Bringing Contracts To Life: Court Interpretation Beyond The Written Word

Every legal document is written in words, but words alone do not decide legal outcomes. Courts do! And when they interpret text, whether from a statute or a private contract, they do more than apply grammar or logic. They weigh text, structure, context, purpose, and effect. Interpretation, in this sense, is not mechanical; it is judgement in action.

The Supreme Court ('Apex Court') decision in Annaya Kocha Shetty v. Laxmibai Narayan Satose^[1] ('the Case') brought this interpretive function to forefront. What started as a disagreement over legal rights morphed into something more foundational: a judiciary enquiry into how meaning is constructed from written instruments. The case did not turn merely on what document said, but on how it was to be understood in light of its form, omissions, and commercial setting. Not only was the outcome important, but so was the Apex Court's method of interpretation. It worked between functional realism and textual fidelity, deriving meaning from silence and structure as much as from words. A deeper jurisprudential tension was subtly brought out by the case: Do courts interpret statutes and contracts in a similar way and where do they differ or overlap?

The Case: From Commercial Agreement to Legal Knowledge

A dispute arose from a 1971 'conducting agreement' under which Annaya Kocha Shetty (the 'Appellant/Plaintiff') managed a hotel property owned by Laxmibai Narayan Satose (the 'Defendant/Respondent'). After operating for decades, the Appellant asserted tenancy rights under the Bombay Rents, Hotel and Lodging House Rates and Control Act 1947 as a deemed tenant. The Respondent contended that it was only a conducting agreement and not of a lease or license. The decision was passed in favor of the Appellant at the Small Causes Court of Mumbai ('SCC, Mumbai'). It took operational action and possession into consideration in addition to the agreement's title. Based on both oral and documentary evidence, it held that the Appellant was a deemed tenant or protected licensee. Whereas, the Appellate Bench of SCC, Mumbai ('Appellate') & High Court of Bombay reversed the decision of SCC, Mumbai and placed a significant reliance on Sections 91 and 92 of the Indian Evidence Act 1972, holding that the document must speak for itself and found the agreement to be one for conducting business and not for lease or license. The Apex Court affirmed the Appellate view and emphasised how crucial it is to interpret the documents based on their text, context, and contemporaneous conduct. It observed that the claim of tenancy was nullified in the absence of a clause granting transfer of possession.

Whether interpreting a statute passed by the legislature or a contract, the interpretation process starts with the seemingly simple idea that legal documents mean what they say. However, every lawyer is aware that language rarely functions in a vacuum. Words acquire their full meaning by taking into consideration the textual, contextual, factual, and structural matrix of the situation. Therefore, courts must interpret texts to ascertain not only what the texts say, but also what the law aims to protect or punish, or what the parties intended.

This process often results in a well-known interpretive framework, especially in common law systems: a transition from literal rule to the golden rule, and followed by the contextual or purposive interpretation, where necessary. This structure represents a methodological practice as used in the Case instead of a set hierarchy, even though it is neither rigorous nor statutorily established. Importantly, these are not the only principles that courts may employ. Each interpretative rule/maxim/doctrine is deployed contextually, based on what the legal text demands.

The literal rule serves as a base for interpretation. It states that courts give texts their plain, grammatical, natural and ordinary meaning. If the language in both statutes and contracts is clear and unambiguous, the court will not delve into it. This rule is based on legal certainty and a respect for party autonomy or legislative sovereignty, as the case may be. The Apex Court in the Case based its reasoning on the literal interpretation of the document when faced with an agreement that had been interpreted differently by SCC, Mumbai as a lease, a license, or a conducting arrangement. Notably, the absence of any clause transferring possession turned out to be crucial. The Apex Court ruled that there could be no tenancy in the absence of a clause of transfer of exclusive possession. The Case highlighted a key principle of Indian contract law: courts will not create rights that the text does not grant.

In a Delhi High Court case, of Union of India v. Jindal Rail Infrastructure Ltd.^[2], it was reiterated that a significant constraint is on how courts can use interpretive tools to clarify confusion in a way that makes sense from a commercial perspective. This is because it is assumed that reasonable parties want their agreements to work. But this flexibility in how to interpret the law does not imply that one party can change the terms of the contract just because it has become difficult for them to execute. The Court stressed that business inconvenience cannot be used as an excuse for judicial reconstruction. They can explain things to make them clearer, but they cannot change the terms of the deal to make them fair and thus, cannot impart commercial wisdom where none was expressed or required. Judicial interpretation is thus not an exercise in rewriting or correcting the contractual terms, but in giving effect to what the parties demonstrably agreed. The role of the court is to honour the consensus ad idem which is the meeting of minds that gives the contract its binding character.

But courts are not ignorant of absurdity. When a literal interpretation leads to outcomes that are internally inconsistent, commercially irrational, or contrary to public interest, the golden rule allows for departure from the text. The golden rule of interpretation was first articulated by Lord Wensleydale in the case of Grey v. Pearson^[3], particularly while interpreting a will. The rule was later cited by the Apex Court in Ms. Eera v. State (Govt. of NCT of Delhi)^[4]. According to Lord Wensleydale, the ordinary and grammatical meaning of words in legal documents should generally be followed. However, if this literal interpretation leads to absurd result, the meaning may be adjusted just enough to avoid such absurdity, but not further. While drawing a comparison from the Case, the Apex Court's consideration of the commercial nature of the agreement and its decision not to assume tenancy in the absence of the required clause to substantiate the same points to the application of golden rule, which states that the contract must be interpreted to make both commercial and legal sense, not just grammatical coherence.

Along the same lines, the purposive approach, which is more prevalent in statutory interpretation but is serving as more beneficial in contract law, allows for a more thorough inquiry of the purpose for which the agreement was created. This method looks beyond words to the factual matrix or the commercial background, that needs to be addressed. In contract law, this may involve considering related documentation and discussions, the conduct of the parties, or the overall structure of the agreement. The Apex Court's analysis in the Case implicitly mirrored this intentional perspective by emphasizing on royalty payments; the long-term nature of the arrangement; and the absence of rent or possession clauses pointed toward a business conduct agreement, not a disguised lease. Instead of interpreting each part individually, the words, context and commercial nature were all seen thoroughly as a whole.

This purposive lens, which allows courts to look beyond the language and into the broader objectives of an agreement or statute, finds its close cousin in the mischief rule. The mischief rule was first articulated in Heydon's Case,^[5] laying out four elements: the common law before the making of the statute, the mischief that the statute aimed to remedy; the remedy proposed, and the true reason behind the remedy. The rule's foundation is functionalism, which holds that interpretation should promote the law's corrective intent rather than obstruct it with strict literalism. In X v. The Principal Secretary, Health and Family Welfare Department, Govt. of NCT of Delhi,^[6] the Apex Court applied the mischief rule from Heydon's Case to interpret the Medical Termination of Pregnancy Act 1971. The Apex Court focused on addressing the mischief of limiting access to safe abortions for unmarried women. This meant interpreting the law in a way that broadened its reach and made sure that all women, regardless of their marital status, could obtain reproductive health care.

However, the principle of harmonious construction underlies each of these techniques, which is often regarded as an additional rule and is an interpretive constant. Its function is to reconcile potentially conflicting provisions within the same document, ensuring that no clause is rendered redundant and that the document operates as an internally coherent whole.^[7] While traditionally applied in statutory interpretation, especially when two sections/clauses/parts of any act contradict each other, the principle finds equal relevance in contractual disputes. Where a clause in a contract seems to grant exclusive rights to a party while another indicates restrictions on the entitled rights, the court's task is to interpret both so that each provision has significance rather than allowing one to overshadow the other. This approach highlights role of the judiciary to uphold not just the word of the law or contract, but its consensual, contextual and structural integrity.

Among the interpretive tendencies that emerge from jurisprudence is one that deserves to be stated clearly: where parties structure an agreement to conceal its true commercial nature, courts will look beyond surface terminology to reveal what the contract actually does. We refer to this as the principle of disguise. Though not doctrinally codified, this principle reflects a consistent judicial posture: that legal consequences must flow from substance, not presentation. Parties often draft contracts in a manner to avoid regulatory obligations, escape liabilities, or disguise commercial realities. These efforts rely on formal language to mask the true effect of the transaction. But interpretation, especially in commercial matters, does not permit such strategic obfuscation. This principle was particularly evident in the Case, where the Apex Court declined to accept the agreement at the face of it. Despite being styled as a “conducting agreement,” the Apex Court examined the agreements in totality of the circumstances put forth to conclude that it was neither a lease nor a license. In essence, the court looked beyond the superficial appearance of the agreement to uncover its true purpose.

Private Texts, Public Reasons: Unpacking the Interpretation of Contracts

After examining how courts approach the interpretation of statutes, the natural follow-up is to ask: do contracts follow the same rules? While both are legal texts, their roles in the legal system are not interchangeable. Statutes speak to the public at large; contracts are rooted in private ordering. They arise from negotiated understandings between parties, shaped by commercial intent and practical realities. Accordingly, the way courts interpret contracts has evolved into a layered process, one that looks beyond isolated words to how the entire agreement functions as a coherent whole.

From within this broader jurisprudence, we identify a guiding principle that we describe as the Manifestation of Intent. This principle does not dwell on abstract notions of what parties might have meant in hindsight. Instead, it asks how the intent to get into agreement was outwardly expressed through written terms, conduct, negotiations, and commercial context. After all, contracts are not enforced because people privately intended to agree. They are enforced because that intention was expressed in a way the law could recognise and give effect to. Whether through signed clear obligations, consistent performance, or course of dealing, it is this manifested intent that gives legal shape to the parties' understanding. This principle aligns with the foundational contract law idea that mutual assent and actual intent must be objectively demonstrable and not just subjectively hoped for. It ensures courts interpret and enforce. Rather than indulging in what parties might have wished, courts under this lens focus on what the parties actually agreed to do, what they did for it and how that agreement made itself known. There is no claim that this is a new principle. Instead, position it as a functional restatement of a theme that runs through much of modern contractual reasoning in both Indian and comparative common law jurisprudence. By centering manifestation, this principle offers a bridge between rigid literalism and uncontrolled discretion.

According to this perspective, the various doctrines that courts frequently use are instruments of judgements rather than stand-alone methods. Each, in its own way, provides legal effect to the intent that parties have objectively manifested through their words, actions, and commercial context. Instead of speculating about what the parties may have privately intended, courts focus on what they actually expressed and whether that expression took a form the law is equipped to recognise.

The parol evidence rule restricts the use of external evidence to alter or contradict the clear terms of a written contract. As affirmed in Mangala Waman Karandikar (D) tr. L.Rs. v. Prakash Damodar Ranade,^[8] if the contract's language is unambiguous, no extrinsic evidence is allowed to modify its meaning. This ensures that the written agreement stands as the final expression of the parties' intent. This approach highlights a larger judicial trend to begin with the literal meaning of the words used. Courts presume that the language chosen by the parties reflects their commercial intent. This adherence to textual clarity supports the rule of law, promotes certainty, and discourages frivolous litigation. It also aligns with the maxim verba ita sunt intelligenda ut res magis valeat quam pereat which states that words should be understood so as to make the contract effective rather than void.

The framework of contractual interpretation in India has been notably shaped by the principles articulated in Investors Compensation Scheme Ltd. v. West Bromwich Building Society^[9]. In this landmark ruling, Lord Hoffmann outlined five key interpretive propositions:

• Objective understanding as a reasonable person with the same background knowledge at the time of the contract;
• Matrix of fact which is easily available to the parties;
• Exclusion of prior negotiations and subjective intentions;
• Legal meaning of a document is not the same as the dictionary meaning of the word it uses; and
• Start with plain and natural meaning but don't be blind to the commercial context.

The case of Bangalore Electricity Supply Co. Ltd. v. Konark Power Projects Ltd.^[10] also draws on these principles. While interpreting a Power Purchase Agreement, the court moved beyond a rigid, literal reading and instead grounded its analysis in the commercial and factual setting by emphasising and understanding that terms like the Scheduled Commissioning Date and Commercial Operation Date had to be understood in light of how and when power was actually injected into the grid.

Furthermore, in Novartis Vaccines and Diagnostics Inc. v. Aventis Pharma Ltd.^[11], the Bombay High Court was required to interpret a number of interrelated agreements governing a pharmaceutical joint venture. The court rejected a clause-by-clause decontextualized reading and instead emphasized that agreements must be interpreted not in isolation but within the broader commercial relationship. A joint venture is a shared economic arrangement that goes beyond the sum of its contracts. By emphasizing on contextual reading, the court underlined that language might fail to convey the parties' true arrangement when it is separated from the commercial context in which it was used.

Although the interpretation method is determined by context and intent, this does not grant unrestrained power of judicial interpretation. The idea that a contract must still operate in a way that is commercially viable is still upheld by Indian courts. This is where the doctrine of business efficacy plays a vital role. Courts may infer a term in a contract when it is essential to ensure that the contract delivers its intended result. The term must be so clearly intended that it would have been included if it had been suggested at the time of contracting, which is a rigorous test. This is similar to the officious bystander test, which states that a term may be implied if it is so obvious that both parties would have agreed with an 'of course' if an officious bystander had proposed its incorporation during negotiations.^[12] These doctrines are meant to give practical effect to the contracts when the written text is insufficient to convey the parties' intention, and not to rewrite the contracts. This reasoning was applied in Mumbai Metropolitan Region Development Authority v. Unity Infraprojects Ltd.^[13], where the Bombay High Court interpreted a 'lump sum' contract in the context of a major infrastructure project. The court held that, although the term 'lump sum' suggested a fixed and final payment, the complexity and unpredictability of such projects meant that some scope for variation and adjustment was necessarily implied. In this case, business efficacy was not used to alter the agreement but to ensure that it remained workable in practice and reflected the commercial understanding between the parties.

A similar regard for commercial purpose can be seen in the case of M.O.H. Uduman v. M.O.H. Aslum^[14], where the Apex Court interpreted a partnership deed by going beyond the formal text to how the parties actually managed their operations. The judgement illustrates that courts may consider the conduct of the parties and the operational reality of the agreement even in cases where a document has been formally executed.

The courts may apply the contra proferentem rule by interpreting the ambiguity against the party that drafted the clause if it persists even after textual and contextual tools are exhausted. Although the rule is frequently used in insurance and consumer contracts, Indian courts have applied it more broadly in situations where the bargaining power was unequal or the drafting was one-sided. The principle ensures that a party who controls the text of a contract does not benefit from its ambiguity.

Together, these principles represent a balanced system of law that prioritises the written text but balances it with fairness, significance, and context. The Indian courts have consistently shown their willingness to adapt interpretation doctrines to the commercial realities that contracts are supposed to regulate. The resulting methodology is not a rigorous formula but rather a multilayered approach that prioritises clarity, thoughtfully resolves ambiguity, and guarantees that commercial reasoning is never disregarded. In this way, contractual interpretation is a process not only of reading but also of reconstructing and not of altering but of completing the intent that sustains private legal agreements.

Between Statutes and Contracts: Concluding the Interpretative Inquiry

Although both contracts and statutes are written documents, the frameworks that govern their interpretation are influenced by the different functions they serve. Statutes, as expressions of legislative will and their interpretation remain confined to the enacted language. When interpreting statutes, courts follow a methodical process, rarely deviating from the text and occasionally relying on sources like legislative debates or historical context. The objective is predictability, consistency, and adherence to what the legislature has officially enacted. Contracts, in contrast with their interpretation, are inherently more adaptive, intended to implement negotiated intent, even where the language is insufficient. Courts do not rely on text alone but consider the factual matrix, course of dealings, and commercial background. Principles like contra proferentem, business efficacy and the officious bystander test which permit courts to infer words or resolve ambiguities in a way making it compatible with the contract's purpose, thus, encourage this openness.

One more point of difference is the judicial authority to amend or complete the legal instrument. In contract law, courts may interpret terms to ensure commercial operability or apply rectification to correct written errors that fail to reflect mutual intent. Statutory interpretation does not allow this. Courts interpreting statutes are confined to the four corners of the text and may not introduce what the legislature did not intend. A contract can be completed; a statute can only be defined.

So, is there a strict divide then? Are there two systems of interpretation used by courts, or are they variations of a more fundamental framework? The key is in realising that the structure of the legal instrument determines how the fundamental tools: literal meaning, context, and coherence are used, even though they overlap. Contractual interpretation seeks to fulfil intentions, whereas statutory interpretation attempts to fix meaning. One completes, the other defines. Interpretation is ultimately the process of thinking in constraints, whether they be literal in statutes or contextual in contracts.

Drafting is a legal act having long-term repercussions; it is not only an administrative or linguistic process. Every uncertainty poses a risk. Every omission creates a gap. The courts will not rectify the omissions made by the parties to the contract. They will never rewrite a contract. The parties have relinquished their rights to the judiciary by the time interpretation takes over in the event of an absurdity. In this spirit, the following questions are presented as a beneficial checklist for litigators, drafters, and negotiators rather than as rhetorical techniques. Therefore, prior to signing a contract, enquire:

• Is the document internally consistent and logically structured?
• Are the obligations, rights, and conditions expressed precisely?
• Do all parts of the agreement align with one another, or could any clauses potentially contradict or conflict with the others?
• Does the agreement clearly reflect the essential ingredients required for the type of arrangement/transaction being created?
• Has the drafter accounted for the legal and regulatory framework applicable to the type of agreement/transaction including central or state laws, sector-specific guidelines, or mandatory compliance requirements that could affect enforceability?
• Are there any assumptions that have been relied upon that remain unstated?
• Could ambiguity arise from silence, overlap, or poor sequencing of clauses?
• Will the courts, years later, still comprehend this document if the parties are not there to explain it?
• Does the agreement's wording accurately convey the parties' intentions without disguising or modifying its core content?
• Are there any clauses that call for further action or decisions?
• Does the agreement reflect the parties' current understanding while being adaptable enough to accommodate future changes?
• Is there clarity on any implied or tacit terms, and does the agreement include all essential components showing the parties' intention?

These questions pertain to enforcement rather than style. Ambiguous drafting of contracts will not be excused by the courts. They interpret; they do not create. The primary responsibility for the clarity of the document rests first and foremost with the parties who created it.

Beginning with a single case of a dispute regarding a hotel conducting agreement, this article raised a wider jurisprudential question: how do courts balance the distinction between the written and intended meanings? The answer lies not in rigid formulas, but in reasoned interpretation which respects both the autonomy of parties and the structure of the legal system. Interpretation in the end, is where law becomes legible. It is where language acquires meaning. Whether dealing with statutes or contracts, courts do not merely read but they reason. And through that reasoning, the law does not merely exist; it endures.

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