The need for interpreting a contract can arise in two situations. Firstly, if the Judge or Arbitrator is of that opinion that “a gap is needed to be filled” in order to interpret the Contract and secondly, if she/he believes that “an ambiguity is needed to be resolved” in order to find the correct intention of the contract. The Doctrine of Contra Proferentem is generally applied by the Judges in the later case where a contract appears ambiguous to them.
With the passage of time, the Judges have started appreciating the significance of this doctrine. This doctrine which has derived its essence from Insurance law, applies in a situation when a provision in the contract can be interpreted in more than one way.2 In that case, the court will prefer the interpretation which is more favorable to the party which has not drafted the agreement. In other words, the Judge will be more oriented towards the interpretation which goes against the party who has inserted the ambiguous or the disputed clause in the agreement.
In this epoch of Globalization, normally the Corporate giants frame their agreement in such way, that the ultimate user or the consumer is left with no choice but to sign it. At that moment, the doctrine of Contra Proferentem is helpful to protect the rights of the Consumers. Sometimes, even in a perfect agreement, an interpretive problem may arise.
If one observes the judicial trend in Insurance law keenly, he/she will notice that in several cases the Judges have applied this doctrine against the insurer. The reason behind is that normally their policy is a contract of adhesion in which the other party is left with hardly any bargaining power, compare to the insurer. The justification for this doctrine is that many a times, the parties to a contract do not stand at the same level while signing it, and it has been noticed that usually one party dominates on the other. For example, in Standard form contract, the party framing the contract is the one at higher footing and the other party has very less or no bargaining power at all. Thus, to save such parties from the abuse of such clauses in the agreement which may be interpreted both ways, the valid interpretation is taken to be the one which favors the one who had no part in inserting such clauses in the agreement.
Contra- Proferentem places the cost of losses on the party who was in the best position to avoid the harm.
AMBIGOUS CONTRACT TERMS
The precondition for the applicability of this Doctrine is the existence of ambiguity. In a recent celebrated case of Horne Coupar v. Velletta & Company3, the Supreme Court of British Columbia observed that ambiguity in the contract is a requisite of the application of this rule, however, once ambiguity is established, the rule is fairly straightforward in application.4
Similarly in India, the Judges have adopted a similar line of reasoning in the cases involving ambiguous contract. In Bank of India vs. K. Mohan Das5 where the question arose with respect to the interpretation of some of the provisions of the voluntary retirement scheme of 2000 of the appellant bank, Judge Lodhia opined that as it was the bank who ultimately formulated the terms in the Contractual Scheme which stated “the optees of voluntary retirement under that Scheme will be eligible to pension under the Pension Regulation, 1995,”therefore, they bear the risk of lack of clarity, if any.6 He further said that in these kind of cases the interpretation against the party is preferred who have drafted the policy or agreement.
COMMON LAW DEVELOPMENT OF THE DOCTRINE AGAINST THE EXCLUSION OF LIABILITY CLAUSES
An exclusion clause or exemption clause is a term in a contract which restricts the liability or rights of the parties to the contract. There are several ways in which a party may curb or reduce its liability in a contract. For example, a party can insert a clause under which for certain types of losses, the party will not be liable to pay.
Likewise, in many common law countries, particularly in Britain, the courts have taken a similar stand whereby if the court notices that the terms are framed in such a way to exclude or limit a party’s liability, then the court will use the Doctrine of Contra Proferentem and construct the term against the party which is getting benefitted from the exemption clause.7 But it is important to keep a fact at the back of one’s mind while dealing with the exemption clause and that is, the court do not go through similar rigorous exercise, where the clause merely limits (instead of excluding) liability. At this juncture, the Court will look into whether the intention of the party is to exclude or limit liability has been appropriately explained to the other party or not.
Lord Morton laid down very comprehensive guideline which is to be followed by the parties if they wish to exclude the ‘negligent act’ from the contract. He said “if the clause contains language which expressly exempts the person in whose favor it is made from the consequence from the negligence of his own servants, effect must be given to that provision.”8 Although, the approach is stated in terms of excluding liability of the acts of the defendant’s servant, but will equally apply to the situation where the defendants is directly liable for negligence.
Borrowing from the same line of reasoning, it was held in Monarch Airlines Ltd. London Luton Airport9 that the clause “act, omission neglect or default” will undoubtedly include the act of negligence.
The most important task of the Judges while interpreting the agreement is to honor the intention of the parties who have knowingly signed the contract. Based on this statement, the court in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank10 established that even though the agreement had general exclusion for misrepresentation in ‘truth of statement’ clause but still fraudulent misrepresentation and non disclosure cannot be done. Only the innocent and negligent misrepresentation and non disclosure were excluded effectively.
Now this doctrine will be applicable even in the cases of indemnity clause, exclusion clause and liquidated damages clause.11