Supreme Court Establishes Principles for Contract Interpretation in Landmark Decision

 

By Abhishek Jat, Advocate

In a significant ruling that clarifies the principles of contract interpretation, the Supreme Court of India has delivered a comprehensive judgment in Annaya Kocha Shetty (Dead) Through LRs v. Laxmibai Narayan Satose Since Deceased Through LRs & Others (Civil Appeal No. 84 of 2019). The judgment, authored by Justice S.V.N. Bhatti, establishes a hierarchical framework for interpreting contractual agreements and elucidates the application of Sections 91 and 92 of the Indian Evidence Act, 1872.

The Supreme Court has articulated a three-tiered approach to contractual interpretation. The primary approach involves interpreting contracts in their "plain, ordinary and literal meaning," serving as the foundational principle for judicial interpretation of contractual terms. When literal interpretation creates absurdity, courts may deviate from strict literal meanings under the "golden rule of construction," which permits reasonable modifications to prevent nonsensical outcomes. As a final resort, contracts may be interpreted in light of their object and context to determine their underlying purpose, though the Court emphasized that this "purposive construction" approach "must be used cautiously." The judgment reinforces the primacy of written agreements and establishes that departure from literal interpretation should occur only when necessary to resolve genuine ambiguities or prevent absurd results.

A significant portion of the judgment addresses the interplay between Sections 91 and 92 of the Evidence Act, which govern the admissibility of evidence regarding written agreements. The Court clarified that Section 91 establishes written agreements as the primary evidence of terms between parties, while Section 92 prohibits oral evidence that contradicts, varies, adds to, or subtracts from written terms. A crucial distinction exists: while evidence to vary contractual terms is inadmissible, evidence showing the absence of agreement ab initio remains admissible. The Court held that oral evidence contradicting written agreements is barred unless it falls within specific exceptions outlined in the provisos to Section 92.

The dispute centered on an agreement dated August 16, 1967, wherein the plaintiff claimed to have received premises under a leave and license arrangement, thereby asserting deemed tenancy rights under Section 15A of the Bombay Rent Act. Conversely, the defendant maintained that the agreement merely authorized the plaintiff to conduct business operations on behalf of the defendant. Applying the principles of contract interpretation, the Court meticulously analyzed the agreement's clauses and determined that the nomenclature explicitly referenced an "agreement of conducting," parties were consistently referred to as "owner" and "conductor," multiple clauses established the relationship as one where the plaintiff was authorized to conduct the owner's business rather than occupy premises independently, consideration was characterized as "royalty" rather than rent, and the agreement contained no provisions transferring possessory rights.

The judgment emphasized that the true characterization of an agreement depends not on nomenclature alone but on a holistic reading of its substantive provisions. The Court observed that the agreement lacked critical elements required for establishing a lessor-lessee relationship under Section 108 of the Transfer of Property Act, 1882. This judgment establishes authoritative guidance for contract interpretation across legal contexts. It reinforces judicial preference for written agreements while clarifying the limited circumstances under which courts may consider extrinsic evidence. The ruling also addresses the concerning trend of "meandering pleadings" and "AI-generated statements," urging courts to invoke Order 6 Rule 16 jurisdiction to streamline litigation. By establishing a clear hierarchy of interpretive principles and reinforcing evidentiary standards, the Supreme Court has provided valuable guidance that will influence contractual disputes across various sectors of Indian jurisprudence.