In the current dynamic business landscape, parties are increasingly relying on well-drafted commercial agreements for protecting their respective interests, for fostering smoother collaboration and with a view to avoid costly legal disputes in future. Business teams execute contracts to capture their commercial deals and to ensure that in an event of a contention or a breach, they should be able to seek appropriate remedy of performance or damages. Therefore, there remains a high importance on how clauses in a business contract may be interpreted by courts when such time may come. Any likely interpretation should therefore be as the contract was first conceived, drafted and finally executed.

In light of the recent judgment by the Hon’ble Supreme Court in case of Bharat Sher Singh Kalsia v. State of Bihar and Another^[1] (“Bharat Kalsia Case“), we have analysed the various legal principles for interpretation of clause in contract, as laid down by the courts in India.

Doctrine of ‘ut res magis valeat quam pereat’

 The Hon’ble Supreme Court in the case of Radha Sundar Dutta v. Mohd. Jahadur Rahim^[2] (“Radha Sundar Case”) discussed the doctrine of ‘ut res magis valeat quam pereat‘, which translates into ‘let the thing have effect rather be void‘. Thus, if there are two possible constructions of a document, one which will give effect to all the clauses therein while the other which will render one or more of them nugatory, it is the former that should be adopted.

Former clause prevails over the latter

 In the Radha Sundar Case, the Hon’ble Supreme Court quoting the Privy Council in the case of Forbes v. Git and others^[3], has held that:

‘The principle of law to be applied may be stated in few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the deed prevails over the later. Thus, if A covenants to pay 100 and the deed subsequently provides that he shall not be liable under his covenant, that later provision is to be rejected as repugnant and void, for it altogether destroys the covenant. But if the later clause does not destroy but only qualifies the earlier, then the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole. …’

Thus, in case, the doctrine of ‘ut res magis valeat quam pereat‘ cannot be given effect to, i.e. two clauses of a document are not capable of co-existing or cannot be given effect to, without repugnancy, then the earlier clause in the document will prevail over the later (“Earlier Clause Doctrine”). Recently, the Hon’ble Supreme Court has further reaffirmed the Earlier Clause Doctrine while interpreting the clauses of a Power of Attorney (POA) in the Bharat Khalsia Case.

Harmonious construction of clauses

The courts in India have generally tried to harmoniously interpret all the clauses of a contract, and only rely on the Earlier Clause Doctrine, in cases of the repugnancy or inconsistency between the clauses of the same document. The Hon’ble Supreme Court of India has emphasized on this in the case of Ram Kishore Lal v. Kamal Narayan^[4], where it has held that:

“The golden Rule of construction, it has been said, is to ascertain the intention of the parties to the instrument after considering all the words, in their ordinary, natural sense. To ascertain this intention the Court had to consider the relevant portion of the document as a whole and also to take into account the circumstances under which the particular words were used. Very often the status and the training of the parties using the words have to be taken into consideration. It has to be borne in mind that very many words are used in more than one sense and that sense differs in different circumstances. Again, even where a particular word has to a trained conveyancer a clear and definite significance and one can be sure about the sense in which such conveyancer would use it, it may not be reasonable and proper to give the same strict interpretation of the word when used by one who is not so equally skilled in the art of convincing. It is clear, however, that an attempt should always be made to read the two parts of the document harmoniously, if possible; it is only when this is not possible, e.g., where an absolute title is given is in clear and unambiguous terms and the later provisions trench on the same, that the later provisions have to be held to be void.”

Conclusion

While the rules of interpretation of the clauses of a contract have evolved over the years, the courts in India have generally, taken the view to try and harmoniously give effect to all the clauses of the document. However, in certain cases, where it is not possible to give effect to all the clauses of the contract, then the courts in India have relied on the Earlier Clause Doctrine.

Therefore, considering the jurisprudence on interpretation of the clauses of a contract, utmost care needs to be taken at the stage of drafting and negotiation of contractual and commercial agreements, to ensure that there is no inconsistency between any clause of the same contract, to ensure that the rights of the parties are not hampered in any manner and the objective of the parties to enter into contract is achieved. This certainly emphasized need of a very good lawyer for any contract drafting and negotiations!!!

Footnotes:

[1] 2024 INSC 77, Criminal Appeal No. 523 of 2024.

[2] AIR 1959 SC 24.

[3] [1922] 1 AC 256.

[4] AIR 1963 SC 890.