Commercial Agreements & Contracts In IndiaInterpretation of An Agreement By Courts

May 4, 20210

In Bangalore Electricity Supply Company Limited (BESCOM).Vs E.S. Solar Power Pvt. Ltd. & Ors. in Civil Appeal No. 9273 of 2019 the Court held that Interpretation of an Agreement cannot be done by Courts in a Liberal or Narrow Manner.

Decided on

3rd May,2021

Core Issue

The Court mainly had to interpret the agreement to decide as to

“whether the Respondents did not commission the Solar Projects before the expiry of 12 months from 17.10.2016 which is the date of approval of PPA by KERC. The conflicting views of the parties relate to the computation of 12 months for the purpose of determining whether the Scheduled Commissioning Date is 16.10.2017 or 17.10.2017.”


The Court before interpreting the agreement in reference made reliance upon settled jurisprudence as below:

A. Lord Hoffmann in Investors Compensation Scheme Limited vs. West Bromwich Building Society- 1998 (1) AIR 98, summarized the broad principles of interpretation of contract as follows:

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (See : Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945.

(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB [1985] 1 AC 191, 201: “… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.


B. The Court further went on to rely upon the ratio as held in Smt. Kamala Devi vs. Seth Takhatmal & Anr,  1964 (2) SCR 152 wherein the Court held that

The duty of the Court is not to delve deep into the intricies of human mind to explore the undisclosed intention, but only to take the meaning of words used i.e. to say expressed intentions.

C. In Ashville Investment v. Elmer Contractors, 1988 (2) All ER 577, it was held that;

In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean. It can happen that in doing so one is driven to the conclusion that clause is ambiguous, and that it has two possible meanings. In those circumstances, the Court has to prefer one above the other in accordance with the settled principles. If one meaning is more in accord with what the Court considers to the underlined purpose and intent of the contract, or part of it, than the other, then the court will choose former or rather than the later.

D.In Bank of India and Anr. v. K. MohanDas and Ors,2009 5 SCC 313, it was held that;

The intention of the parties must be understood from the language they have used, considered in the light of the surrounding circumstances and object of the contract.

E. In Bihar State Electricity Board, Patna and Ors. v. M/s. Green Rubber Industries and Ors, 1990 (1) SCC 731, wherein, it was laid down that;

Every contract is to be considered with reference to its object and the whole of its terms and accordingly the whole context must be considered in endeavoring to collect the intention of the parties, even though the immediate object of inquiry is the meaning of an isolated clause.


The Court having dealt with the jurisprudence on interpretation of an agreement, concluded on the main issue as under:

a. There is also no dispute between the parties that 12 months means 365 days. According to the Appellants if 17.10.2016 is included in computation of 365 days, the Scheduled Commissioning Date is 16.10.2017.

b. According to 1.2.1 (k), any reference to a month shall mean a reference to a Calendar month as per the Gregorian Calendar. 1.2.1 (l) provides that references to any date or period shall mean and include such date, period as may be extended pursuant to the agreement.

c. As per Article 1.2.1 (m), any reference to any period commencing from a specified date and until the specified day shall include both such day or dates. The other crucial provision which has to be taken note of is the definition of the expression ‘Month’ in Article 21.1 of the agreement. Month has been defined to mean a period of 30 days and excluding (the date of the evet) where applicable, else a Calendar month.

d.Reverting to the definition of ‘Month’, it is clear that a month shall mean either 30 days where applicable or a Calendar month. In this case, there is no dispute that 12 Calendar months have to be taken into account for determining the Scheduled Commissioning Date. The crucial expression in the definition of ‘Month’ is “excluding the date of the event”. If the date of the event i.e. 17.10.2016 is excluded, the Scheduled Commissioning Date would be 17.10.2017.

e. In our view, the Commission has committed an error in applying 1.2.1 (m) when the provision that is applicable is 1.2.1 (k) read with the definition of month in Article 21.1. There is a specific mention of ‘twelve months’ in the definition of ‘SCOD’ and Article 1.2.1 (k) categorically provides that any reference to a ‘Month’ shall be a calendar month. Applicability of Article 1.2.1 (k) excludes the operation of Article 1.2.1 (m) to the facts of this case.


The present decision has further reiterated the settled jurisprudence on an interpretation of an agreement.

An agreement has to be read, understood, analysed and implemented with its plain and literal meaning rather than inferring an interpretation to reflect any other side or meaning of the word and expression deployed in the clauses of an agreement.

Rather, the intent and purport of an agreement has to be derived from the body of the agreement itself with the words and expressions used therein alone.There cannot be any room for any artificial meaning assigned to any words or expressions used to draw a different meaning altogether.

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