While determining whether a contract created an interest in the premises or in the business, the Supreme Court recently reiterated the parol evidence rule in the case of Mangala Waman Karandikar vs. Prakash Damodar Ranade1 . Simply put, the rule of parol evidence is a rule of contract interpretation that bars the admission of any extrinsic evidence of prior agreements that modify, contradict, or vary the terms of a contract. This means that the courts are generally restricted to interpreting the contract within the four corners of the written document.2 In the Indian context, the principles of this rule are incorporated in certain sections of the Indian Evidence Act, 1872 (“Act”) which the Supreme Court of India discussed in this judgment.
Two parties entered into an agreement in 1963, with respect to a stationary business by the name of ‘Karandikar Brothers’. When the appellant issued a notice for the respondent to vacate the suit premises, the respondent contended that their contract constituted a rent agreement with the sale of business only being incidental and hence the Bombay Rent Act would be applicable. Whereas the appellant contended that the agreement was a license to run said business and not to lease the premises.
The appellant approached the Trial Court, and it was held that the agreement was a transaction for the sale of business. The Trial Court made some crucial observations in noting that the contract excluded the word “premises” and “rent” and rather used “shop” and “royalty”. Thereafter, the matter on appeal reached the High Court of Bombay and the Trial Court’s order was set aside. Aggrieved by judgment of the High Court of Bombay, the appellant approached the Supreme Court.
Observations of the Supreme Court
The Supreme Court observed that determining the true meaning of a contract is an iterative process undertaken by courts and involves the interpretation of the intention expressed by the parties. The courts are thus required to decipher the meaning behind the language used in a contract.
The respondent had placed reliance on Section 95 of the Act, to contend that the Court should consider extrinsic evidence, such as receipts of payment addressed as “rent receipts” to adduce the proper meaning of the contract.
Section 95 states that “when language used in a document is plain in itself, but is unmeaning in reference to existing facts, evidence may be given to show that it was used in a peculiar sense.”3
Further, Section 92 of the Act explains that when terms of a contract have been proved, “no evidence of any oral agreement or statement shall be admitted for the purpose of contradicting, varying, adding to or subtracting from its terms.” The sixth proviso to this section states that “any fact may be proved that shows in what manner the language of a document is relating to existing facts.”4
Clarifying the ambit of the proviso and its nexus with Section 95, the Supreme Court explained that the proviso could be invoked only when the terms of a document are ambiguous. However, when the terms are straightforward, the proviso does not apply. The proviso cannot be construed as an exception to Section 92 since that would defeat the purpose of the Section. Moreover, Section 95 of the Act, on which the High Court relied on to decide the matter only builds on the said proviso.
Holding of the Supreme Court
The High Court’s interpretation was deemed to be in violation of the rules of legal interpretation as it enlarged the scope of the proviso beyond the main section. The Supreme Court observed that the introduction of additional evidence in this case, would lead to a contradiction of the terms of the contract which is prohibited as per Section 92. It was clear that the contract mandated continuation of the business on a monthly royalty basis.
Therefore, the Supreme Court elucidated that unless ambiguity in the language was established, parol evidence that contradicts the contract could not be introduced. Since the language of the impugned contract was clear and unambiguous, the Court could not consider extrinsic evidence. The Court held in favor of the appellant by concluding that the license was created for the continuation of the business rather than a lease of shop premises.
The Bombay High Court gave undue importance to the external evidence of rent receipts and ignored the intention of the parties established in the contract. The Supreme Court has repositioned the focus on the sanctity of written contracts by refining the understanding of the parol evidence rule in this case.
The role of ‘Entire Agreement’ clauses
This judgement is a demonstration of why contracts should be drafted in clear, specific, and unambiguous language. There are different measures that one can take to prevent a contract from being rendered litigious. The answer can be found in boilerplate clauses that are often underestimated or overlooked. An ‘Entire Agreement’ clause is one such way in which disputes over different understandings between the parties adopted at different times can be avoided.
An ‘Entire Agreement’ clause usually states that the written agreement is the final and complete expression of the parties’ terms, and the contract is in supersession of any prior agreements. It is also known as a ‘merger’ or ‘total integration’ clause since it merges all prior understandings into a written agreement. The presence of such a clause would limit the court to the written contract and deter parties from introducing any extrinsic evidence.5 However, this is subject to the condition that the terms of the contract are unambiguous. While drafting an entire agreement clause, it is pertinent to ensure that it represents the intention of the parties. This judgement provides perspective to the value a boilerplate clause holds.
1 Mangala Waman Karandikar (D) TR. LRS. vs. Prakash Damodar Ranade, Civil Appeal No. 10827 of 2010
2 Gualandi v. Adams, 385 F.3d 236 (2nd Cir. 2004).
3 Section 95 of the Indian Evidence Act, 1872
4 Section 92 of Indian Evidence Act, 1872
5 Alex Ritchie, ‘How Contract Boilerplate Can Bite’ 50(243) 261 Rocky Mountain Mineral Law Foundation Journal<https://digitalrepository.unm.edu/law_facultyscholarship/321.>