Interpreting Terms of Contract, 5 Condition Test and the Principles of Law

Interpreting Terms of Contract, 5- Condition Test and Principles of Law

Bombay High Court's Judge [Hon'ble J. R.I. Chagla] wrote in his recent Judgment [2025] GCtR 1703 (Bombay) following words : 

"It has been held by the Supreme Court in Nabha Power Ltd. Vs. Punjab State Power Corporation Limited that in the absence of ambiguity, an Arbitrator must strictly enforce the terms of the Contract and cannot introduce terms on the basis of business efficacy unless the rigorous test is satisfied. The Supreme Court accordingly, formulated the “Penta Test” for identifying implied Contractual terms."

The correct thing is Nabha Power Ltd [2017] GCtR 5555 (SC) has not dealt with any arbitral award. It was an appeal not an SLP. Appeal was filed against Order of Appellate Tribunal for Electricity. No provision of A&C Act, 1996 were invoked in said case. There was no award of arbitrator under challenge in Nabha Power Case. The word arbitrator was not even used in Nabha Power Judgment even once. Nabha Power Judgment runs into 63 pages and Hon'ble J. Sanjay Kishan Kaul wrote it. 

The case was about [as page 23] shows "interpretation of the commercial contract inter se the parties." 

In Nabha Power [2017] GCtR 5555 (SC), it was clarified that the touchstone for interpreting commercial documents, cannot be ‘mere reasonableness’ as Lord Denning had observed, but ‘necessity’.

Parties indulging in commerce act in a commercial sense. It is this ground rule which is the basis of The Moorcock test of giving ‘business efficacy’ to the transaction, as must have been intended at all events by both business parties. The development of law saw the ‘five condition test’ for an implied condition to be read into the contract including the ‘business efficacy’ test. It also sought to incorporate ‘The Officious Bystander Test’. Requisite conditions to be satisfied: (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3) it goes without saying, i.e., The Officious Bystander Test; (4) capable of clear expression; and (5) must not contradict any express term of the contract. The same penta-principles have been discussed in Nabha Power [2017] GCtR 5555 (SC).

Needless to say that the application of these principles would not be to substitute Court’s own view of the presumed understanding of commercial terms by the parties if the terms are explicit in their expression. The explicit terms of a contract are always the final word with regards to the intention of the parties. The multi-clause contract inter se the parties has, thus, to be understood and interpreted in a manner that any view, on a particular clause of the contract, should not do violence to another part of the contract.

Another maxim for interpretation which was found to be acceptable was ‘Reddendo Singula Singulis’ [Francis Bennion – Statutory Interpretation (Butterworths – 1984, London); (Part XXII, pg. 842)] : "Where a complex sentence has more than one subject, and more than one object, it may be the right construction to render each to each, by reading the provision distributively and applying each object to its appropriate subject. A similar principle applies to verbs and their subjects, and to other parts of speech.”