Limitation In The Applicability Of Doctrine Of Contra Proferentem In Commercial Laws Essay.

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Contra proferentem and its Application in Contractual Provisions

Contra poferentum is considered as a statutory principle, which implies if there is ambiguity in any contract, a clause shall be interpreted against the party who puts such clause forward and usually relies on such clause. There are two circumstances, which makes it necessary to construe a contract. Firstly, if the arbitrator or a judge deems it necessary to interpret the contract to amend the ambiguity in the contract or to fill in the lacunae that is present in the contract, it becomes essential to construe such contract. Secondly, if the judge or the arbitrator of is of the opinion that it is essential to resolve the ambiguity in the contract to determine the correct intention of the contract, it becomes a necessity to construe the contract under such circumstances. The Contra poferentum rule is usually applicable in cases where the judge considers there is ambiguity in the contract, which must be resolved to identify the intention of the contract. However, this rule is becoming limited in its applicability in commercial contracts, especially those that are negotiated from both the parties to the contract

The doctrine of contra proferentem is applied under circumstances where there is a doubt regarding the scope or meaning of an exclusion clause and such ambiguity must be resolved against the party who relies upon such exclusion clause. This is because it is not likely that the parties to the contract intend to exclude the remedies that are provided by law under circumstances where the contract was contravened unless it is explicitly stipulated in the contract. According to Hunter (2017), the prerequisite for the applicability of this doctrine of Contra Proferentem is the prevalence of ambiguity as was observed in the Horne Coupar v Velletta & Company 2010 BCSC 483 where the Supreme Court of Columbia held that ambiguity in a contract is the precondition to apply this doctrine. However, after the ambiguity is established, the rule is applied directly.

An exemption or an exclusion clause is considered as a contractual term that restricts the rights or liabilities of the parties to the contract. For instance, a party may incorporate a clause in a contract that such party shall not be held liable for certain type of losses. According to McKendrick (2014) in several common law countries, like Britain, in particular, the courts have  adopted the applicability of the contra proferentem rule under circumstances where the contractual terms excludes or limits the liability of a party to a contract. The applicability of the doctrine in the contract shall modify the term against the party deriving benefits from such exclusion clause. However, under circumstances where the contractual terms is merely restricting the liability instead of excluding the same, the court shall determine whether the intention of the party to limit or exclude the liability has been acknowledged to the other party to the contract.

Exemption or Exclusion Clauses in Contracts

In Monarch Airlines Ltd London Luton Airport, it has been observed that if the contractual terms include language that expressly excludes the person in whose favor the clause is made because of the negligent consequence of the servants, effect must be given to such provision. However, the doctrine shall not apply to situations where defendants are directly liable for negligence. In H/H Casualty and General Insurance Ltd v Chase Manhattan Bank, it was established that while construing an agreement the judges are required to honor the intention of the parties that have signed the contract despite being aware of the exclusion clause. Braun (2016) asserts that although general exclusion for misrepresentation is permitted as general exclusion but fraudulent misrepresentation and non-disclosure cannot be excluded.

The rule of contra proferentem that requires any ambiguity in any indemnity clause or exclusion clause to be resolved against the party who puts the clause forward and relies on the same has been originated from English case Canada Steamship Lines Ltd v The King [1952] AC 192. The rule in this case has been extensively applied as guidelines instead of a strict rule. () states that English court has been adopting a commercial approach to the application of the Canada Steamship rule while construing exemption and indemnity clauses that is excluded from the scope of the Unfair Contract Terms Act 1977. According to McKendrick (2014 ), the rule of contra proferentem was being considered as rarely decisive with respect to the meaning of a commercial contract as was held by the Court of Appeal in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904.

Similarly, in Transocean Drilling UK Ltd v Providence Resources PLC [2016] EWCA Civ 372, it was held that the words used in the contract, the factual and documentary contexts, commercial sense were sufficient to determine the meaning of ant contractual provision. In both the cases of K/S Victoria and Transocean drilling, the Court of Appeal held that the contra proferentem rule has become restricted in its application to construe contractual provisions of commercial contracts that are formed after negotiation between contracting parties having equal bargaining power.

However, in the recent judgment in Persimmon Homes Limited and Others v Ove Arup & Partners Limited and another [2017] EWCA Civ 373, the Court of Appeal suggested that the impact and applicability of the Contra Proferentem rule in commercial contracts should be limited. As per the facts of the case, the plaintiffs initiated damage claims against the defendant Arup, the project consultant of the plaintiffs for failing to identify and report about the additional asbestos at the initial stage. In 2014, the claimants initiated legal proceedings against the defendants for breach of contract, breach of statutory duty and negligence. They further alleged that they overpaid for the site by £2 million and such delayed discovery resulted in additional expenses.  

The Limited Applicability of Contra Proferentem in Commercial Contracts

The defendant argued that it relied on the contractual exemption clause excluding its liability for any claim with respect to the asbestos and limiting its liability for contamination and pollution to £5 million only. The plaintiff further argued that the exemption clause was restricted to the contamination, pollution and asbestos resulted due to the conduct or omission by Arup/defendant and contended that such clause did not exclude negligence. The High Court held that the exclusion clause exempted the defendants from the liability claims contended by the plaintiff. The commercial contracts to which the Unfair Contract Terms Act 1977 is not applicable, parties should be free to apportion risks as they deem fit, which is evident from the exclusion clause incorporated in this case. However, the Court of Appeal agreed with the decision held by the High Court in that the interpretation of limitation or exclusion clauses are construed in the same way as any other exclusion or limitation clause.

According to Justice Stuart-Smith, given the present position of law and the decision held in the cases of K/S Victoria and Transocean drilling, the court is obligated to interpret the limitation or exclusion clauses in accordance to the natural meaning of the language used by the parties and in business common sense like any other contractual provisions. Braun (2016) states that since in the above-mentioned cases, the applicability of the rule of contra proferentem has been limited due to its sporadic decisiveness, the Court of Appeal adopted the similar approach in the Persimmon’s case. There were three essential principles based on which the Court of Appeal rejected Persimmon’s arguments asserting that clauses in dispute excluded liability for asbestos, contamination and pollution resulted due to the conduct/omission of the defendant.

Firstly, the Court of Appeal held that the contra proferentem rule is limited in its application with respect to the commercial contracts that have been formed after negotiation between the parties having equal bargaining power. Secondly, as far as the Canada Steamship guidelines are concerned, they were more relevant to the indemnity clause than to the exemption clauses. Thirdly, exemption clauses are considered part of the contracts for allocating risk in commercial contracts. There was no requirement to approach such contractual provisions with an intention to exclude them from the contract. McKendrick (2014) stated that the judge of the High Court asserted that where the business people that are capable of considering their own interests and in allocating risks agree contractual terms including limitations or exclusions of liability, the court should be slow in distinguishing the contract as non-business type.

From the above discussion, it can be concluded that the decision held in Persimmon Homes’s case establishes the fact that the commercial parties are entitled to exclude or limit liability as a risk-allocation tool. The courts now consider the natural or literal meaning of the words used in the clauses of commercial contracts while construing exclusion clauses. If the wordings used in the clause support more than one meaning, the ‘commerciality’ of the possible interpretations of such clause or the extent to which such words uphold the purpose of the clause should be considered. If there is actual ambiguity in the wordings of such clause, only then the rule of contra proferentem should be applied. This limited applicability of the doctrine fosters the judicial trend of ensuring freedom of contract and determining the commercial intention of the contractual clauses by construing its literal meaning.

Reference list

Braun, E., 2016. The Dutch Method of Dealing with Contradictory Clauses that exist due to the Incorporation of Multiple Sets of Terms and Conditions into a Commercial Contract by One of the Parties.

Canada Steamship Lines Ltd v The King [1952] AC 192

H/H Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6

Horne Coupar v Velletta & Company 2010 BCSC 483

Hunter, H., 2017. Modern Law of Contracts.

K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904

Leib, E.J. and Thel, S., 2014. Contra Proferentem and the Role of the Jury in Contract Interpretation. Temp. L. Rev., 87, p.773.

McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).

Monarch Airlines Ltd London Luton Airport [1997] CLC 698

Persimmon Homes Limited and Others v Ove Arup & Partners Limited and another [2017] EWCA Civ 373

Transocean Drilling UK Ltd v Providence Resources PLC [2016] EWCA Civ 372

Unfair Contract Terms Act 1977