SC: Terms to be implied only if court finds parties must have intended them

The Hon’ble Supreme Court, today i.e. on 2nd July 2019, in the matter of  M/S Adani Power (Mundra) Ltd. v. Gujarat Electricity Regulatory Commission And Ors. observed that an unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract. It is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them. 

The Hon’ble Supreme Court observed that:

The clauses in the agreement ought to be given the plain, literal and grammatical meaning of the expression used in the same. No doubt, that the courts will also try to gather as to what intention the parties wanted to give them. (Para 20)

The principle of business efficacy could be invoked only if by a plain literal interpretation of the term in the agreement or the contract, it is not possible to achieve the result or the consequence intended by the parties acting as prudent businessmen. This test requires that a term can only be implied, if it is necessary to give business efficacy to the contract, to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. (Para 20)

If the contract makes business sense without the term, the courts will not imply the same. (Para 20)

Courts can imply a clause only if it is found that the plain and literal meaning given to the expression used in the terms is not in a position to make out the intention of the parties. Reading an unexpressed term in an agreement would be justified on the basis that such a term was always and obviously intended by and between the parties thereto. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract. It is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them. It must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, although tacit, forms part of the contract. (Para 20)

(Para 20) For invoking the business efficacy test and carving out an implied condition, not expressly found in the language of the contract, the following five conditions will have to be satisfied:

  • Reasonable and equitable;
  • Necessary to give business efficacy to the contract;
  • It goes without saying i.e. the Officious Bystander Test;
  • Capable of clear expression; and
  • Must not contradict any express term of the contract.

Every attempt has to be made to harmonize apparently conflicting entries not only of different Lists but also of the same List and to reject that construction which will rob one of the entries of its entire content and make it nugatory. (Para 28)

To harmonize is not to destroy any statutory provision or to render it otiose. (Para 29)

Copy of judgement:Judgement_02-Jul-2019

-Tushar Kaushik

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