Investors Compensation Scheme v West Bromwich, [1998] 1 WLR 896

(1) Interpretation is the ascertainment of the meaning which the document would convey to a
reasonable person having all the background knowledge which would reasonably have been
available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact,” but
this phrase is, if anything, an understated description of what the background may include.
Subject to the requirement that it should have been reasonably available to the parties and to the
exception to be mentioned next, it includes absolutely anything which would have affected the
way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties
and their declarations of subjective intent. They are admissible only in an action for rectification.
The law makes this distinction for reasons of practical policy and, in this respect only, legal
interpretation differs from the way we would interpret utterances in ordinary life. The boundaries
of this exception are in some respects unclear. But this is not the occasion on which to explore
them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is
not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries
and grammars; the meaning of the document is what the parties using those words against the
relevant background would reasonably have been understood to mean. The background may not
merely enable the reasonable man to choose between the possible meanings of words which are
ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must,
for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v.
Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749.
(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the
common sense proposition that we do not easily accept that people have made linguistic
mistakes, particularly in formal documents. On the other hand, if one would nevertheless
conclude from the background that something must have gone wrong with the language, the law
does not require judges to attribute to the parties an intention which they plainly could not have
had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera
S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201.
Gaurav Monga vs Premier Inn India Pvt Ltd & Ors
A Division Bench of this Court in India International Centre Vs. S.N. Pandit ILR (1976) 1 Delhi
60 was concerned with a suit for damages for breach of contract of employment. The respondent
Mr. S.N. Pandit therein, while applying for employment to India International Centre had stated
that he will be leaving an institution like the Reserve Bank of India which offered him fairly
good prospects and security for joining employment and suggested that his employment be
protected to some reasonable extent. The Division Bench held (i) that it is well settled that the
meaning of the contract documents cannot be varied or influenced by what happened during the
pre-contract negotiations; (Para 25)
It is also the settled principle of law that when a party has entered into a formal contract, the
contract must be construed according to its own terms and not be explained or interpreted by
antecedent communication which led upto it. The resort to evidence as to previous negotiations
is impermissible to the extent the contract is unambiguous. Section 91 of the Evidence Act, 1872
relates to evidence of terms of contract, grants and other dispositions of property reduced to form
of documents and forbids proving the contents of a writing otherwise than by writing itself.
Supreme Court in Roop Kumar Vs. Mohan Thedani (2003) 6 SCC 595 held (i) that Section 91 of
the Evidence Act in reality declares a doctrine of the substantive law, namely, in the case of a
written contract, all proceedings and contemporaneous oral expressions of the thing are merged
in writing or displaced by it; it does not exclude certain data because they are for one or another
reason untrustworthy or undesirable--what the rule does is to declare that certain kinds of facts
are legally ineffective in the substantive law; (ii) that the practical consequence of integration of
a contract in a document is that the scattered parts of the contract in their former and inchoate
shape, have no longer any jural effect--they are replaced by a single embodiment of the act; (iii)
that in other words, when a jural act is embodied in a single memorial all other utterances of the
parties on the topic are legally immaterial for the purpose of determining what are the terms of
their act; (iv) that this rule is based upon an assumed intention on the part of the contracting
parties, evidenced by the existence of the written contract, to place themselves above the
uncertainties of oral evidence; (v) that when persons express their agreements in writing, it is for
the express purpose of getting rid of any indefiniteness and to put their ideas in such shape that
there can be no misunderstanding, which so often occurs when reliance is placed on oral
statements; (vi) that written contracts presume deliberation on the part of the contracting parties
and it is natural that they should be treated with careful consideration by the Courts and with a
disinclination to disturb the conditions of matters as embodied in them by the act of the parties;
(vii) that vide Section 92 of the Evidence Act, the legislature has prevented oral evidence being
adduced for the purpose of varying the contract as between the parties to the contract but no such
limitations are imposed under Section 91 of the Evidence Act; (viii) that Sections 91 & 92 of the
Evidence Act apply when the document on the face of it contains or appears to contain all the
terms of the contract. (Para 26)

Thyssen Krupp Materials AG v. The Steel Authority of India , 2017 SCC OnLine Del 7997
He relied on the negotiations between the parties and exchange of letters to find that there was in
existence a concluded contract between the parties in relation to the second lot. Such kind of
clauses in commercial contracts are known as “entire agreement” clauses, the intention of which
is to preclude parties from adducing evidence of a collateral contract or agreement between the
parties governing the same issue. The English law in relation to such kind of clauses has been
aptly laid down in the case of Inntrepreneur Pub Co. Ltd. v. East Crown Ltd., [2000] 2 Lloyd's
Rep. 611:
“The purpose of an entire agreement clause is to preclude a party to a written agreement from
threshing through the undergrowth and finding in the course of negotiations some (chance)
remark or statement (often long forgotten or difficult to recall or explain) on which to found a
claim such as the present to the existence of a collateral warranty. The entire agreement clause
obviates the occasion for any such search and the peril to the contracting parties posed by the
need which may arise in its absence to conduct such a search. For such a clause constitutes a
binding agreement between the parties that the full contractual terms are to be found in
the document containing the clause and not elsewhere, and that accordingly any promises or
assurances made in the course of the negotiations (which in the absence of such a clause might
have effect as a collateral warranty) shall have no contractual force, save insofar as they are
reflected and given effect in that document. (Para 71)

Inntrepreneur Pub Co vs. East Crown Ltd. ([2000] 2 Lloyds Rep 611), the agreement for
lease contained an acknowledgement that “this agreement… constitutes the entire agreement
between the parties”. The issue was whether the entire agreement clause precluded the defendant
from setting up alleged collateral agreement. It was observed in this case that-
“such a clause constitutes a binding agreement between the parties that the full contractual terms
are to be found in the document containing the clause and not elsewhere, and that accordingly
any promises or assurances made in the course of the negotiations (which in the absence of such
a clause might have effect as a collateral warranty) shall have no contractual force.”
The Court in this case, further explained that “the purpose of an entire agreement clause is to
preclude a party to a written agreement from thrashing through the undergrowth and finding, in
the course of negotiations, some (chance) remark or statement (often long-forgotten or difficult
to recall or explain) upon which to found a claim to a collateral warranty”

In another case, Proforce Recruit Ltd. vs. The Rugby Group Ltd. ([2006] EWCA Civ 69), the
issue was whether for the purpose of construing a written contract it was admissible to take
account of extrinsic evidence, in particular the parties’ pre-contract negotiations and their
subjective declarations of intent. In this case, it was observed that the Courts would be generally
reluctant to interpret the terms of a contract in too broad a term in the absence of any clearly
expressed intention of the parties. In cases of uncertainty, the Courts would prefer ordinary
objective meaning within the factual context of the contract. In any case, the Courts would be
very reluctant to consider any negotiations between the parties prior to the contract and will do
so only in exceptional cases.

Therefore, it becomes all the more essential for the parties to a contract to ensure that all the
documents and statements are adequately included or incorporated into the final contract or
definitive agreement. In case there may be any oral representations made or relied on by any of
the parties during the negotiation or pre-contractual stage, the same can form part of the
‘Representation and Warranties’ clause in the contract.