(This guest post is co-authored by Rahul Kumar and Aditya Singh. Rahul is an advocate at Sarvada and Aditya is a third-year law student at RML-NLU. This post was edited by Devansh Pandit)

The doctrine of Verba Chartarum Fortius Accipiuntur Contra Proferentum (“Contra Proferentem”) is a legal principle used in the interpretation of contracts and other legal documents. It states that if there is an ambiguity in the language of a contract or legal document, any uncertainty or ambiguity should be interpreted against the party who drafted the document.

In other words, if there are different interpretations of a term or provision in a contract, the interpretation that is most favourable to the party who did not draft the contract should be preferred. This is because the party who drafted the contract is typically in a better position to clarify any ambiguities and should have done so at the time the contract was written. The doctrine of contra proferentem is particularly relevant in situations where the parties to a contract have unequal bargaining power. For example, if a consumer signs a standard form contract with a large corporation, the consumer may not have had the opportunity to negotiate the terms of the contract.

In the recent case of Flowmore Ltd v Skipper Ltd, the Delhi High Court relied upon the doctrine of Contra Proferentem to validate the award passed by the arbitrator, stating that if the contract itself is being used to determine the dispute, then the ambiguous terms of the contract must be interpreted against the party which has drafted it.

This post aims to show why the mainstream adoption of such a doctrine is a welcome step in the field of arbitration and how it can become a vital tool to help protect the underdogs in such legal proceedings.

Background

The parties were engaged in business for three months before the contract was prematurely ended by the petitioner on the ground of alleged delays and breach of contractual duties on the part of the Respondent. The Respondent initiated arbitration proceedings against the Petitioner, as a result of which, an award was passed in favour of the Respondent.

It was held by the sole arbitrator that in places where it is possible to have multiple interpretations of any particular term in the contract, the interpretation that is favourable to the Respondent is to be followed. Aggrieved by this line of reasoning and alleging that the arbitrator had not correctly interpreted the evidence while delivering the award, the Petitioner filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).

The Delhi High Court, while upholding the award, stated that “patent illegality” is an illegality that goes to the core of the case. This means that it does not include an arbitral tribunal incorrectly applying the law and therefore would not merit the court from re-evaluating the facts. The court further went on to hold that the award was well-reasoned, with the conclusions being founded explicitly on the basis of all the papers and evidence on file. As a result, the Petitioner’s claim of “patent illegality” was rejected.

Indian position on Contra Proferentum

The Supreme Court’s decision in Bank of India v K. Mohan Das is a landmark in India’s judicial interpretation of the Contra Proferentem rule in India. Justice Lodha remarked at para 32 that “…[i]t is a well-known principle of construction of the contract that if the terms applied by one party are unclear, an interpretation against that party is preferred.” Since the bank drafted the contract, the Supreme Court held that it bore all the risks arising out of lack of clarity in the contract.

The Supreme Court, however, explained that the rule does not apply in commercial contracts, which contracts should be interpreted in the strictest way possible. This is because parties to a commercial contract, courts assume, have reasonable knowledge of contracts and law; they have equal bargaining power and, as such, there is no clear ‘weaker/smaller party’.

The Supreme Court extended the aforesaid exception to insurance disputes in Vikram Greentech (I) Ltd. & Anr. v.  New India Assurance Co. Ltd. The Apex Court observed that “…The endeavour of the court must always be to interpret the words in which the contract is expressed by the parties. The court, while construing the terms of policy is not expected to venture into extra liberalism that may result in re-writing the contract or substituting the terms which were not intended by the parties.”

Accordingly, the Supreme Court held that an insurance contract is a species of commercial transactions and must be construed like any other contract to its own terms and by itself.

International scenario

Contra proferentem has an interesting history in English Courts, to say the least. In Canada Steamship Lines v The King, the privy council noted that where the contract expressly includes an exemption, exclusion, or indemnity clause, courts should interpret the clause against the party benefitting from the exemption clause. Popularly known as the Canada Steamship test, Lord Morton of Henryton laid down a 3-point test to determine the liability of the party benefitting from the exclusion clause:

“(1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called the `the proferens’) from the consequences of his own servants, effect must be given to that provision (2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens (3) If the words used are wide enough for the above purpose, the court must then consider whether `the head of damage may be based on some ground other than negligence.”

The Indian Supreme Court further adds to this by holding that no arbitrator is barred from applying Contra Proferentem when interpreting terms of a contract and that construction of the terms of the agreement is within the jurisdiction of the Arbitral Tribunal and if the view taken is a plausible one, Courts would not interfere and substitute its view in place of the interpretation accepted in the Award.

However, if we look at the modern approach of English Courts, they are very similar to those here, wherein the intent of the parties over an equitable contract is prioritised and courts recognise their knowledge of the risk in commercial contracts. It is through cases like Persimmon Homes Ltd and others v Ove Arup & Partners Ltd and anr,  where the Court of Appeal mentioned that “Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down“;  and Impact Funding v AIG Europe Insurance Ltd that it is clarified that even in cases of removal of exclusion clauses, their interpretations will not defer from the interpretation of any normal clause and Contra Proferentum finds no application.

This substantiates the fact that the role of Contra Proferentem is limited in commercial contracts where parties are of equal bargaining strength.

Application in other fields:

Commercial contracts often involve parties with unequal bargaining power, such as a major industry player versus a smaller, less experienced entity. The major player may have a template contract with vague terms that benefit them, leaving the smaller party with little to no say in the negotiations. In such situations, contra proferentem is a potential tool to help the smaller player.

In the tech industry, consumers are often required to sign agreements which are lengthy and almost always non- negotiable, without fully understanding their terms. Tech companies use complex legal language to protect themselves from potential lawsuits and other legal liabilities, leaving individual consumers with limited options but to accept these terms. This creates an unfair power dynamic that could be remedied by interpreting ambiguous terms in favour of the consumer. This is important given that many consumers do not fully read or understand the terms and conditions they agree to. By interpreting such terms in the consumer’s favour, their interests can be protected, even if they did not have the opportunity to negotiate the terms.

In the insurance industry, contracts are often non-negotiable, leaving the insured with no choice but to accept the terms set by the insurance company. With the pandemic causing an increase in health and life insurance claims, it is necessary for courts to be more sensitive to the needs of the common man and provide assistance through favourable interpretations in the event of a dispute. This ensures that the insured are protected and not taken advantage of by powerful insurance companies.

Adhering to this doctrine also gives courts a clear method for understanding any uncertainty that may exist in a contract. Even if there seems to be a bias in the proceedings, whether in a court or arbitration, the use of this doctrine allows for a sound justification for the potential bias.

Conclusion:

In general, it is preferable for a contract to be interpreted based on its intended terms, as that is likely the most accurate reflection of the parties’ intentions when they entered into the agreement. However, in situations where one party has significantly more bargaining power or expertise than the other, the doctrine of contra proferentem may be employed. This helps to ensure that the smaller party is not unfairly disadvantaged by vague or misleading language in the contract. It is expected that the judicial attitude will be more inclined towards the judgment of Flowmore, along with legislative initiatives which are along the same lines to better protect MSMEs when they are dealing with industrial giants and further strengthen the doctrine of Contra Proferentum.

It is worth noting that the Doctrine of Contra Proferentem is a rule of last resort and should only be applied if other methods of interpreting the contract are unsuccessful. Courts will first attempt to interpret the language of a contract according to its plain meaning, as well as take into account the context and surrounding circumstances. Only if the language is truly ambiguous will such doctrine be used to resolve the ambiguity.