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 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 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?
Updated On: Aug 23, 2024
- 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
The correct option is (B): The present contract did not include loading and unloading of foodgrains from the railway wagons within the scope of contractor’s duties.
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Question: 2
What is the extrinsic evidence that the Court used?
What is the extrinsic evidence that the Court used?
Updated On: Jul 11, 2024
- 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
The correct option is (B): FCI’s Handling and Transport Contracts of 2010 and 2018.
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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 strict 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 strict 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
Updated On: Jul 19, 2024
- Ejusdem generis
- Mischief rule
- Literal rule
- Rule of contextual interpretation
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The Correct Option is D
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The correct option is (D): Rule of contextual interpretation.
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Question: 4
In Clause XII (Road Transport Contract), discussed in the extract 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 in the extract above, the FCI may reimburse itself for damages etc., as Liquidated Damages. What does the term ‘liquidated damages’ mean?
Updated On: Aug 23, 2024
- 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
The correct option is (A): Stipulated amount payable on breach of contract.
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Question: 5
The High Court had held that the Corporation was only entitled to recover losses that were 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 that were incurred due to the contractor’s dereliction of duties under Section 73 of the Indian Contract Act, 1872. What does Section 73 provide for?
Updated On: Jul 11, 2024
- 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
The correct option is (C): Compensation for loss or damage caused by breach of contract.
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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?
Updated On: Jul 11, 2024
- 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
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The correct option is (B): The best interpretation is made from the context.
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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:
Updated On: Jul 11, 2024
- Schedule
- Title
- Words and expressions
- Proviso
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The Correct Option is C
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The correct option is (C): Words and expressions.
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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?
Updated On: Jul 11, 2024
- 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
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The correct option is (C): whether the term “charges” was exclusive of liability for demurrages.
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Question: 9
What does the term ‘latent ambiguity’ mean?
What does the term ‘latent ambiguity’ mean?
Updated On: Jul 11, 2024
- 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
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The correct option is (B): A contractual term is reasonably, but not obviously, susceptible to more than one interpretation.
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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?
Updated On: Jul 11, 2024
- 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
The correct option is (C): Investors Compensation Scheme Limited v. West Bromwich Building Society, [1997].
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