Introduction

The terms of contracts would be concise and unambiguous in an ideal world. But it is understandable that ambiguity in contracts regarding the interpretation or intended meaning of a term frequently results in disputes. while the number of business transactions is growing The amount of risk involved in each transaction also rises , making the business transaction scenario a very careful affair. A person can be a wise business man if he sets out the contract wording, terms and conditions clearly and concisely and complies with the relevant rules, regulations and laws. To avoid any kind of ambiguity, it’s important to include all foreseeable contingencies and how to deal with them. But occasionally, despite taking every precaution to avoid them, certain terms in a contract can still be read in different ways depending on the circumstances. so the Conflict can arises between the parties when such terms tend to affect the contract. so The Contra Proferentem rule was one of the rules that the courts had to put into place in order to break these conﬂicts.

The contra proferentem rule is a principle of contract law that holds that any provision that is thought to be ambiguous should be interpreted against the interests of the party who proposed the provision or asked for its inclusion. When a contract is argued in court, the contra proferentem rule is applied as a guide to determine how the law should interpret the agreement.

The fundamentals of what constitutes a valid contract should be discussed before delving into the complexities of the contra proferentem rule.

A contract is only uphold able in court if:

The parties have reached an agreement (offer and acceptance);
consideration has been given by each party;
the parties intended the agreement to be binding;
the parties are of legal age to enter the agreement;
the agreement is certain and comprehensive; and
the contract complies with all formalities (for example, those prescribed under legislation).

The Contra Proferentem Rule Explained

Contracts can be complex documents created after long periods of protracted negotiations. Each party to the contract will want the contract language to be favourable to them because they are each ostensibly looking out for their own best interests. This could lead to situations where the language of the contract is ambiguous or unclear, causing one party to interpret it differently than the other. This rule is an arrangement between two parties with comparable bargaining power, though occasionally one party’s bargaining power may be greater than the other. The dominating party will be able to take advantage of the other party and craft the contract in a way that serves his or her best interests, which is when this rule comes to the rescue. Even if this occurs, it does not imply that the weaker party won’t carefully read the contract. Even if a contract’s terms are unjust, as long as they are clear, legal, and not against public policy, both parties must abide by them. Humans have a tendency to seek his benefit. Therefore, a party to a contract will consciously consider what will serve it best and will want the contract’s language to be favourable to them. To accomplish this, some parties may apply ambiguous or vague language in a contract, which will cause it to be interpreted by a third party differently and, as a result, favour the interests of the party who created the clause. Therefore, the Contra Proferentem rule was implemented in order to put an end to this unethical method of obtaining results.

the source of the English word “Contra Proferentem.” Is the Latin phrase verba chartarum fortius accipiuntur (Contra Proferentem), which means “against the offeror or drafter,” This rule is based on the idea that whoever created the ambiguity is accountable for it. Only the party who inserted the clause, not the other party to the contract, needs to clarify any ambiguities regarding the meaning or scope of any term in written documents. In the 1922 case of Rutter v. Palmer, it was decided that the party seeking protection from liability must demonstrate that the terms of the contract are explicit and fully describe everything.

This rule basically applies against the person who uses such ambiguous clause. The contra proferentem rule governs how contracts should be interpreted legally and is applicable to any contract that is being argued in a court of law. This rule states that the party who drafted, proposed, or requested the inclusion of an ambiguous clause in the contract must be held liable. This law is intended to punish those who knowingly included an ambiguous clause in a contract. The purposeful inclusion of ambiguous clauses in a contract may be to favour the parties’ own interests. So, this rule basically aims to reduce ambiguity and guard a victim from unfairness and uncertainty.

In the case of Lee John and Son Grantham Limited v. Railway Executive, 1949, [1]

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 and the goods were damaged 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:[2]

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.

Situations where the Contra Proferentem Rule is applicable

When reviewing a contract, courts follow a multi-step process to determine whether the contra proferentem rule is applicable. first court Review the contract’s language in order to ascertain whether a clause is sufficiently ambiguous to raise doubt or not. Then The court will make an effort to ascertain the intentions of the drafting party when the party was entered into the contract. and if the drafting party was unable to provide enough evidence that dose not resolve the ambiguity of the contract language. then the rule of Contra proferentem is used, and the court rules against the party who drafted or proposed the clause to be included and in favour of the innocent, unknowing party,

Ambiguity in contracts

If a clause in a contract could reasonably be interpreted in more than one way, it is said to be ambiguous. This might raise questions about the agreement’s overall meaning and the parties’ true intentions. A contract is considered ambiguous when a certain term, definition, phrase, or word is unclear. A casual example is when a word’s definition is ambiguous and open to various interpretations.

EXAMPLE; for an Australian insurance contract, A dollar amount might have been mentioned in a contract between an Australian company and a company from the United States. and the “dollar” can refer to either Australian or US dollars, so it is ambiguous. so The contra proferentem rule is there to encourage those who design contracts to be diligent in making sure there is clarity, avoiding ambiguity, and carefully considering foreseeable circumstances.

Examples of the Contra Proferentem Rule

Any contract can be challenged in court for being in contra proferentem. The insurance sector is one where contra proferentem is frequently disputed. Insurers design and insured parties sign insurance contracts. In most cases, an insurance contract’s terms must be accepted by the policy holders in order obtain insurance coverage. Since the insurer alone typically design insurance contracts, it has considerable power and authority to potentially include ambiguous or vague language that could restrict their obligations for paying an insurance claim. In order to further demand that an insurance company pay their claim, an insured may decide to submit a contra proferentem complaint to a court. If the court determines that an insurance clause was purposefully vague or ambiguously written by the insurer to avoid a claim payment, this filing would necessitate court intervention and could result in a pay out by the insurance company.

Case laws

In the case of Transmission Corporation of Andhra Pradesh Limited v. GMR Vemagiri Power Generation Limited 2018, [3]

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,[4] 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: https://blog.ipleaders.in/guide-contra-proferentem-rule/
- 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 [5]

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, [6] 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 Bank of India v. K Mohandas [7] 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.

Conclusion

Nothing is simpler than expressing oneself in plain and simple language, and if this is not done then various ambiguous terms can be used to express oneself in a contract, then the intention behind using such terms is unfair and not in accordance with the provisions of law. Many people who are perfect in framing the contract may put a term which is ambiguous and against the will of the other party and which can exploit the other party,s rights. For the benefit of their own in these kind of situation rule of Contra Proferentem came in picture to save the other party and to save their rights. Thus The rule of the Contra Proferentem assists in preventing such situations, and safeguards against the other party’s unfairness, and helps to prevent any type of dispute that might result from such contracts.

The main lesson to be learned from this rule is to make sure that all business contracts are crystal clear and free from of any kind of ambiguity.