Introduction: –
Agreement and Contract
In terms of provisions of Section 2(e) of the India Contract Act, every promise and every set of promises forming the consideration for each other is an agreement.
An agreement between the parties will come in subsistence in accordance with the rule of offer and acceptance with an acceptance of the offer being absolute, unqualified and communicated to offeror and in terms of the provisions of Section 7 of the Indian Contract Act.
Section 10 of the Indian Contract Act provides that all agreements are contract if they are made by free consent of the parties competent to contract, for a lawful consideration with lawful object and are not expressly declared to be void. Thus, for an agreement to be amounting to a contract, it has to be legally enforceable in terms of various principles contained in the Indian Contract Act.
Oral Agreements
Even the oral agreement can constitute abiding contract and it will be enforceable. The oral agreement will be as much a legally enforceable contract u/s. 10 as a written agreement subject to satisfaction of the conditions prescribed in Section 10 of the Indian Contract Act. This principle has been duly recognized by the Supreme Court of the India in the case of Alka Bose Vs. Paramatmadevi and ors. Civil Appeal no. 6197 of 2000 and through various other decisions of the High Courts.
Preference for written Contracts and factors that may weigh against finality
Preference for written agreement generally and the same being matter of almost certainly an flexible rule for commercial contract is on account of difficulties in proving the terms of the oral agreement.
In today’s commercial world, we therefore see various written commercial agreements ranging from agency agreement, consultancy agreement, distribution agreement, E-commerce related and franchise agreement, outsourcing agreement, supply of goods agreements etc. to the banking and finance agreement, shareholders agreement and other investment agreements.
Normally commercial agreements are drafted with the advise of a legal practitioner and law firms in large scale transactions and they duly take care of the issues which can weigh against the enforceability of the such documents in future; however, we have, in practice seen various commercial agreements between the large corporations and even a larger number of such agreements when they are between mid and small sized companies, to have been drafted by the commercial team of the these corporations with standard templates from search engines. In some cases, this gives rise to an opening of a window for introduction of extraneous evidence to impeach the sanctity of the written contracts.
In this article, we seek to analyse the finality of the written agreements between the parties and the reasons owing to which the oral and other extraneous evidence maybe sought to be introduced for interpretation of written documents.
Extraneous Evidence to interpret Written Contracts:
Parol Evidence Rule
Under the contract law of common law jurisdictions it is generally an accepted principle of law that use of extrinsic evidence to contradict, vary or add to contract is not permissible. The rule is essentially in place to prevent unscrupulous and unwarranted attacks to impeach the valid written document between the parties.
This rule is however subject to exceptions. For example, extrinsic evidence maybe taken into accord for clarification of ambiguous terms in a contract, for showing that the contract was not the final one or for showing that the it didn’t amount to the complete contract/agreement between the parties, to indicate if the contract was formed by mistake of the fact and to prove if the contract was induced to enter into through fraud or misrepresentation.
Provisions of Indian Law Regarding Extraneous Evidence for interpretation of Written Contracts
Section 91 of the Evidence Act, 1872 (Section 94 of the Bhartiya Shakshya Adhiniyam, 2023) provides that when the terms of contract or of any grants or disposition of property have been reduced to formal document or when any matter is required by law to be reduced in the form of a document, no evidence shall be given in proof of terms of such contracts or grant or disposition of property except the document itself.
Sec. 92 of the Indian Evidence Act, 1872 (Section 95 of the Bhartiya Shakshya Adhiniyam, 2023) makes it clear that once the contents when the terms of such contracts have been proved in accordance with the provisions of Section 91 of Indian Evidence Act, 1872 (Section 94 of the Bhartiya Shakshya Adhiniyam, 2023), no evidence of any oral agreement or statement is admissible for the purpose of contradicting wherein, adding to or subtracting from its terms.
However, there are various provisos under said section providing for exceptions when oral or other evidence may be admissible.
Exceptions pertaining to inducement to enter into a contract through fraud, misrepresentation etc. are self-explanatory and we don’t seek to elaborate on the same.
Another important exception is that the parties are not prevented from proving that they entered into distinct oral agreement on some collateral matter and the rule of excluding parol evidence to vary and contradict written document is not infringed by the proof of any collateral oral agreement, which is not contradicting the terms of written agreement though it might be relating to same subject matter.
Yet another exception to the rule of exclusion of parol evidence is that it doesn’t excludes the evidence regarding separate oral agreement (either contemporaneous or as preliminary measure) that the terms of the written contract were to take effect only after satisfaction of any condition precedent agreed between the parties had been fulfilled. Parol evidence is further admissible for proving that the condition precedent agreed between the parties were not fulfilled.
Yet another exception is regarding admissibility of a subsequent oral agreement to rescind or modify any such contract, grant or disposition of the property. The judicial pronouncements in this regard are varying. There are judgments that say that while the evidence could not be given for varying the terms of the agreement, distinct subsequent oral agreement modifying or rescinding the contract altogether is admissible as after having entered into a contract; parties are free to have a new contract waiving or rescinding the earlier contract altogether and this will be in the nature of novation. Some judgments take a more conservative view on this proviso. While we do not want to go into the nitty gritty of a given proviso and the judgments on the same, it will be important to note that the proviso itself postulates that it will be inapplicable when the contract or disposition of property, etc., is required to be in writing by law or it has been registered according to law in force for the time being (whether or not registration is compulsory under the Registration Act).
section 93 of the Evidence Act provides that when the language used in a document on its face, is ambiguous or a defective, evidence may not be given of the facts which would show its meaning or supply the defects. However, the rule applies to the documents, the language whereof is so inherently vague or defective on the face of them so as to convey no meaning whatsoever i.e. ambiguity in a document is so patent that it is incapable of being dispelled by accepted rules of construction and interpretation of documents evolved through judicial pronouncements.
However, if the construction of a written or a printed document is doubtful but the meaning is capable of being ascertained through regard to circumstances surrounding it and context, it will be open for the court to study the document as a whole as also to have evidence of the context and surrounding circumstances.
Conclusion and Recommendations
Thus, the above principles indicate that there are various grounds on which the parol evidence as regards the interpretation of a written document, could be admissible, and the same is the last thing that a party to a commercial contract will ever want to have. We therefore seek to provide broader recommendations on the aspects to have finality of the document to eliminate or significantly reduce the possibility of introduction of parol evidence for interpretation of any such documents.
We recommend having the background of the contract narrated with sufficient clarity to indicate the purpose and context surrounding the contract; we also recommend the terms utilized in the contract be defined very succinctly at the beginning of the contract document itself.
It is highly recommended to indicate in the written document itself that such contract amounts to a whole of the agreement between the parties superseding any other previous agreements on the subject matter. Additionally, it will also be helpful to have it in writing in the very same agreement that there is no separate oral agreement between the parties on any subject matter of or collateral to the written agreement. (Although it may not contradict the terms of the written agreement.)
Also, it is recommended that it be indicated in the agreement that any conditions precedent are captured in the written agreement itself and no other conditions precedent are recognized by the parties although they may have been indicated at the time of negotiation or in the emails or in any other form of communications.
Lastly, we highly recommend having all the written contracts registered under the Registration Act 1908 with payment of applicable stamp duty, irrespective of whether they are required to be registered or not, so as to avoid any arguments regarding rescinding or modification of the contract as a whole through subsequent oral agreement.
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