Rule Of "Contra Proferentem" - Ambiguous Term In Insurance Contracts To Be Interpreted In Favour Of Insured : Supreme Court

A Bench comprising Justices U.U. Lalit, S. Ravindra Bhat and P.S. Narasimha allowed an appeal filed assailing the order of the National Consumer Dispute Redressal Commission, which had held in favour of the insurer. The Apex Court set aside the order and directed the issuer to pay the claim amount of Rs. 2.45 crores along with interest at the rate of 9% p.a.

Considering the fact that the insurer is the only government company offering such niche services, the Bench reckoned -

"It is the only government company offering such niche services, and is exempt from following the Trade Credit Insurance Guidelines periodically revised by the Insurance Regulatory and Development Authority of India. To deny the appellant's claim over an incorrect interpretation of an ambiguous term, that too with delay amounting to only one day, goes against such duties, especially given the fact that the appellant had transacted with the respondent on several previous occasions."

Factual Background

The respondent (insurer) is a Government Company which provided a range of credit risk insurance cover to exporters. One of these exporters was the appellant (insured), which was engaged in the export of fish meat and fish oil. On 13.12.2012, the appellant paid a premium for a policy, which covered foreign buyer's failure to pay for the exported goods. The vessel set sail on 15.12.2012. However, on the Bill of Lading prepared on 19.12.2012, the date of despatch was mentioned as 13.12.2012. Eventually the goods were delivered, but the buyer defaulted in making payment. A claim was filed by the insured, but the insurer rejected the same. Finally on 28.03.2015 it was rejected by the Independent Review Committee ("IRC") on the ground that the date of despatch as construed in terms of DGFT Guidelines was 13.12.2012 and effective date of policy was 14.12.2012. The insured approached the National Consumer Disputes Redressal Commission ("NCDRC") alleging deficiency in service and seeking compensation. The NCDRC affirmed the decision of the IRC upholding its rationale.

Contentions raised by the appellant

Senior Advocate, Ms. Anjana Prakash, appearing on behalf of the appellant submitted that the term 'despatch' as defined in the policy did not clarify the effective date of initiation of the coverage. She argued that in the absence of clear definition, the condition would be interpreted to mean the date on which the vessel set sail i.e. 15.12.2012 and not the date on which loading of the goods started i.e. 13.12.2012. However, she pointed out that as per the definition of 'shipment' in the DGFT Guideline, the relevant date in the instant case would be the date of Bill of Lading or the Date of Mate Receipt, whichever is later. Placing reliance on United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal (2004) 8 SCC 644 and LIC v. Insure Policy Plus Services (P) Ltd. (2016) 2 SCC 507, she argued that the policy being a commercial contract, it ought to have been interpreted only in terms of its own clauses and not based on the Guidelines drafted by a third party. Citing Industrial Promotion And Investment Corporation of Orissa Ltd. v. New India Assurance Co. Ltd. (2016) 15 SCC 315 it was contended that when a policy contains an ambiguous term, then it should be interpreted against the drafter of the contract (contra proferentem).

Contention raised by the respondent

Advocate, Mr. Rajnish Kumar Jha, appearing for the respondent submitted that the DGFT, a statutory body for regulation and promotion of foreign trade had drafted the Guidelines in exercise of power under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992. The insurer being a government company was bound to adhere to the same. He referred to some judgments including Export Credit Guarantee Corporation of India Ltd. v. Garg Sons International (2014) 1 SCC 686 wherein the Apex Court had held that doctrine of contra proferentem does not apply in cases of commercial contract.

Analysis by the Supreme Court

The Court noted that reconciliation of ambiguous terms in commercial contracts was a phenomenon across jurisdiction. It referred to the decision in Rainy Sky SA v. Kookmin Bank (2011) UKSC 50 wherein the United Kingdom Supreme Court was of the view that while interpreting an ambiguous term if two constructions are possible, then the one which is consistent with business common sense ought to be preferred. In Arnold v. Britton (2015) UKSC 36, the UK Supreme Court had set out some broad parameters like ordinary meaning of the clause; overall purpose of the clause, facts in the knowledge of the parties at the time of execution; commercial common sense, to be considered while interpreting a written contract. The Apex Court noted that the UK Supreme Court in Woods v. Capita Insurance (2017) UKCS 24 had observed that while interpreting, the court must consider the contract as a whole.

Applying the principles to the policy, the Court opined that the date of loading goods was of lesser significance than the date on while the foreign buyer defaulted i.e. 14.02.2013, which was squarely covered by the policy. The policy was contemplated to cover the default and not the transit. Therefore, as envisaged in Peacock Plywood (P) Ltd. v. Oriental Insurance Co. Ltd. (2006) 12 SCC 673, the Court noted that the reason for entering into the insurance contract and the risk it seeks to cover must be considered on its own terms and the policy ought to be construed in its entirety.

Referring to the Constitution Bench judgment in General Assurance Society Ltd. v. Chandumull Jain (1966) 3 SCR 500, the Court noted -

"It is entrenched in our jurisprudence that an ambiguous term in an insurance contract is to be construed harmoniously by reading the contract in its entirety. If after that, no clarity emerges, then the term must be interpreted in favour of the insured, i.e., against the drafter of the policy."

The rule of contra proferentem, which protects the insured from the 'unfavourable interpretation of an ambiguous term to which it did not agree', found favour with the Apex Court in United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694. The rule plays a significant role in cases of boilerplate contracts where the insured has negligible bargaining power.

In Sushilaben Indravadan Gandhi v. New India Assurance Company Limited (2021) 7 SCC 151, the Apex Court had held that -

"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."

Harmoniously construing the policy documents, the Court opined that the reliance on DGFT Guidelines was not good in law. However, it noted that even if reliance was placed on the Guidelines, the date on the Bill of Lading had to be considered as date of despatch and therefore, would not favour the case of the insurer.

Case Name: Haris Marine Products v. Export Credit Guarantee Corporation (ECGC) Limited

Citation: 2022 LiveLaw (SC) 432

Case No. and Date: Civil Appeal No. 4139 of 2020 | 25 April 2022

Corum: Justices U.U. Lalit, S. Ravindra Bhat and P.S. Narasimha

Rule of Contra proferentem - The rule of contra proferentem thus protects the insured from the vagaries of an unfavourable interpretation of an ambiguous term to which it did not agree - 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.

Interpreting ambiguous terms in an insurance contract - first harmoniously by reading the contract in its entirety - if still vague then the term must be interpreted in favour of the insured, i.e., against the drafter of the policy.

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