Supreme Court clarifies the distinction between a business license and a rent agreement in Mangala Waman Karandikar vs. Prakash Damodar Ranade (2021)

Date of the Judgment: May 7, 2021

Citation: 2021 INSC 293

Judges: N.V. Ramana, CJI, Surya Kant, J., Aniruddha Bose, J.

Can a contract to operate a business be interpreted as a lease agreement for the premises where the business is located? The Supreme Court of India addressed this question in a dispute over a stationary shop, clarifying the difference between a license to run a business and a lease of property. This case revolves around whether an agreement to operate a shop constitutes a license for the business or a lease of the shop premises. The Supreme Court, in this judgment, determined that the agreement was for the transfer of a business, not a lease of the property. The bench was composed of Chief Justice N.V. Ramana and Justices Surya Kant and Aniruddha Bose, with the judgment authored by Chief Justice N.V. Ramana.

Case Background

The case involves a dispute between Mangala Waman Karandikar (represented by her legal heirs), the appellant, and Prakash Damodar Ranade, the respondent. Initially, the appellant’s husband operated a stationary business called “Karandikar Brothers.” After his death in 1962, the appellant continued the business for a while but later decided to let the respondent run it. An agreement was made on February 7, 1963, which outlined the terms of the arrangement. The agreement stated that the respondent would take over the “Karandikar Brothers” stationary shop for two years, from February 1, 1963, to January 31, 1965, and pay a monthly royalty of Rs. 90. The rent for the shop premises was to be paid by the appellant to the owner, and the respondent was not responsible for it.

Over time, the contract was extended. In the 1980s, the appellant wanted to restart her husband’s business and issued a notice on December 20, 1980, asking the respondent to vacate the shop by January 31, 1981. The respondent claimed that the agreement was a rent agreement, not a sale of business. The appellant then filed a civil suit in 1981.

Timeline:

Course of Proceedings

The Trial Court ruled in favor of the appellant on August 30, 1988, stating that the agreement was for the sale of the business, not a lease. The court noted that the appellant intended to transfer the running business to the respondent, not merely the premises. The court also observed that the agreement used the term “royalty” instead of “rent” and specifically referred to the “shop” in the context of the business, not the premises.

The respondent appealed to the Additional District Judge, Pune, but the appeal was dismissed on July 29, 1991. Subsequently, the respondent filed a second appeal before the High Court of Bombay. The High Court, on November 7, 2009, allowed the second appeal, setting aside the decisions of the Trial Court and the First Appellate Court. The High Court held that the agreement was a license agreement covered under Section 15A of the Bombay Rent Act and that the Trial Court lacked jurisdiction to try the case. The High Court also stated that the agreement indicated that the premises were transferred to the respondent on a leave and license basis.

Legal Framework

The case primarily revolves around the interpretation of the agreement between the parties and the applicability of the Bombay Rent Act. The Supreme Court considered the following provisions of the Indian Evidence Act, 1872:

• Section 92: This section deals with the exclusion of oral evidence when the terms of a contract have been reduced to writing. It states that once a contract is proven, no oral agreement or statement can be admitted to contradict, vary, add to, or subtract from its terms. However, Proviso (6) allows for the proof of facts that show how the language of a document relates to existing facts.
• Section 95: This section addresses situations where the language used in a document is plain but unmeaning in reference to existing facts. In such cases, evidence may be given to show that the language was used in a peculiar sense.

  “95. Evidence as to document unmeaning in reference to existing facts.—When language used in a document is plain in itself, but is unmeaning in reference to existing facts, evidence may be given to show that it was used in a peculiar sense.”

Arguments

Appellant’s Arguments:

• The appellant argued that the High Court misinterpreted the contract. The language of the agreement clearly indicated that the intention was to create a license for continuing the existing business, which was previously run by the appellant’s husband.
• The appellant contended that the agreement was for the transfer of the business, not a lease of the premises. The use of the term “royalty” and the specific reference to the “shop” in the context of the business, rather than the premises, supported this view.

Respondent’s Arguments:

• The respondent argued that the contract was a license to use the shop, which is covered under the Bombay Rent Act.
• The respondent supported the High Court’s decision, stating that extrinsic evidence showed that the agreement was a license to use the shop, not a transfer of business. The respondent relied on receipts of payment that used the term “rent” to support their argument.
• The respondent argued that the Trial Court did not have jurisdiction to try the case, as it should have been heard by the Small Causes Court under the Provincial Small Causes Court Act.

[TABLE] of Submissions:

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the agreement of 7th February, 1963, was a license to conduct a business in the premises or was a license to run the existing business which was being run by the respondents in the suit premises? Does the document create an interest in the premises or in the business?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Investors Compensation Scheme v. West Bromwich Building Society, [1998] 1 WLR 896: This case was cited to emphasize the need to interpret contracts reasonably within the context of the trade as understood by the parties. The Supreme Court highlighted that contractual interpretation depends on the intentions expressed by the parties.
• Rohitash Kumar v. Om Prakash Sharma, (2013) 11 SCC 451: This case was cited to reiterate the basic principles of legal interpretation, emphasizing that the interpretation of a legal provision should not nullify the object of the provision itself. The Supreme Court stated that the High Court’s interpretation violated basic tenets of legal interpretation.

Legal Provisions:

• Section 92, Indian Evidence Act, 1872: This section was considered to emphasize that when the terms of a contract are clear, oral evidence cannot be used to contradict, vary, or add to those terms.
• Section 95, Indian Evidence Act, 1872: This section was considered to clarify that extrinsic evidence can only be used when the language of the document is plain but unmeaning in reference to existing facts.

[TABLE] of Authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Investors Compensation Scheme v. West Bromwich Building Society, [1998] 1 WLR 896*, to emphasize that contracts should be interpreted reasonably, considering the context understood by the parties.
• The Supreme Court cited Rohitash Kumar v. Om Prakash Sharma, (2013) 11 SCC 451*, to reiterate that legal interpretations should not nullify the object of the provision itself.
• The Court used Section 92 of the Indian Evidence Act, 1872*, to highlight that oral evidence cannot contradict clear terms of a written contract.
• The Court used Section 95 of the Indian Evidence Act, 1872*, to explain that extrinsic evidence is only admissible when the document’s language is unclear in the context of existing facts.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear and unambiguous language of the contract, which indicated that the agreement was for the transfer of a business, not a lease of the premises. The court emphasized that the use of the term “royalty” and the specific reference to the “shop” in the context of the business were crucial in determining the true intention of the parties. The court also highlighted that it is not permissible to introduce extrinsic evidence to contradict the clear terms of a contract unless there is an ambiguity in the language of the contract.

Sentiment Analysis of Reasons Given by the Supreme Court:

Ratio Table (Fact:Law):

Logical Reasoning Flowchart:

The Supreme Court rejected the High Court’s interpretation, stating that it had erred in appreciating the scope of Section 95 of the Indian Evidence Act, 1872. The court emphasized that extrinsic evidence should not be considered when the language of the contract is clear. The court also noted that if the High Court’s interpretation were to be accepted, it would amount to the courts substituting the bargain made by the parties. The Court noted that the High Court had incorrectly interpreted the document and the surrounding circumstances.

The Supreme Court stated, “It is clear from the reading of the contract that the parties had intended to transfer business from appellant to respondent during the contractual period. This agreement was not meant as a lease or license for the respondent to conduct business.”

The Court further added, “Once the parties have accepted the recitals and the contract, the respondent could not have adduced contrary extrinsic parole evidence, unless he portrayed ambiguity in the language.”

The Supreme Court also observed, “On consideration of the matter, the High Court erred in appreciating the ambit of Section 95, which led to consideration of evidence which only indicates breach rather than ambiguity in the language of contract.”

The court concluded that the Bombay Rent Act did not apply to the agreement, as it was a license for continuing the existing business, not a lease of the premises. The court restored the Trial Court’s decree.

Key Takeaways

• When interpreting contracts, the primary focus should be on the plain and unambiguous language used by the parties.
• Extrinsic evidence can only be considered when the language of the contract is unclear or ambiguous in reference to existing facts.
• The use of specific terms like “royalty” and the context in which terms like “shop” are used can be crucial in determining the nature of an agreement.
• Agreements for the transfer of a business are distinct from lease or license agreements for premises.
• The Bombay Rent Act does not cover agreements for the transfer of a business.

Directions

The Supreme Court set aside the impugned order of the High Court and restored the decree of the Trial Court. The respondent was directed to hand over the suit property to the appellant, including the furniture and other articles.

Development of Law

The ratio decidendi of this case is that when a contract is clear and unambiguous, extrinsic evidence cannot be used to contradict its terms. The court reaffirmed the principle that contracts should be interpreted based on the intentions expressed by the parties, as reflected in the language of the contract itself. This judgment clarifies the distinction between a license to run a business and a lease of property, emphasizing that the Bombay Rent Act does not apply to agreements for the transfer of a business. This case reinforces the importance of adhering to the terms of a written contract and the limited circumstances under which extrinsic evidence can be admitted.

Conclusion

The Supreme Court’s judgment in Mangala Waman Karandikar vs. Prakash Damodar Ranade clarifies the distinction between a business license and a lease agreement. The Court held that the agreement was a license for continuing the business, not a lease of the premises, and thus, the Bombay Rent Act did not apply. The Court emphasized the importance of the language of the contract and the limited admissibility of extrinsic evidence. This decision reinforces the principle that contracts should be interpreted based on the intentions expressed by the parties in the agreement itself.