[The Viewpoint] Contra proferentem and insurance contracts

It is a rule of interpretation that contracts are to be interpreted based on their plain meaning, as a whole and in accordance with the language used. It is also a settled principle that in case of any ambiguity, a contract will have to be interpreted taking into consideration the surrounding facts and circumstances.

However, where there are ambiguities, especially in cases of insurance contracts, the principle of contra proferentem steps in to aid the interpretation, as reiterated by the Supreme Court in its recent decision rendered on April 25 in Haris Marine Products v. Export Credit Guarantee Corporation Limited.

Jurisprudence on contra proferentem and ambiguity

Before delving into the decision, it is imperative to examine the principle of contra proferentem. It is etymologically traceable to the maxim verba chartarum fortius accipiuntur contra proferentem, which means the words of deeds are to be taken most strongly against he who uses them.

It is also relevant to refer to its meaning as contained in Halsbury’s Laws of England which defines the contra proferentem rule as,

“Where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application.”

As to what amounts to “ambiguity” is clarified in P Ramanatha Aiyar’s Advanced Law Lexicon, which defines the term “ambiguous” as doubtful or uncertain, particularly in respect of signification; equivocal; indeterminate; indefinite; unsettled; indistinct.

Therefore, but for the contractual terms which fall under the above classes of ambiguousness in insurance contracts, the principle has no application. Industry practice indicates that insurance contracts are generally standard form contracts containing certain clauses which many a time are not defined either in the policy or through interpretation even vide judicial precedents.

Such clauses therefore may not be equipped to handle peculiar situations that may arise, eventually leading to an unsettled ambiguity. Such ambiguities impinge on the issues of acceptance or non-acceptance of the claims by an insurer. In such cases, to resolve the ambiguity, credence is lent to the doctrine of contra proferentem and ambiguous terms would receive an interpretation favourable to the insured.

Dissecting the Haris Marine Products case

This case arose out of an appeal against an order passed by the National Consumer Disputes Redressal Commission (NCDRC) dismissing a complaint filed by the insured against Export Credit Guarantee Corporation Limited (ECGC) for rejecting the insured’s claim. The issue was whether the NCDRC was correct in placing reliance on guidelines issued by the Directorate General of Foreign Trade (DGFT) to interpret the date of ‘despatch/shipment’ in the Single Buyer Exposure Policy resulting in the consequent denial of the claim. The insured argued for the application of the principle of contra proferentem, as the Policy was silent on what amounted to the date of ‘despatch’ or ‘shipment’. While adopting the DGFT Guidelines, the NCDRC rejected the insured’s contention that in absence of a clearly specified provision in the Policy, it was entitled to the benefit of the rule of contra proferentem.

The Supreme Court applied the principle of contra proferentem and held that the rule assumes special significance in standard form insurance policies, called contract d' adhesion or boilerplate contracts, in which the insured has little to no countervailing bargaining power.

It further clarified that the contra proferentem rule protected the insured from the vagaries of an unfavourable interpretation of an ambiguous term to which it did not agree. The apex court was propelled to allow the insured’s claim along with interest by reading into the objectives of the ECGC - a government company offering the niche service of export credit insurance - and held that denial of the insured’s claim would be contrary to the duties of the ECGC.

Non-applicability of the principle

Contra proferentem is not a principle of universal application. Where the terms of the policy are clear, there will be no occasion to apply the contra proferentem rule. It is useful to refer to the decision rendered in Export Credit Guarantee Corporation of India Ltd. v. Garg Sons International wherein it was held that it is not permissible for the court to substitute the terms of the contract itself, under the garb of construing terms incorporated in the agreement of insurance. It was also held that no exceptions can be made on the ground of equity. Further, the principle must certainly not be extended to the extent of substituting words that were never intended to form a part of the agreement.

The contra proferentem principle does not merit applicability in case of commercial contracts, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon as held in a number of judgments, including in Rashtriya Ispat Nigam Ltd v. Dewan Chand Ram Saran.

Conclusion

Contra proferentem has been a principle which is time-tested and is applied to enable resolution of ambiguities in insurance contracts to the favour of the insured. Though, vide the march of law over time, the application of the principle has been narrowed down by restraining its application to contracts with terms bilaterally agreed, the primary applicability insofar as insurance contracts are concerned remains unchanged. The thumb rule is aptly summarized in the judgment, by holding that an ambiguous term must first be interpreted by reading the entire contract harmoniously and only then the contra proferentem rule may be applied if no clarity emerges.

It is thus imperative to understand that this principle does not tend to be used liberally to interpret every undefined term in a contract. It is imperative to identify and confine its application only to ambiguities that may arise, to prevent an abuse of the principle in the hands of the insured.

Raghavan Ramabadran and Krithika Jaganathan are Executive Partner and Principal Associate respectively at M/s. Lakshmikumaran & Sridharan Attorneys (Chennai).