Contributed by Yuvraj Sharma

Introduction

In the intricate realm of contract negotiation and drafting, where parties meticulously craft agreements to safeguard their interest, the resulting documents often carry complex legal language. Unfortunately, the prolonged nature of negotiations can give rise to agreements with ambiguous clauses, setting the stage for diverse interpretations. It is within this backdrop that the “Doctrine of Contra Proferentem” emerges as a crucial legal principle, offering a remedy for the challenges posed by unclear contractual language.

This article takes a comprehensive look at a nuanced understanding of the doctrine, analysing essential principles that are crucial in addressing uncertainties in contracts. It explores the implementation of the “Doctrine of Contra Proferentem” and the rule of harmonious construction, both acting as a guiding principle in unravelling the intricacies of contractual language. The aim is to promote clarity and fairness in contractual relations.

At the heart of our exploration lies the legal principle known as “Verba Chartarum Fortius Accipiuntur Contra Proferentem” or “Contra Proferentem.” this principle dictates that in cases of language ambiguity, interpretation should lean in favour of the party who did not draft the document. In simpler terms, when there are multiple possible interpretations for a term in a contract, the one most favourable to the non-drafting party takes precedence. This becomes especially important in scenarios where there is a significant power imbalance, like when a consumer enters into a standardised contract with a large corporation, where negotiation opportunities for such consumer are limited.

This doctrine gains reals world resonance through the recent case of Flow more Ltd v. Skipper Ltd in the Delhi High Court. This case underscores the significance of Contra Proferentem by upholding an arbitrator’s award and asserting that in disputes determined by the contract, ambiguous terms must be construed against the party responsible for drafting. This article makes a compelling case for the widespread adoption of this doctrine in arbitration, shedding light on its potential as a crucial tool to safeguard the interest of underrepresented parties in legal proceedings.  

Exclusion Clause vis-à-vis Doctrine of Contra Proferentem

An exclusion or exemption clause in a contract limits the liability or rights of the involve parties. Such clauses can reduce liability by specifying that certain types of losses are not covered. In common law countries like Britain, courts may apply the Doctrine of Contra Proferentem if they observe terms aimed at excluding or limiting a party’s liability. This doctrine constricts the term against the party benefiting from the exemption clause. However, when a clause only limits rather than excludes liability, the court assesses whether the intention to limit or exclude liability has been clearly communicated.

Lord Morton provided comprehensive guidelines for excluding “negligent acts” from a contract, emphasising the need for clear language expressly exempting a person from the consequences of negligence by their servants. This principle extends to situations where the defendant is directly liable for negligence, as seen in the Monarch Airlines Ltd. which affirmed that the clause covering “act, omission, neglect, or default” includes negligence.

Judges interpreting agreements prioritize honoring the party’s intentional commitments. In HIH Casualty and General Insurance Ltd the court held that despite a general exclusion for misrepresentation in a ‘truth of statement’ clause, fraudulent misrepresentation and non-disclosure were not exempted, while innocent and negligent misrepresentation and non-disclosure were excluded. This interpretive approach is now applicable to indemnity clauses, exclusion clauses and liquidated damages clauses.

Consumer Shield: Contra Proferentem in Global Agreements

In an era of globalization, major corporation wield significant influenced and resources often leveraging their dominance to shape agreement in their favour, which can limit consumer’s negotiation option. For example, in the telecommunication industry larger companies may impose long term contracts with unfavourable terms on consumers, who may feel compelled to agree due to limited alternative providers in their area.  

In such scenarios, the Doctrine of Contra Proferentem serves as a vital safeguard for consumer rights. This legal principle dictates that any ambiguity or uncertainty in a contract should be interpreted against the party who drafted the contract- in this case the corporation. By holding corporation accountable for any unclear or unfair terms they include in contract, the Doctrine of Contra Proferentem helps to level the playing field and protect consumers from exploitation.

An examination of the judicial trends in insurance law reveals instances where judges have consistently applied Contra Proferentem against insurers. This practice is particularly notable in insurance contracts, often characterized as contracts of adhesion, where one party, typically the insurer, holds a significant advantage in bargaining power. The underlying rationale for this doctrine stems from the recognition that contractual parties may not always be on equal footing with one exerting dominance over the other during the signing process. For instance, in a standard form contract, the typically holds the upper had leaving the other party with minimal or no bargaining power. To safeguard parties from ambiguous clauses in agreements Contra Proferentem dictates that the valid interpretation should favor the party that played no role in inserting such clauses into the agreement.

Moreover, beyond its application in consumer protection, contra proferentem stands as a principle that allocates the cost of losses to the party best equipped to prevent harm. In exploring this doctrine, it is essential to recognise its broader implication not only the realm of contractual disputes but also in shaping a fair and equitable legal landscape for parties with disparate bargaining power.

Tackling Uncertainties: Contra Proferentem in Arbitration Cases and Legal Interpretation

Flow More Ltd. involves parties engaged in business for three months, with the petitioner terminating the contract citing alleged delays and breaches by the respondent. Subsequently, the respondent-initiated arbitration, resulting in an award favoring them. The petitioner, dissatisfied with the arbitrator’s interpretation filed a  Section 34 application but the Delhi High Court upheld the award, dismissing claims on grounds of “patent illegality.”

Examining the Indian position on Contra Proferentem, the Supreme court, in Bank of India v. K. Mohan Das, applied the rule asserting that unclear contract terms are construed against the drafting party. However, this rule is not strictly applied in commercial contracts, assuming equal bargaining power and knowledge. This exception also encompasses insurance disputes treating insurance contracts similarity to other commercial agreements.

On the International front, Canada Steamship Lines Case introduced the Canada Steamship Test, guiding the interpretation of exemption clause against the benefiting party. The Indian Supreme Court permits arbitrator to apply Contra Proferentem, aligning with English courts, which prioritize party intent to equitable contracts. Nevertheless, Contra Proferenteml’s role is confined in commercial contracts where parties share equal bargaining strength.

The significance of Contra Proferentem is underscored in commercial contract marked by unequal negotiating leverage. In such context contra Proferentem functions as a safeguard for smaller entities ensuring their protection.  In the tech industry, where consumers often confront non-negotiable terms, interpreting ambiguous clauses favorably can rectify power imbalances. In the insurance sector, where contracts are typically non-negotiable, courts should exhibit sensitivity to safeguard insured individuals particularly during health crises. Contra Proferentem, as a tool for handling uncertainties in contracts, provides a rationale for potential biases in legal proceedings.

In the tech sector, where non-negotiable agreements are frequently encountered by consumers, construing ambiguous phrases in a way that is advantageous might address power disparities. In the insurance industry, where contracts are usually non-negotiable, courts ought to be sensitive in order to protect insured people, especially in times of medical emergency. Contra Proferentem as a method for addressing ambiguities with contracts, clarifies any biases or discrepancies that may arise during legal proceedings. This principle plays a crucial role in helping courts navigate and resolve disputes regarding the interpretation of contracts, ensuring fairness and transparency in the process.

Conclusion

The purpose of the rule under examination is to safeguard the less powerful party, hence it must be applied carefully and sensibly. When applying this principle, care must be taken to ensure that it is only applied in cases where a contractual provision is interpreted to be vague due to true ambiguity. The parties concerned should also negotiate contracts proactively, avoiding simple claims that the agreements unfairly benefit the side with the most negotiating strength. To prevent future legal issues and avoid unnecessary liabilities, a proactive method entails carefully reviewing the contents of the contract, consulting with experts, and negotiating terms before the contract is executed.

It is emphasized that in order to support the veracity of their viewpoints, the party in charge of drafting the contract should keep a record of all processes and other supporting documentation. By using a consistent rule for contract construction, the counterparty will find it easier to understand and the relationship will be more transparent. When drafting contracts, care is taken to make sure they are clear, concise, and understandable to those without specialized legal expertise.

It is imperative to recognize that contracts must be reviewed and updated on a regular basis due to the ever-changing nature of company and technology. Updates between the parties are alert in adjusting contracts to evolving situations, utilizing creative fixes, and taking unanticipated difficulties that can arise during the contractual partnership into account. The robustness and adaptability of contracts in a changing business environment are enhanced by routinely reviewing and improving their conditions.