This article is written by Gitika Jain pursuing BBA.LLB (Hons) from Amity University, Kolkata. This is an exhaustive article which deals with the doctrine of Contra Proferentem.
With every year passing by, the volume of commercial transactions is also increasing, along with new technologies and increasing means of communication. With the increasing number of transactions every year, the amount of risk involved in each transaction also increases, making the business transaction scenario a very conscientious affair. A person can be a prudent businessman when he lays down clearly and concisely the language in the contract, the terms and conditions in a contract and adheres to the rules, regulations and the laws related to it. It is important to incorporate all the foreseeable contingencies and the ways to deal with them to avoid any kind of ambiguity. But sometimes even after doing all the possible ways to avoid ambiguities, there are various terms in a contract that have a tendency to be interpreted in multiple meanings depending on the cases. When such terms tend to affect the right of both the parties to contract, it creates conflict between them. To disentangle these deadlocks, the courts needed to bring into effect certain rules and regulations and the Contra Proferentem rule was one of them.
The concept of contra proferentem
This rule is an agreement between two parties that have similar bargaining power but in some cases, the negotiating power of one party can be more than the other one. Those are cases where this rule comes to the rescue because the dominating party will have the power and advantage to exploit the other party and draft the contract according to the language which suits his or her best interests. Even if this happens this does not mean that the weaker party will not read the contract thoroughly. However unfair the terms of the contract maybe, if the clauses are unambiguous, legal, clear and not against the public policy they are binding on both the parties. It is a human tendency that he will seek his benefit. Hence a party to a contract will intentionally look for what best suits its interest and will want the language of the contracts to be in favour of them. To achieve this, some parties may use ambiguous or unclear languages in a contract that will lead to being interpreted by another party differently and hence will result in favouring the interest of the party making the clause. Hence, the rule of Contra Proferentem was brought into force to end this unfair means of achieving results.
The word Contra Proferentem has been derived from the Latin word verba chartarum fortius accipiuntur (Contra Proferentem) which means against the offeror or the drafter. This rule is based on the principle that a person behind the framing of such ambiguity is responsible for it. In the case of written documents where there is ambiguity about the meaning or scope of any term that needs to be cleared, only by the party who inserted that clause and not the other party of the contract. In the case of Rutter v. Palmer, 1922, it was held that the party who asks for protection against the liability must prove that the word provided in the contract is clear and describe everything exhaustively.
This rule applies more simply against the person who uses such contracts. Contra Proferentem rule is a legal doctrine that guides the interpretation of contracts in a legal sense and applies a contract that is challenged in any Court of law. This rule states that any clause that is regarded as ambiguous must be against the party that created, introduced or requested that clause be included in the contract. This rule is designed as a legal punishment for those who intentionally introduced a vague clause in a contract. The intentional introduction of ambiguous clauses in a contract can be for favouring the interests of the parties themselves.
Thus, this rule seeks to mitigate such vagueness to an act and protect an innocent party from such ambiguity and unfairness. In the case of Lee John and Son Grantham Limited v. Railway Executive, 1949, the plaintiff leased a railway warehouse to the defendant. There was a clause in the lease contract that exempted the defendant from any liability that occurred in case of loss or damage to the company. After some time the goods were kept in the warehouse for damage by fire because of the negligence of the defendant. The defendant took the exemption clause from the contract but the court held and applied the Contra proferentem rule in this case and highlighted the words ‘but for tenancy by created’. The clause, therefore, had a wider meaning and it was held by the court that it had to be interpreted against the grantor and hence the defendant was not exempted from their liability. From this case, Lord Morton of Henryton in Canada Steamship Lines Ltd v. The King 1952, laid down:
- If the clauses of the contract contain any language that expressly exempts the person from any kind of liability the effect must be given to that provision.
- If there is no expressed reference to the exemption, the court must use the meaning of the clause in the wider sense and if any doubt arises as to the clauses of the contract, it must be resolved by the party introducing it.
- If the contract language is made in a wider sense and general sense, then the court must consider the situation widely and announce the judgement carefully.
In any case, where the language of the contract is ambiguous, the interpretation must be done in the least favourable way to the party which relies on it. Like in the case of Houghton v. Trafalgar Insurance, 1954, there was an accident that carried 6 people in a 5 seater car. The insurance policy of the driver exempted the insurance from any liability that arises out of the damage while the car carries any person above the specified limit. Thus it was held that the clause did not protect the insurers. It was restricted in cases where the car was carrying an excessive load and not the case where it extended to carrying excessive passengers.
When does the Contra Proferentem rule apply
There are various steps to determine whether this rule will be applied to a particular contract or not. The first step can be to determine the language of the contract whether any particular clause is ambiguous to create uncertainty. If it does, then the court will have to determine the intention of the party who drafted such a clause when it was entered into. If the nature of the contract is not found to be unambiguous, then the rule applies and the court will decide its judgment in favour of the innocent. This rule requires the decision of the court to change the interpretation of the contract that has ambiguity.
Examples of the rule
Contra Proferentem rule is a contract between two parties that tends to change a clause in a contract that has an ambiguous nature after the decision of the court. Insurance industries are the examples to it that can file complaints in the court if it finds a contract to be of such a nature.
Need for this rule
In today’s world of commercial transactions, this concept of Contra Proferentem has made the small firms incorporate their terms in a contract with corporate giants. The need for interpreting the language of the contract arises in two situations:
- First, when the arbitrator or the judge feels that there exists a gap that needs to be filled, to properly interpret the contract.
- Second, when it is believed, there lies an ambiguity that needs to be resolved to find the intention behind making the contract.
Thus, the doctrine of Contra Proferentem applies when the intention to contract is needed to be found out.
- In the case of Transmission Corporation of Andhra Pradesh Limited v. GMR Vemagiri Power Generation Limited 2018, it was held by the Supreme Court that the form of the contract can both be expressed or implied but when it comes to the ultimate analysis of the construction of contract and interpretation of the meaning of the contract, certain surrounding factors must be taken into consideration and in case of any ambiguous factor, it would be better to take into account all the surrounding facts and circumstances and then conclude as to who should be held liable for the interpretation of unambiguous terms must be decided.
- 5 point test- In the case of Nabha Power limited NPL v. Punjab State Power Corporation Limited 2017, the Supreme Court held that only when the five conditions laid down in BP Refinery Proprietary Limited v. The President Counselors and Weight Pairs of Hastings is satisfied then the principle of business efficiency should be applied:
- The terms reasonable and equitable must be implied.
- There must be a necessity to give business efficacy to the contract.
- The implied item must be so obvious that it goes without saying.
- It must be clear.
- There must not be any contradiction.
- In the case of Industrial Promotion and Investment Corporation of Odisha Ltd v. New India Assurance Company Limited 2016, it was held by the Honourable Supreme Court that there are chances of ambiguities in most of the contract and the other party must make all the terms of the contract clear before coming into the contract. However, there is the saying that nothing is easier than explaining oneself in simpler terms. But there arise chances of ambiguity and unfairness.
- In the case of Life Insurance Corporation of India v. itself policy plus services private limited and others 2015, the Honourable Supreme Court discussed the principles of Contra Proferentem and said that when the word of a contract is clear or ambiguous and plain, this rule cannot be applied.
- In the case of United India Insurance Company Limited v. Orient Traders Private Limited 2016, it was held that in the absence of ambiguity, the rule of Contra Proferentem cannot be applied and the party cannot speak undue advantage of the rule.
- In the case of Bank of India v. K Mohandas, the fact in issue was a prospective interpretation of some of the clauses of the voluntary retirement scheme of 2000 Banks, where the judge announced that it was the bank who stated the terms of the contractual scheme, therefore, the bank has to bear the risk of the lack of clarity. The judge further announced that in these types of cases, the interpretation of the clauses is usually against the person who made it.
Nothing is easier than expressing oneself in a plain and simple language and if this is not done and various ambiguous terms are used to express oneself in a contract or anywhere then the intention behind using such terms is unfair and not according to the provisions of law. Thus providing for the rule of the contract of Proferentem helps to avoid such circumstances and protects any unfairness of the other party or avoid any kind of dispute that arises out of such contracts. By the principles of Contra Proferentem, it was held that there were so many commercial disputes and also served as a language to provide a clear interpretation of certain terms in the contract to the other party. The contractual interpretation rule of Contra Proferentem is therefore of utmost importance today and it should never be forgotten. The main thing to take down from this rule is to make sure that the contracts in the business are clear and free from any kind of ambiguities.
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