This article is written by Shankarlal Raheja, pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.

Introduction

Drafting a contract is a long process, an average Complex contract takes months to draft as this involves lengthy negotiations. Both parties have several negotiations and each one safeguarding and protecting their interest. Due to this sometimes contracts do end up having terms with complex legal jargon, which should be interpreted by both parties in different perspectives. This led to the evolution of the doctrine of contra proferentem. The phrase literally means against the offeror. It has Latin origins and can also be interpreted as the guilt of the drafter. The doctrine of contra proferentem occurs when there is an ambiguity in the interpretation of a certain term in a contract, in such scenarios the court mostly rules against the favouring party i.e. the party that benefits from the ambiguity or the party that requested for that clause.  Thus, in contract law the contra proferentem rule implies that any clause considered ambiguous be interpreted against the interests of the party that created, introduced, or requested that a clause be included. The doctrine therefore acts as a deterrent so that people are more cautious while drafting terms of a contract.

Evolution of doctrine of contra proferentem

Contra Proferentum emerged in the late 19th century in a post aristocratic world when laws were divorced from reality. During that era, laws were formed on laboratory-like conditions and were mostly based on idealistic theories. Hence, like most social theories of that era were ineffectual in its purpose. Courts did not even believe in interfering in contractual matters. This deficiency prompted the popularity of adhesion contracts. 

Adhesion contracts

Adhesion contracts is a contract drafted by one party, who is in dominant and stronger bargaining power. Thus Adhesion contracts are contracts where only one party dictates the terms like in insurances, purchase agreements, mortgages major e-commerce giants etc. Also known as boilerplate clauses, these are mostly used by corporate giants who have a lot of transactions with a similar kind of clientele or where the supply of the goods and services is low as compared to the demand. These contracts have a standard set of terms and conditions for all their customers/ acceptors and this other party does not have much power or leverage to negotiate the terms of these contracts. Corporations use this weakness to their advantage and sneakily add clauses, which excludes them from any liability. Common examples are builder-buyer Agreement in the real estate industry, Insurance industry or Private moneylender and finance companies in the Loan Agreements etc

With industrialization and technological revolution, the ever-increasing power and influence of corporations’ legal rules needed to be re-invented in the new world. There was an urgent need for fairer principles, which would create a more equitable standing for both parties. These rules are meant to be more realistic and applicable to the real world rather than dictating ideal circumstances. New legal rules emerged to not only protect consumers but also prevent big corporations from exploiting their customers.

Applicability of the rule

In United India Insurance Co Ltd v Kiran Combers & Spinners the rule is stated as “every exception clause is to be interpreted in case of ambiguity, contra proferentem.” 

Albeit, the rule is applicable only on the prerequisite of an ambiguity i.e. the only contention is that there should be a clear difference in interpretation for both parties, once that is established the application of the rule is pretty straightforward. The ruling will be against the party the ambiguity favours and this rule only applies where one contracting party is in a superior bargaining position. This was established in the case Horne Coupar v. Valletta & Company in British Columbia and later in Bank of India vs K. Mohan Das in India. In this landmark judgement, about a voluntary retirement scheme Judge Lodhia iterated that since it was the bank that drafted the terms they shall endure the risk caused due to lack of clarity. He said in these circumstances the interpretation will be against the party that drafted the policy. It was held that “the optees of voluntary retirement under that Scheme will be eligible to pension under the Pension Regulation, 1995”.

In Contracts, the rule is mainly used to determine liability. In the case, Hollier v Rambler Motors AMC Ltd. the court had to determine whether terms of invoice were applicable when the customer did not sign it. Since there was an exclusion clause which removed liability in case of fire. Here, the court held the defendant liable. In another case, Mac Cutcheon v David Macbrayne, Salmon LJ asserted that “It is well settled that a clause excluding liability for negligence should make its meaning plain on the face of it to an ordinary literate and sensible person….. the defendant should not be allowed to shelter behind language that might lull the customer into a false sense of security by letting him think that he would have security by letting him think that he would have redress….. For any damages which he might suffer from the negligence of that person.”

The Doctrine is very popular in insurance contracts which are infamous for having skillfully framed boilerplate clauses to exclude themselves from liability. One can also observe a trend that judges in these scenarios normally favour the insurer or customer. The court reasons that the insurer has no bargaining power as compared to the insurer. In Houghton v Trafalgar Insurance Co Ltd. a dispute over an insurance contract arose as the contract had an exemption clause which exempted the defendant from paying insurance if the petitioner’s vehicle had any excess load at the time of the accident. The petitioner had an accident and the vehicle has 6 people instead of 5. The court ruled in favour of the petitioner stating that the clause was too vague. Court urged the defendant to include exact specifications like the weight in his contract and also to print red ink to draw attention.

In Life Insurance Corporation of India v. Insure Policy Plus Services Pvt Ltd And Others the Supreme Court discouraged adding public policies in contractual matters as they are imprecise and ambiguous. It also stated that LIC cannot object to transferring assignments or policies which is a general global practise.

One should also bear in mind that this doctrine is applicable only when the clauses are unreasonable or discriminatory. If it is realised by the court that the clause is reasonable, sound and plausible then the respective condition in the contract will be applicable. Lately, this principle is facing criticism all around the world for its applicability in commercial contracts when both parties are sophisticated, equally knowledgeable and have had equal bargaining power about the terms of the contract. There is an increasing perception that parties involved in commercial contracts should be free to allocate risks while negotiating.

Courts in India have generally agreed that Commercial contracts should not use the benefit of a contra proferentem rule. Although in KSL & Industries Ltd. v. National Textiles Corporation Ltd the court ruled in favour of the petitioner when there was an ambiguity in interpretation thus using the doctrine as a precedent while deciding cases.

In a 2013 case, Export Credit Guarantee Corp of India Ltd v Garg Sons International stated that:

“The contract must be read as a whole and every attempt should be made to harmonize the terms thereof, keeping in mind that the rule of contra proferentem does not apply in case of commercial contract, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon.”

Recently the Court of appeal in the United Kingdom refused to apply the contra proferentem rule in the commercial contract case Persimmon Homes v Ove Arup. The court agreed that the rule has become more relevant as an indemnity clause rather than an exclusion clause and stated that it is a sensible system to allocate risk between agreeing parties. The Judge noted that the contractors and consultants would surely take into consideration the degree of risk involved while negotiating their fees., usually either as a result of greater experience or the assistance of counsel.

Conclusion

The rule is intended to protect and safeguard the interest of the weaker party; it should be used thoughtfully with a lot of caution. The doctrine should only be applied in cases where there is actual ambiguity in interpreting the clause and is vague. Parties should also negotiate the contract and not merely plead that the contract is skewed in favour of the party with huge bargaining power and develop a habit to carefully read terms and seek expert advice to negotiate before executing the contract to avoid unnecessary litigation later or be saddled with unwarranted liabilities. The party drafting the contract should keep a copy of proceedings and other pieces of evidence to prove the genuineness of his case. They could use a standard rule for constructing the contract to make it easier for the other party to navigate. Contracts should be comprehensive, clear and easy to understand for a layman.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

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