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Published : March 08, 2013 | Author : Priyank
Category : Law - lawyers & legal Profession | Total Views : 5890 | Rating :

Priyank Srivastava Lawyer, Public Sector Undertaking, (Energy Sector)

Contra Proferentem

[The evolvement of the said bilateral participation has resulted in several situations that have given invitations to new set of legal battles.]

Contra Proferentem- “My Piece of cake
Onion’ business is the field in which one wants to put his hand on to. Ultimately the end target is to dictate terms in the market and to fetch the maximum benefit. This is the condition of the today’s corporate world, where the corporate giants assessing the situation, dictate their terms for due compliance by the ‘smaller fishes’ in the market.

In the realm of commercial transactions, the concept of ‘Contra Proferentem’ has now made the Corporate giants to endure the small ‘fishes’ to incorporate their terms also in the contractual issues. The said bilateral participation has mitigated the impact of the contentions of the concept of ‘Contra Proferentem.’ Conversely, the said bilateral participation has resulted in several situations that give invitation to new legal battles, one of the situations being that of ‘Conflict of Laws.’

Contra Proferentem is a rule of construction which interprets an ambiguous contract against its drafter. The concept of ‘Contra Proferentem’ was commonly witnessed in the insurance industry. The doctrine was often used to construe the document against an insurer in a dispute with the policyholder on the basis that the policy is a contract of adhesion where the policyholder has little bargaining power in comparison to the insurer.

With the increase in the cross border transactions, it has resulted in the proliferation of disputes, particularly international disputes. In turn the concern for having adequate dispute resolution mechanisms has also raised eyebrows of one and all. The need for harmonized best mechanism has been the topmost concern for the corporate giants.

Acknowledging the fact of increased chances of inception of disputes, the Corporate(s) along with having a say in other terms of the contract have also started eyeing the opportunity of having their ‘Choice of Law,’ so as to safeguard their interest during situations of dispute resolutions. Primarily the said opportunity, given birth, has been allowed to be groomed, because of the attitude of the Courts on commercial disputes, and with the frequent application of the concept of Contra Proferentem while adjudicating disputes.

A recent example of the Court’s application of the said concept was witnessed in IN THE SUPREME COURT OF BRITISH COLUMBIA in the case Horne Coupar v. Velletta & Company, wherein the Court adjudicated in the light of the clear applicability of the concept of ‘Contra Proferentem.’ In coming to this decision the Court used the Contra Proferentem doctrine. Specifically the Court reasoned as follows:

[10] Contra proferentem is a rule of contractual interpretation which provides that an ambiguous term will be construed against the party responsible for its inclusion in the contract. This interpretation will therefore favour the party who did not draft the term presumably because that party is not responsible for the ambiguity therein and should not be made to suffer for it. This rule endeavours to encourage the drafter to be as clear as possible when crafting an agreement upon which the parties will rely. This rule also encourages a party drafting a contract to turn their mind to foreseeable contingencies as failure to do so will result in terms being construed against them. That there is 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.

[11] In my view the Contra Proferentem rule clearly applies in this case.

The fact of the Giant corporate (s) exploiting the weaker section to the extent of dictating their terms behind the curtain of having a ‘standard form of the contract,’ has been frequently witnessed by Courts.

The plea of having ‘standard forms of Contract’ and the position of law i.e. having its genesis from the elements of Contract law, has somewhat weakened the approach of the Courts to protect the interest of the weaker section of the corporate world. In such cases the Courts have found it very difficult to come to the rescue of the weaker party particularly where he has signed the document. Courts have been constrained to hold that the weaker will be bound by the document even if he never acquainted himself with its terms as he has signed the document.

Even with the above position, having a standard form of the contract for the business, has seen a set back from the side of the Courts in various cases, reason being the absence of the element of consensus. The Courts in various cases have pierced the transactions to apply the doctrine of ‘Contra Proferentem.’

In India, Contract law provides for the grounds when a contract can be struck down. Section 23 of the Contract Act provides for agreement which can be declared a void.

23. What consideration and objects are lawful, and what not

The consideration or object of an agreement is lawful, unless -It is forbidden by law; or is of such nature that, if permitted it would defeat the provisions of any law or is fraudulent; of involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

An example of the Court holding that an unfair or an unreasonable contract entered into between parties of unequal bargaining power was void as unconscionable, under Section 23 of the Act, was in the case of Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly before the Hon’ble Supreme Court of India. The findings by the Court in support of the present writing are reproduced herein below:

“…This principle is that the Courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract entered into between parties who are not equal in bargaining power. The above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creating of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however, unfair unreasonable or unconsionable a clause in that contract or form or rules may be. This principle will not apply when the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infrastructural organisations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power…

It has been rightly witnessed and acknowledged that the interest has to be protected of the members of the corporate world entering into transactions with ‘Corporate giants,’ especially those giant organizations taking the plea of having printed and standard version of documents.

At this stage, after subsisting with the expectations of highlighting the existence of the concept of ‘Contra Proferentem’ in today’s corporate façade, it is time to come up with idea of highlighting the evolution of the concept of ‘Conflict of laws’ vis-à-vis ‘Contra Proferentem’ involving two parties from different lands.

To understand the idea of highlighting ‘Contra Proferentem’ as one of the reasons for giving birth to the problem of ‘Conflict of laws,’ it is important to examine and understand the said concepts.

Broadly speaking on the issue, Conflict of law covers three aspects:

(1) Jurisdiction, endeavoring the question of which of the courts will adjudicate the dispute;
(2) Choice of law, endeavoring the question for deciding on the applicability of the substantive law; and
(3) Judgment-recognition, endeavoring for its execution, as rendered in another state.

To understand the intention of the presence of ‘Conflict of laws’ with the concept of ‘Contra Proferentem’ in this write up, the need to acquire a worm’s eye view arises.

The think tank behind the organizations having understood the implication of the doctrine of ‘Contra Proferentem’ started predicting the failure of the practice of having printed version of documents. On predicting the situation, they started inviting organizations to have equal participation during finalization of terms for corporate transactions.

The idea of eliminating the concept of ‘Contra Proferentem’ by virtue of allowing the increase in the bargaining power of the other party resulted in having mixed ideas in and during finalization of contracts pertaining to International transactions. It is a known position that usage of terms/words/concepts may have different interpretations and understanding, and will differ from one land to another.

The problem primarily cropped in when the parties understood their position for having the right of ‘Choice of Law.’ The mismatch between the various terms of the contract as intended by one party and the applicable law for the contract as intended by other party is the end trap.

The aforementioned problem has been a known and a frequent feature these days in International transactions. ‘Conflict of laws’ is bound to happen, due to the reason that the parties mutually exchange terms of the contract, and then one party ends up deciding the applicable law for the contract.

The ambit of intrusion of the problem of ‘Conflict of laws’ in International Transactions is a legal brain child of the concept of ‘Contra Proferentem.’

Problem ensues with the parties forgetting that conformity has to be maintained with regard to the intentions of the parties during incorporating terms of the contract in the light of the applicable law for the contract.

The problem is becoming severe day by day. It is essential that ‘Conflict of laws’ under the umbrella of ‘Contra Proferentem’ is taken up with utmost caution. Caution shall result in curtailing proliferation of litigation.

Words of caution: Accept terms willingly during bargain but in light of the proper and applicable law of the land.
A rule premised on the belief that if a party is able to stipulate terms, or is the party who writes the contract, then implicitly he occupies the stronger position. To redress the imbalance between the parties, contra proferentem holds that the interpretation that favours the other party will be chosen. (http://www.mcgill.ca/maritimelaw/glossaries/conflictlaws/)
# In the Supreme Court of British Columbia
# Horne Coupar v. Velletta & Company,
# 2010 BCSC 483
# 1986 AIR 1571
# Foreign party

Authors contact info - articles The  author can be reached at: priyank.srivastava@legalserviceindia.com

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