Interpretation of documents: Substance and form revisited

In this post, I had looked at a decision of the Supreme Court in Faqir Chand Gulati v. Uppal Agencies. I had observed, “the broad nature of the observations suggests that the legal form of an agreement is irrelevant in cases of interpretation of documents, and all that matters is the substance of the document.” Questions may be asked as to whether this decision in fact changes the position of law on the point. As a clarification, it must be stated that the position of the law has not been changed by Faqir Chand Gulati’s case.

For instance, reference may be made to Sundaram Finance v. State of Kerala, decided by a three-Judge Bench of the Supreme Court, reported in AIR 1966 SC 1178. The majority (Shah and Sikri, JJ.) went behind the words of the agreement to look at the real nature of the transaction; while Subba Rao J. dissented. Subba Rao took the view that the intention of the parties to a valid contract must be gathered from the words used by the parties in the contract – in other words, the finding of the ‘substance’ must be based on the ‘form’. On the other hand, the majority stated, “In each case, the Court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents…”

It must be added however, that looking at the “substance” ignoring the legal form is justifiable only when there is clear evidence as to the substance. This paragraph in Azadi Bachao Andolan v. Union of India, dealing with the substance-over-form debate in taxation, sums up the position, “If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the Court might be justified in overlooking the intermediate steps, but it would not be permissible for the Court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the 'real motive' of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’-the-wisp.”

The correct position of law in relation to the interpretation of documents therefore seems to be:

1. The goal of the interpreter is to find the true intention of the parties.
2. Ordinarily, this true intention must be gathered from the words used. The substance is therefore to be determined in accordance with the form.
3. However, when it is manifestly clear (from the surrounding circumstances, and from the document read as a whole) that the specific words used do not reflect the true intention of the parties, then the words may be ignored. To that extent, substance will prevail over form.

Thus, the words used by the parties can be presumed to indicate the real intention of the parties; but this presumption can be rebutted in exceptional circumstances. Gulati's case must be read according to these principles, and must not be read to mean that the form is irrelevant.