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Interpretation Of Contract Vis-À-Vis Contra Proferentem Rule

The judiciary in the recent time is observing a thorough transformation because of diversified civil matters coming up. Be it the establishment of specific tribunals and quasi-judicial bodies such as National Company Law Tribunal or development of different other dispute resolution mechanism such as arbitration. One thing that remain constant for such judicial and quasi-judicial bodies while dealing with civil matters is interpretation of agreements along with interpreting statues.

Much have been written and umpteen rules and doctrines thereof have been evolved on the topic concerning interpretation of statutes. However, the law till date still remains silent and unsettled on the question regarding the interpretation of the agreements between the private parties which needs immediate attention.

Statutes versus Agreement

Whenever the issue concerning the jurisprudence of interpretation arises, be it of agreements or statues, courts fall back to certain basic rules such as determination and enforcement of the party’s intent[1] or legislature’s intention. But unlike the statutory interpretation where the judiciary has set forth means like Golden rule, Mischief rule and Literal rule of interpretation to derive at the intention of the legislature, no such means or rules have been laid down in cases of interpretation of agreements which creates a vacuum in the law.

It must be noted that the agreements are no different from Statutes in the sense that similar to the statutes, agreements are also drafted by a human being who are committed to make mistakes which may lead to drafting errors.[2] Apart from this the draftsmen can never be fully capable to forecast every future situations which may lead to certain ambiguity and vagueness in the agreement requiring adequate interpretation.[3] Moreover, just like the statutes, agreements are also affected by the dynamic facet of the language. Meaning thereby the change in the language leads certain void in the agreement. Therefore, it becomes important to ponder upon the rules of interpretation of agreements.

The Bombay High Court in Mumbai Metropolitan Region Development Authority v. Unity Infraproject Ltd.,[4] tried to analyzed such interpretation from the perspective of four principles which it laid down as following (i) Giving effect to the intention of the parties as found in the words they use; (ii) Repugnancy of an exclusion clause; (iii) The Contra Proferentem Rule; and (iv) Standard form and exclusion clauses.

Contra Proferentem Rule

Out of the four principles mentioned above, it is the rule of contra proferentem which concerns us the most as it remains highly unsettled as different courts have laid down different opinions on the extend and applicability of this rule.

Contra proferentem rule states that in situations whenever ambiguity arises in any provisions of the agreement, it has to be construed more forcibly against the party putting forth the document, and in favour of the other party.[5] Article 4.6 of the UNIDROIT enshrines this as “if contract terms supplied by one party are unclear, an interpretation against that party is preferred.”

This approach to interpreting an agreement is answer to the question that while enforcing the intention of the parties, which party’s intention should be given preference to.[6] As observed by the hon’ble Supreme Court in Bank of India and Ors. v. K. Mohandas and Ors.[7], in India, this principle have been exhaustively applied in the insurance cases in favour of the insured since the agreement is wholly drafted by the insurance company giving no opportunity to the other party to negotiate.[8] Fundamental position is that, it is the banks who are responsible for formulation of the terms in the contractual scheme therefore they should bear the risk of lack of clarity, if any and interpretation against that party should be preferred.

Differences in Approach on Commercial Contract Cases

The dispute arises on the question of application of the doctrine of contra proferentem in the commercial contracts where even if one party drafts the contract, other party has the liberty to negotiate the terms of the contract. This liberty is not merely a right of the other contracting party but it also becomes their duty failing to which court cannot grant any relief since the person sleeping over their rights cannot later claim damages. Therefore, Principle of contra proferentem seems applicable only where the aggrieved person did not have bargaining power and/or legal assistance while entering into such agreement.[9] It is therefore courts in India have unequivocally held that the contra proferentem doctrine must not be applied in the field of commercial contracts.[10]

However, in KSL & Industries Ltd. v. National Textiles Corporation Ltd.[11] where the petitioner was awarded the contract to form a joint venture for reviving several textile mills through invitation of bids. Later the ambiguity arose on interpretation of certain clauses of the agreement and the court inter alia observed that interpretation would preferably be made against the respondent, as the contract was drafted by the respondent in the standard form and the doctrine of contra proferentem would be applicable.

Also, in National Highways Authority of India v. HCC Ltd.[12], NHAI invited bids for construction of road for which respondent was successfully awarded the contract. However, there was delay in the completion of the awarded work. NHAI raised challenge in relation to recovery of uncovered compensation for the delay on the ground of applicability of Clause 70 of the contract agreement. The court observed here that ambiguity exists in clause 70.2 and the doctrine of the contra proferentem is applicable against the petitioner.

These two cases are the fine example of how the court did not hesitate in applying this rule in the commercial contracts which forms precedence and let other cases of similar nature a pathway to escape their duty and liability. This gives rise to the grey area field of interpretation of contracts with respect to contra proferentem rule.

No doubt that it has always been the case that the court must construe a written agreement in the light of the surrounding circumstances in which it has been undertaken by the parties.[13] This is the basic principle that allows the court to apply the rule of contra proferentem. But in commercial contracts such cannot be the case since it is the duty as well as responsibility of both the parties to execute the contract with open eyes. Thus, application of contra proferentem in such cases cannot be justified on that ground that one party had no choice than to sign the agreement and allowing them beneficial or advantageous position.

It is the most fundamental principle of interpretation is that any rules of construction must be applied consistently and uniformly.[14] Therefore the court must settle the differences in opinion on the scope and extent of application of the contra proferentem rule of interpretation.

  1. Networktwo Comm. v. Spring Valley Marketing, 372 F.3d 842.
  2. Kirkbi v. Ritvik Holdings, [2005] 3 SCR 302.
  3. CCH v. Law Society of Upper Canada, [2004] 1 S.C.R. 339.
  4. 2008 (5) BomCR 196.
  5. Ghaziabad Development Authority v. Union of India, AIR 2000 SC 2003
  6. Halsbury's Law of England (4th Ed.), at P. 567.
  7. (2009) 5 SCC 313.
  8. LIC of India v. Insure Policy Plus Services Pvt. Ltd. and Ors., AIR 2016 SC 182.
  9. Gujarat Urja Vikas Nigam Limited and Ors. v. Tata Motors Limited, (2013) SCC 818 ¶29.
  10. Bank of India v. K. Mohan Das, (2009) 5 SCC 313.
  11. 2012 (3) ArbLR 470 (Delhi).
  12. 211 (2014) DLT 656.
  13. Reliance Industries Limited v. Reliance Natural Resources Limited, (2010) 7 SCC 1.
  14. Ibid.

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