Comprehension
Food Corporation of India (“FCI” or “Corporation”), 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 is 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?
XII [Road Transport Contract]. Recovery of losses suffered by the Corporation (a) The Corporation shall be at liberty to reimburse themselves for any damages, losses, charges, costs or expenses suffered or incurred by them, or any amount payable by the Contractor as Liquidated Damages as provided in Clauses X above…
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.
It was observed 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 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. 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. After examining the contract in its entirety, including its nature and scope, the Court concluded that the contractors’ liability in the present contract was clearly distinguishable from other contracts entered into by the Corporation in 2010 and 2018, which included 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.
[Extracted from: Food Corporation of India v. Abhijit Paul, (CA 8572-8573/2022), Judgment of Justices A.S. Bopanna and P.S. Narasimha, 18 November 2022]
XII [Road Transport Contract]. Recovery of losses suffered by the Corporation (a) The Corporation shall be at liberty to reimburse themselves for any damages, losses, charges, costs or expenses suffered or incurred by them, or any amount payable by the Contractor as Liquidated Damages as provided in Clauses X above…
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.
It was observed 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 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. 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. After examining the contract in its entirety, including its nature and scope, the Court concluded that the contractors’ liability in the present contract was clearly distinguishable from other contracts entered into by the Corporation in 2010 and 2018, which included 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.
[Extracted from: Food Corporation of India v. Abhijit Paul, (CA 8572-8573/2022), Judgment of Justices A.S. Bopanna and P.S. Narasimha, 18 November 2022]
Question: 1
According to the Court, how was this Road Transport Contract different from FCI’s earlier contracts with transport contractors?
According to the Court, how was this Road Transport Contract different from FCI’s earlier contracts with transport contractors?
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When comparing contracts in legal interpretation, note differences in scope of work — these directly affect liabilities and penalties.
Updated On: Aug 17, 2025
- FCI’s earlier contracts had expired
- The present contract did not include loading and unloading of foodgrains from the railway wagons within the scope of contractor’s duties
- Earlier contracts were executed by FCI with contractors who were both handlers and transporters
- Earlier contracts were not validly executed
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The Correct Option is B
Solution and Explanation
Step 1: Understanding the context.
The Court compared the present Road Transport Contract with FCI’s earlier Handling and Transport Contracts of 2010 and 2018. Those earlier contracts included loading and unloading foodgrains from railway wagons as part of the contractor’s scope of duties.
Step 2: Key distinction.
The present contract omitted these loading/unloading duties. As a result, penalties such as demurrages for non-performance in those areas were not relevant or recoverable under the present contract.
Step 3: Elimination.
(A) Incorrect — The question is about the difference in scope, not contract expiry.
(C) Incorrect — Although earlier contracts did involve handling and transport, the Court’s emphasis was on the omission of loading/unloading duties.
(D) Incorrect — There is no indication earlier contracts were invalid.
\[ \boxed{\text{B}} \]
The Court compared the present Road Transport Contract with FCI’s earlier Handling and Transport Contracts of 2010 and 2018. Those earlier contracts included loading and unloading foodgrains from railway wagons as part of the contractor’s scope of duties.
Step 2: Key distinction.
The present contract omitted these loading/unloading duties. As a result, penalties such as demurrages for non-performance in those areas were not relevant or recoverable under the present contract.
Step 3: Elimination.
(A) Incorrect — The question is about the difference in scope, not contract expiry.
(C) Incorrect — Although earlier contracts did involve handling and transport, the Court’s emphasis was on the omission of loading/unloading duties.
(D) Incorrect — There is no indication earlier contracts were invalid.
\[ \boxed{\text{B}} \]
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Question: 2
What is the extrinsic evidence that the Court used?
What is the extrinsic evidence that the Court used?
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Extrinsic evidence can include prior contracts between the same parties — useful for understanding consistent or changed intentions.
Updated On: Aug 17, 2025
- Work order under the Road Transport Contract
- FCI’s Handling and Transport Contracts of 2010 and 2018
- Tender documents filed by the contractors
- FCI’s Handbook on Movement Operations
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The Correct Option is B
Solution and Explanation
Step 1: Concept of extrinsic evidence in latent ambiguity.
The judgment explains that while courts generally interpret contracts using intrinsic evidence, they may use extrinsic evidence to resolve latent ambiguities — where terms seem clear but their application to facts is uncertain.
Step 2: Application in this case.
The Court faced ambiguity over whether “charges” in the present contract included demurrages. To clarify, it compared the present contract with earlier Handling and Transport Contracts (2010, 2018), which explicitly included loading/unloading duties and thus a direct link to demurrage penalties.
Step 3: Elimination.
(A) Incorrect — Work orders are operational documents, not cited here as interpretive evidence.
(C) Incorrect — Tender documents were not the reference for resolving the ambiguity.
(D) Incorrect — Handbook not cited in this context.
\[ \boxed{\text{B}} \]
The judgment explains that while courts generally interpret contracts using intrinsic evidence, they may use extrinsic evidence to resolve latent ambiguities — where terms seem clear but their application to facts is uncertain.
Step 2: Application in this case.
The Court faced ambiguity over whether “charges” in the present contract included demurrages. To clarify, it compared the present contract with earlier Handling and Transport Contracts (2010, 2018), which explicitly included loading/unloading duties and thus a direct link to demurrage penalties.
Step 3: Elimination.
(A) Incorrect — Work orders are operational documents, not cited here as interpretive evidence.
(C) Incorrect — Tender documents were not the reference for resolving the ambiguity.
(D) Incorrect — Handbook not cited in this context.
\[ \boxed{\text{B}} \]
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Question: 3
The Court referred to Union of India v. Raman Iron Foundry (1974) to explain that contractual terms cannot be interpreted in isolation, following strictly etymological rules or be guided by popular connotation of terms, at variance with the contractual context. This principle of interpretation of contracts is known as:
The Court referred to Union of India v. Raman Iron Foundry (1974) to explain that contractual terms cannot be interpreted in isolation, following strictly etymological rules or be guided by popular connotation of terms, at variance with the contractual context. This principle of interpretation of contracts is known as:
Show Hint
Always interpret contractual terms in light of the whole document and surrounding circumstances — not in isolation.
Updated On: Aug 17, 2025
- Ejusdem generis
- Mischief rule
- Literal rule
- Rule of contextual interpretation
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The Correct Option is D
Solution and Explanation
Step 1: Understanding the principle.
The case illustrates that meaning must be drawn from the context of the entire contract, not from isolated word meanings or popular definitions. Step 2: Eliminate incorrect principles.
(A) Ejusdem generis applies to interpreting lists of words of the same class.
(B) Mischief rule focuses on remedying the defect the law sought to address.
(C) Literal rule applies the ordinary meaning of words without context.
Step 3: Match with correct principle.
The method used here matches the rule of contextual interpretation. \[ \boxed{\text{D}} \]
The case illustrates that meaning must be drawn from the context of the entire contract, not from isolated word meanings or popular definitions. Step 2: Eliminate incorrect principles.
(A) Ejusdem generis applies to interpreting lists of words of the same class.
(B) Mischief rule focuses on remedying the defect the law sought to address.
(C) Literal rule applies the ordinary meaning of words without context.
Step 3: Match with correct principle.
The method used here matches the rule of contextual interpretation. \[ \boxed{\text{D}} \]
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Question: 4
In Clause XII (Road Transport Contract), discussed above, the FCI may reimburse itself for damages etc., as Liquidated Damages. What does the term ‘liquidated damages’ mean?
In Clause XII (Road Transport Contract), discussed above, the FCI may reimburse itself for damages etc., as Liquidated Damages. What does the term ‘liquidated damages’ mean?
Show Hint
Liquidated damages = pre-agreed breach penalty; unliquidated damages = assessed after breach.
Updated On: Aug 17, 2025
- Stipulated amount payable on breach of contract
- Amount payable for actual damage caused due to breach
- Amount intended to secure performance of contract
- Damages payable for breach, where the exact amount is not pre-agreed
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The Correct Option is A
Solution and Explanation
Step 1: Legal definition.
Liquidated damages are a sum fixed in advance by the contract, payable upon breach, regardless of actual damage.
Step 2: Eliminate wrong options.
(B) refers to unliquidated damages (based on proven loss).
(C) is a performance bond or security, not liquidated damages.
(D) contradicts the “pre-agreed” nature of liquidated damages.
\[ \boxed{\text{A}} \]
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Question: 5
The High Court had held that the Corporation was only entitled to recover losses incurred due to the contractor’s dereliction of duties under Section 73 of the Indian Contract Act, 1872. What does Section 73 provide for?
The High Court had held that the Corporation was only entitled to recover losses incurred due to the contractor’s dereliction of duties under Section 73 of the Indian Contract Act, 1872. What does Section 73 provide for?
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Section 73 = general rule for breach damages; Section 74 = damages with penalty clause.
Updated On: Aug 17, 2025
- Obligation of parties to perform their promise
- Compensation for breach of contract where penalty stipulated for
- Compensation for loss or damage caused by breach of contract
- Effect of refusal of party to perform promise wholly
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The Correct Option is C
Solution and Explanation
Step 1: Wording of Section 73.
Section 73 states that a party suffering from breach is entitled to receive compensation for loss/damage naturally arising from the breach or likely to arise in the usual course.
Step 2: Eliminate distractors.
(A) relates to Section 37.
(B) overlaps with Section 74 (penalty clause).
(D) relates to Section 39 (refusal to perform).
\[ \boxed{\text{C}} \]
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Question: 6
The Court used the expression “Ex praecedentibus et consequentibus optima fit interpretatio”. What does this mean?
The Court used the expression “Ex praecedentibus et consequentibus optima fit interpretatio”. What does this mean?
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Latin maxims often guide interpretation — here, it’s about reading provisions in their broader textual context.
Updated On: Aug 17, 2025
- Of the same kind
- The best interpretation is made from the context
- An exception proves the rule
- No action arises on an immoral contract
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The Correct Option is B
Solution and Explanation
Step 1: Translation.
The Latin phrase means “The best interpretation is made from what goes before and after” — i.e., context is key.
Step 2: Application.
The Court invoked it to stress reading contract clauses in relation to the whole contract. \[ \boxed{\text{B}} \]
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Question: 7
In the case excerpted above, the Court used the following as an internal aid to interpret the contract:
In the case excerpted above, the Court used the following as an internal aid to interpret the contract:
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Internal aids are within the document; external aids are from outside sources like previous contracts or legislation.
Updated On: Aug 17, 2025
- Schedules
- Title
- Words and expressions
- Proviso
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The Correct Option is B
Solution and Explanation
In the case of Food Corporation of India v. Abhijit Paul, the key focus was on the interpretation of contractual terms to determine whether certain liabilities, specifically demurrages, could be recovered under a particular clause of the contract. The court's task was to ascertain the true intention of the parties as expressed within the contract itself. When interpreting contracts, words and expressions used therein are essential tools. These are examined in the context of the entire contract. Intrinsic aids like titles, headings, and clauses are pivotal in understanding the parties' intentions.
The court in this scenario relied on the Title of the contract as an internal aid. Titles can offer insight into the content and purpose of the document sections, providing clarity on disputed areas. Hence, while interpreting clause XII (a) concerning the recovery of charges, the court utilized the title of the contract, aiding in the understanding that demurrages were not intended to be included under "charges" as interpreted in this particular agreement.
Understanding the contract's structure, including clause titles and their implications, helped clarify the liabilities reasonably expected under this contract. Therefore, in this case, the correct internal aid used by the Court to interpret the contract was the Title.
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Question: 8
What was the latent ambiguity in the contract discussed in the case excerpted above?
What was the latent ambiguity in the contract discussed in the case excerpted above?
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Latent ambiguity = clear on paper, unclear in context; here, “charges” was the term in question.
Updated On: Aug 17, 2025
- if the parties had capacity to perform the contract
- if the parties intended to execute the contract
- whether the term “charges” was exclusive of liability for demurrages
- whether the Corporation can recover charges under the contract
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The Correct Option is C
Solution and Explanation
Step 1: Identifying the specific uncertainty.
The dispute centered on whether “charges” in Clause XII included railway demurrages. On its face, “charges” seemed clear, but applying it to the factual context created doubt.
Step 2: Why it is latent ambiguity.
Latent ambiguity arises when wording appears clear until it is applied to the facts, revealing multiple possible interpretations. Here, the question was whether “charges” covered demurrages in this specific contract’s scope.
Step 3: Elimination.
(A) and (B) relate to capacity and intention — not relevant. (D) is too broad — the core issue was the meaning of “charges” specifically regarding demurrages. \[ \boxed{\text{C}} \]
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Question: 9
What does the term ‘latent ambiguity’ mean?
What does the term ‘latent ambiguity’ mean?
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Patent ambiguity = obvious; Latent ambiguity = hidden until applied in context.
Updated On: Aug 17, 2025
- A glaring ambiguity, obvious from the face of the contract
- A contractual term is reasonably, but not obviously, susceptible to more than one interpretation
- A contractual term written in plain language and clearly understood
- A contractual term that is illegal and against the public good
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The Correct Option is B
Solution and Explanation
Step 1: Definition.
Latent ambiguity exists when a term looks unambiguous until applied in context, where it can lead to different reasonable interpretations.
Step 2: Elimination.
(A) describes “patent ambiguity” (clear on its face).
(C) is the opposite of ambiguity.
(D) concerns illegality, not ambiguity.
\[ \boxed{\text{B}} \]
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Question: 10
Which one of the following cases is a key precedent on contextual interpretation of contracts?
Which one of the following cases is a key precedent on contextual interpretation of contracts?
Show Hint
For contextual interpretation, remember the ICS principles — they shifted English law toward purposive and background-based reading of contracts.
Updated On: Aug 17, 2025
- Louisa Carlill v. Carbolic Smoke Ball Company, [1892]
- Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1914]
- Investors Compensation Scheme Limited v. West Bromwich Building Society, [1997]
- Home Office v. Dorset Yacht Co. Ltd., [1970]
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The Correct Option is C
Solution and Explanation
Step 1: Significance of the case.
In Investors Compensation Scheme (ICS), Lord Hoffmann set out five principles emphasizing that contract interpretation must consider the background (“matrix of fact”) known to both parties, rather than focusing solely on literal meaning.
Step 2: Eliminating other options.
(A) Carlill is a contract formation case (offer/acceptance).
(B) Dunlop concerns penalty clauses and liquidated damages.
(D) Dorset Yacht concerns negligence by public authorities.
\[ \boxed{\text{C}} \]
In Investors Compensation Scheme (ICS), Lord Hoffmann set out five principles emphasizing that contract interpretation must consider the background (“matrix of fact”) known to both parties, rather than focusing solely on literal meaning.
Step 2: Eliminating other options.
(A) Carlill is a contract formation case (offer/acceptance).
(B) Dunlop concerns penalty clauses and liquidated damages.
(D) Dorset Yacht concerns negligence by public authorities.
\[ \boxed{\text{C}} \]
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