Interpretation of Commercial Contracts

In a recent case Novartis Vaccines & Diagnostics Inc. v. Aventis Pharma Limited (dated 11.12.2009), the Bombay High Court has once again enumerated the principle of interpretation of commercial contracts. Justice Mohta while re-affirming his earlier observations in the Reliance Natural Resources Ltd.v. Reliance Industries Limited (2007 (Supp.) Bom. C.R. 925) further laid down the following principles for the interpretation of a commercial contract:

1. Ordinary Meaning: This principle essentially signifies that the words in the contract are to be construed in their ordinary and popular sense. The underlining principle being that parties to a contract, as reasonable men must have intended to use the word in its commonly used sense.

2. Business Like Interpretation: It signifies that a commercial contract must be interpreted in a manner which conforms with sound commercial principles and good business sense. In this regard Lord Diplock's observationin Antaios Cia Navieras SA V Salen Rederierna ((1984) 3 All ER 229) is apposite:
"If a detailed semantic and syntactical analysis of words in a
commercial contract is going to lead to a conclusion that flouts business common
sense, it must be made to yield to business common sense."

3. Commercial Object: This principle is based on a rather well established rule that the "the contract should be read as a whole" in light of the purpose of the contract.

4. Construction to Avoid Unreasonable Results: If the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, the reasonable interpretation should be adopted. It is to be presumed that the parties, as reasonable men, would have intended to include reasonable stipulation in their contract.

The traces of these principles can also be found in the apex court's recent decision in Vimal Chand Ghevarchand Jain & ors.v. Ramakant Eknath Jajoo (2009 (5) SCALE 59).