The Supreme Court recently comprising of a bench of Justice AS Bopanna and Justice PS Narasimha declined to adopt a textual interpretation of the contractual term "charges" and held that the expression "charges" cannot always be interpreted to include demurrages. (Food Corporation of India vs Abhijith Paul)
The Court held that the contractual terms cannot be interpreted in isolation and must be interpreted as intended by the parties to the contract.
The Bench observed, "The expression "charges", stand alone, is not amenable to a precise meaning. Its dictionary meaning is open textured, defining "charges" as "any consideration that one must pay for goods and services provided". Therefore, the scope of the expression "charges" must be understood as intended by the parties to the contract. The process of interpretation, though the exclusive domain of the Court, inheres the duty to decipher the meaning attributed to contractual terms by the parties to the contract."
Facts of the case
Food Corporation of India, the Appellant herein, procures and distributes foodgrains across the length and breadth of the country as a part of its statutory duties. In the process, it enters into many contracts with transport contractors. In one such contract, the subject matter of present appeals, the Corporation empowered itself (under clause XII (a)) to recover damages, losses, charges, costs and other expenses suffered due to the contractors’ negligence from the sums payable to them.
The short question arising for consideration was whether the demurrages imposed on the Corporation by the Railways can be, in turn, recovered by the Corporation from the contractors as “charges” recoverable under clause XII (a) of the contract. In other words, does contractors’ liability for “charges”, if any, include demurrages?
The Single Judge and the Division Bench of the High Court of Tripura have held that demurrages cannot be recovered as a charge by the Corporation.
Contention of the Parties
The learned Senior Counsel appearing on behalf of the Respondents submitted that the Corporation acted arbitrarily. It failed to follow due process of law to determine the liability of the contractors, despite specific instructions in a previous round of litigation. He also submitted that contractors were not responsible for loading and unloading of foodgrains from railway wagons. Hence, the event which led to the incurrence of demurrages, i.e., delayed unloading of foodgrains from railway wagons, was not within the scope of contractor’s responsibilities. He took the bench through the contracts that were executed in 2010 and 2018 by the Corporation, which delegated the task of loading and unloading the foodgrains to contractors, and therefore the relevant expression “demurrages” was present in the liability clauses in those contracts.
Courts Observation and Judgment
The bench at the very outset observed, "Interpretation of contracts concerns the discernment of the true and correct intention of the parties to it. Words and expressions used in the contract are principal tools to ascertain such intention. While interpreting the words, courts look at the expressions falling for interpretation in the context of other provisions of the contract and also in the context of the contract as a whole. These are intrinsic tools for interpreting a contract. As a principle of interpretation, courts do not resort to materials external to the contract for construing the intention of the parties. There are, however, certain exceptions to the rule excluding reference or reliance on external sources to interpret a contract. One such exception is in the case of a latent ambiguity, which cannot be resolved without reference to extrinsic evidence. Latent ambiguity exists when words in a contract appear to be free from ambiguity; however, when they are sought to be applied to a particular context or question, they are amenable to multiple outcomes"
“Latent ambiguity: When the instrument appears on its face to be free from ambiguity but, upon the endeavour being made to apply it to persons or things indicated, it appears that the words are equally applicable to two or more persons, or two or more things, either without any inaccuracy or with a common inaccuracy...”
The bench noted that extrinsic evidence, in cases of latent ambiguity, is admissible both to ascertain where necessary, the meaning of the words used, and to identify the objects to which they are to be applied.
The bench further noted, "It is evident from the above that the Handling and Transport Contract from 2018, similarly involved loading and unloading of foodgrains from the railway wagons within the scope of contractors’ duties, thereby necessitating the inclusion of demurrages as a penalty for non-performance of contractual duties. Thus, the present Road Transport Contract is distinct from the Handling and Transport Contract from 2018, as the responsibility of loading and unloading of foodgrains from railway wagons is absent in the present contract. For this reason, the Corporation in the present contract has chosen not to include the power to recover demurrages and as such the expression “charges” cannot be interpreted to include demurrages."
The bench dismissing the appeal remarked, "in light of the foregoing conclusions, we are not inclined to adopt a textual approach for the interpretation of the contractual term “charges”, and hence, the decisions of this Court in Raichand Amulakh Shah and Trustees of the Port of Madras are of no aid, as they simply describe demurrages as a charge. Demurrage is undoubtedly a charge, however, such a textual understanding would not help us decipher the true and correct intention of the parties to the present contract."
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