On 20th July 2003, the Petitioner invited tenders for the construction of 1648 tenements for the rehabilitation of project affected households. This was a World Bank Project. The work was to be carried out in two phases. The two phase programme of work was to be in accordance with the availability of vacant space for the construction of buildings. The offer submitted by the Respondent was the lowest responsive offer and a letter of acceptance was issued on 3rd November 2003. During the course of the work, the Respondent raised claims towards loss of overheads, increases in costs etc. The Engineer appointed under the contract refused to certify the claims of the Respondent. The Adjudicator was required to take a decision within 28 days. The Respondent referred the dispute to the Adjudicator on 3rd September 2004. On 27th October 2004, the Respondent invoked arbitration under the arbitral provisions contained in Clause 25.2 of the contract, principally on the basis that the Adjudicator had failed to render a decision within the stipulated period. The Institution of Engineers appointed an Arbitrator under Clause 25.3 of the contract and the Arbitral Tribunal was constituted. The Petitioner raised an objection under Section 16 of the Arbitration and Conciliation Act, 1996, to challenge the jurisdiction of the Arbitral Tribunal.
The application was rejected. Eventually, by its award dated 17th April 2007, the Arbitral Tribunal awarded an aggregate sum of Rs. 1,65,03,119/- together with interest at the rate of 10% per annum from 3rd May 2005 till the date of the publication of the award and future interest at the rate of 12% per annum from the date of the award till payment. The award has been questioned in these proceedings.
Bombay High Court: Key Observations
The Bombay High Court in this case discussed some of the important principles of interpretation of contract in the following words-
- Business Sense/Commercial Meaning: The duty of the Court when called upon to assess where the balance lies in a contractual dispute, is to read the contract as a whole in order to understand the business meaning which the parties attributed to their obligations. Interpretation in law must ensure in commercial matters that the view which the Court takes records the sense which the parties to an arms length transaction attribute to the terms which they incorporate. The law is not divorced from business realities nor can the vision of the Judge who interprets the law be disjointed from the modern necessities to make business sense to business dealings.
- Harmonious Construction: In interpreting a contract, the Court cannot place emphasis on an isolated provision divorced from the context and unrelated to the other provisions which govern contractual obligations. Contracts represent business understandings between the parties. The Contract in the present case cannot be regarded as prohibiting extra payments. There is merit in the submission that a reading of the entirety of the contract would indicate that although lump sum bids were invited, the contract did not prohibit extra payment for extra work. In the present case, the petitioners in their preliminary submissions relied on the Supreme Court decision in Kaivelikkal Ambunhi v. H. Ganesh Bhandary. The court in this case observed that the aforesaid judgment of Supreme Court cannot be read to mean that the Court has ruled against a holistic reading of the terms of contract while interpreting a contract. In construing a contractual document, the entirety of the contract must be construed and an effort must be made to harmonize the individual parts into the whole.
- Giving effect to the intention of the parties (as found in the words they use): The same principle is restated in Chitty on Contracts, Volume 1, 29th Edition, pg 744 in the following words- “Where the different parts of an instrument are inconsistent, effect must be given to that part which is calculated to carry into effect, the real intention of the parties.” Thus, the mechanical rule of interpreting clauses of a contract in sequence is no longer valid in law, as it is an extremely restrictive way of interpreting commercial contracts.
- Repugnancy of an Exclusion Clause: There is a succinct statement in Halsbury of the impact of an exclusionary clause. Such clauses clauses are generally of two basic types. One type seeks to exclude or cut down a primary obligation of the contract. The other type, seeks to qualify the rights of the promisee upon breach. It is further stated in Halsbury that “…the court may refuse to give effect to an exclusion clause which is repugnant to another provision of the contract”. Moreover, “an exclusion clause may be deprived of effect because of repugnancy to other provisions of the contract. This may arise where the provisions of an exclusion clause are such as to wholly nullify another positive clause of the contract; then, the exclusion clause is to be ignored and unqualified effect given to the other clause.“ It is stated in Halsbury (4th Edition, Pg. 566) that “…the court may refuse to give effect to an exclusion clause which is repugnant to another provision of the contract.”
- The Contra Preferentum Rule: When there is a doubt or ambiguity in the words of an exclusion clause, the words are construed more forcibly against the party putting forth the document, and in favour of the other party. The principle is elucidated in Halsbury’s Laws of England in the following words-“…any ambiguity is to be construed against the party putting forward the clause for his protection.”
- Standard Form and Exclusion Clauses: An exclusion clause may be deprived of effect if it is repugnant to other provisions of the contract. Where the exclusion is contained in a printed standard form of contract and there is a conflict between it and another clause, written or typed in or otherwise added, the latter will prevail. In Halsbury, this has been attributed to the fact that greater weight is given to that which the parties have expressly agreed in detail, than to that which appears in the standard form. This principle has also been enunciated in the Albion France, Fenwick & Tyne & Wear Co. Ltd. v. Swan Hunter & Wigham Richanrdson Ltd., where it was held that, “…if there is a direct conflict, a written term in a contract will override or prevent the application of general words in a printed condition, or, at any rate, will normally do so.”
The Bombay High Court further examined the validity of the reference to arbitration to hold that there is absolutely no valid ground to assert that the invocation of the arbitration was premature. The adjudicator having failed to render his decision within 28 days of his appointment, the Respondent was within its right in invoking arbitration. Accordingly, it was held that the view taken by the Arbitral Tribunal on this aspect of the matter was correct and did not warrant any interference. The Court thus rejected the contention owing to absence of merit of in the submissions.
The High Court of Bombay held that the award of the Tribunal holding that the claims were arbitrable despite the letter dated 10th January 2005 suffers from a patent illegality and is liable to be quashed and set aside. An important aspect of the case was that Arbitral Tribunal cannot entertain any dispute which is contrary to arbitration agreement.
Author: Sushmita Ravi
 Halsbury’s Laws of England, 4th Edition, Pg. 552.
 4th Edition, Pg. 566
 Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd.  Q.B. 400
 Ghaziabad Development Authority v. Union of India, AIR 2000 SC 2003. See also Pollock & Mulla, Indian Contract & Specific Relief Acts, 12th Edition, Pg. 276
 4th Edition, Pg. 559
 Halsbury’s Laws of England, 4th Edition, Vol.9(1), para 807
 J. Evans & Sons (Portsmouth) Ltd. v. Andrea Mertano Ltd.  2 All ER 930, Central Meat Products Co. Ltd. v. J.V. Mc.Daniel Ltd.  1 L R 562
  2 All ER 679
  2 All ER 679