus Jainabi Alimiya Wagale & Ors.5, wherein it was held that in the facts and circumstances of that case, that the agreement executed between the parties was a license and not a lease.
However, the hon'ble Supreme Court did not address the judgments referred to by the Bombay High Court and has rather limited its findings on the basis of the rules of contractual interpretation. It would be thus useful to have such issues settled by the Supreme Court in some other relevant case, involving the issue of "license for continuing existing business".
1. The judgment can be found on: (https://main.sci.gov.in/supremecourt/2010/11126/11126_2010_31_1501_28001_Judgement_07-May-2021.pdf ) (Last checked on 20.07.2021)
2. A.I.R 2021 S.C. 2272.
3. Prakash Damodar Ranade versus Mangala Waman Karandikar (since deceased through heirs), Second Appeal No. 537 of 1991, decided on 07.11.2009
4. 1966 MhLJ 649. The judgment was reaffirmed by the Hon'ble Supreme Court in the case of Sohan Lal Naraindas versus Laxmidas Raghunath Gadit, 1971 1 S.C.C 276
5. A.I.R 2004 Bombay 394
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