Literal V Liberal Interpretation of Contract
Updated: Dec 9, 2022
We all must be cognizant of the term ‘Contract’. The simplest definition possible for the word could be, a promise enforceable by law. It is a legally binding document executed between two or more parties, which governs the relationship between the parties of the contract as well as their rights, duties, and responsibilities. Therefore drafting the terms of the contract is the prime responsibility of the parties to the contract.
However, we are not God and it is the nature of human beings to make mistakes, the reason being, under pressure, lack of availability of time, or language barriers, leading to failure incorrectly describing the rights, duties, and responsibilities of the parties to the contract. As a result, there will be more than one interpretation of clauses in the agreement. In cases of ambiguity, the court decides the rules and principles of interpretation.
Cambridge Dictionary describes the word Interpretation as, ‘an explanation or opinion of what something means. Whereas in a legal sense, it is explained as a process followed by the courts to obtain the meaning of the clauses mentioned in the contract with the words in which it is originally expressed.
Interpretation of a contract is needed when any dispute arose on the language of the contract or any clause of contract and parties cannot come to any conclusion then it is necessary for interpretation of the contract by the court. The main objective behind the interpretation is to get the nearest meaning of the clauses in the contract and to understand what intentions the parties to the contract had before entering into the contract. The main focus of the courts while interpreting is to think from the point of view of the parties and give the meaning of the words as close as to the intention of the parties and the law in force.
Literal Interpretation of Contract
Literal interpretation as the name suggests, means, that if there is one direct or specific meaning of any provision in the contract then there is no need for further interpretation. In simple words, it can be said as what law says and not what law means. It basically focuses on the original and exact meaning of the words of the contract and no other interpretation. The courts generally, while dealing with the cases of interpreting the contracts ignore the concept of the intention of the parties in the contract and rely upon what is mentioned in the contract, when it is in writing. The courts in such cases cannot presume anything apart from the literal meaning of the provisions. It states that the scope of law should not extend beyond the actual meaning of the words.
Interpreting contracts is not always easy because of the complex nature and subjectivity of the provision in the contract. Eventually, to simplify the complex procedure of interpretation courts follow a set of standard steps. Written agreements are always given more importance than oral agreements. We cannot deny the fact that in the case of the written agreement if oral evidence contradicts the written agreement which is deemed to be complete, then the oral evidence may not be entertained.
Therefore, while applying the literal rule of interpreting the contracts, the court should step into the shoes of the person making the contract and try considering what he is intending to do and not what it might mean. This rule can only be applied if the words to the contract are clear, unambiguous, and in simple language with no further modification.
This tool prevents courts from being biased and helps provide a fair consistency in the interpretation. As a coin has two sides, similarly if we find this interpretation tool beneficial and useful, there are some disadvantages also. It may create loopholes in the law which results in unfair judgment and injustice. It blocks courts from considering the wider picture of the situation and presumes that there is a specific meaning of every word but with the passage of time, the word undergoes various changes in its meaning.
Liberal Interpretation of Contract
We might have heard the word Liberal many times which according to the dictionary means, ‘willing to respect and accept the ideas of others or in simple words, ‘open to new opinions’. Hence, from the meaning of the word liberal itself, we can draw a picture in our mind of what Liberal Interpretation would mean. It is, not believing blindly in what we read. Legally, liberal interpretation of contract means interpreting the provisions of contract liberally with the intention of getting an extensive and magnified meaning of it. It is basically what the reader believes the author’s intention would reasonably be.
Here it is important to understand to the word liberal does not mean change. The interpretation must be reasonable and not beyond the scope of the actual meaning of any provision in the agreement. It is possible that sometimes the meaning cannot be drawn clearly or directly from the words but the concept of reasonableness cannot be ignored. Neither does it allow the court to interpret the provisions of the contract which are already unambiguously mentioned in the agreement and are ready to be applied.
Therefore, liberal interpretation gives the court power to think beyond and act according to the situation of the case as it may deem fit. This tool also enables the court to look at the situation from the perspective of others to solve the day-to-day modern problems. As being the exhaustive tool used for the interpretation of contracts, it widens the scope of thinking and application of the law.
The key difference between Liberal and Literal Interpretation of Contract
The key difference between the Liberal interpretation of the contract and literal interpretation of a contract is that liberal interpretation of contract does not restrict the court to the literal meaning of the provisions in the contract, whereas, the court is bound to stick to the literal meaning of the provisions in case of the literal interpretation of the contract.
The court has to step into the shoes of the parties to think like them in the case of literal interpretation, but on the other side, the court has the power to widen the scope of their thinking and application of law in the case of liberal interpretation.
Chartbook Ltd v Persimmon Homes Ltd (2009)
The parties had an agreement to construct commercial and residential premises and subsequently sell flats. The agreement had a clause that Persimmon Homes Limited would pay an amount of ‘total land value’ and balancing payment including an ‘additional residential pay’. The clause of additional residential pay was ambiguous the parties misinterpreted it completely. Subsequently, the parties calculated totally different due amounts of additional residential pay. Persimmon limited demanded rectification of the contract.
The court in this case held that ‘the language of additional residential pay clause is completely faulty and has no similarity with the original definition of additional residential pay’. As a result, the true intention of the parties cannot be reflected. Therefore, the court on the basis of common man language and reasonableness grated rectification of contract to persimmon limited.
Nabha Power Limited (“NPL”) V Punjab State Power Corporation Limited (“PSPCL”) & Another
Punjab State Electricity Board held an international competitive bidding process for selecting developers for power procurement i.e. the construction of power stations in Punjab. L&T Power Development Limited was the successful bidder. It acquired 100% shareholding of Nabha Power Limited (NPL) and then NPL executed 25 years power purchase with Punjab State Power Corporation Limited PSPCL - the successor entity of PSEB. NPL was supposed to supply coal to PSPCL, who in return, would pay monthly tariffs to them. The dispute arose when PSPCL made some deductions from the first payment. NPL claimed that the clause of cost in the agreement contained the cost of washing, handling, storing, and transporting coal including certain ancillary charges such as crushing and sizing of coal. Whereas, PSPCL claimed that the cost of washing was not expressly mentioned in the energy charges formula and hence denied to pay for the washing charges. NPL filed a petition for the wrong deduction in payment with the state regulator which was dismissed. NPL then appealed to the Appellate Tribunal which was also dismissed. An appeal was filed before the Supreme Court of India by NPL.
The court in this case, on the basis of the nature of the contract and interpretation of the contract, held that cost would include, the cost of washing of coal, transportation of coal, handling of coal, and storage of coal. Any other cost such as the cost of crushing and sizing of coal would not be implied in the charges formula clause. The Supreme Court stated that an unexpressed term cannot be inferred in the contract unless both the parties intended to do so before entering in the contract. The court said that we have read the contract as it reads and not in implied terms. Court also held that “the formula for energy charges, to our mind, was quite clear. We have only expounded it in accordance to its natural grammatical contour, keeping in mind the nature of the contract.”
The court also relied upon some landmark judgments of English Courts such as Shirlaw v Southern Foundries, Liverpool City Council vs. Irwin where it was held that the court can only imply any term in the contract when it is reasonable, and also Union of India vs. M/s. D.N. Revri & Co. and Ors.
Hence, it can be concluded that interpretation of the contract is done when the language of the agreement is such that it creates more than one meaning in the mind of the parties and it becomes difficult for the parties to agree upon the same conditions. The court in such cases certain set of rules in order to interpret the contract.
The literal interpretation of a contract is interpreting the exact and original meaning of the words and not focusing on any other factor. But the interpretation is such that it does not go beyond the scope of original meaning. But there are certain drawbacks as well, literal interpretation restricts the extent of thinking and applicability of the law. Whereas, liberal interpretation is interpreting the provisions of contract liberally with the intention of getting an extensive and magnified meaning of it. The court in such cases thinks beyond but must be reasonable.
Therefore, the purpose of interpreting the contract is to get the intention of the author more clearly and precisely when there is a mistake in understanding the contract by both or any of the parties to the contract.
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