Contract law: the contra proferentem rule

Before diving into the complexities of the contra proferentum rule, it is worth mentioning the basics as to what constitutes a valid contract.

A contract is legally enforceable only if:

• an agreement has been reached between the parties (offer and acceptance);
• consideration has been given by each party;
• the parties intended the contract to be binding;
• the parties have legal capacity to enter the contract;
• the agreement is certain and complete; and
• the contract complies with all formalities (for example, those prescribed under legislation).

What is contra proferentem?

The contra proferentem rule comes from the Latin maxim “verba chartarum fortius accipiuntur contra proferentem”, meaning that ambiguous words should be construed in the sense in which a prudent and reasonable person on the other side would understand them.

So, when a term of a contract is uncertain or ambiguous, the term is to be construed against the party attempting to rely on it.

This maxim often applies to situations involving standardised contracts or when the parties are of unequal bargaining power. It does not apply to situations where the language at issue is mandated by law (for example, legislatively prescribed words in insurance contracts).

The golden rule

When the courts adjudicate disputes about the meaning of an ambiguous provision, they generally apply the “golden rule”.

The rule requires the court to:

1. determine the primary and natural meaning of the words used in the provision;
2. consider the context of the contract, including its purpose and any background clauses; and
3. modify the meaning, as appropriate, if inconsistencies remain or absurdities arise.

The contra proferentem rule will be considered by the courts as the final resort, when the ambiguity of the provision is so great that it cannot be resolved by applying the golden rule.

It is important to note that the contra proferentem rule is irrelevant to disputes involving ambiguous terms or clauses within legislation.

The contra proferentem rule states that the ambiguity should be interpreted against:

1. the party who prepared the contract; or
2. the party who seeks to rely on the ambiguous provision.

If the court finds that the provision is ambiguous, it will try to determine the intention of the parties at the time the contract was formed. If it determines that the parties did not intend for the provision to be ambiguous, the contract will be applied according to what the evidence suggests.

Ambiguity in contracts

A contract term is considered ambiguous if it is reasonably open to more than one interpretation. This may lead to uncertainty about the contract as a whole and what the parties actually intended.

Generally, an ambiguous contract means that a specific term, definition, phrase or word is unclear. A common example is when a word is not clearly defined, leaving room for different interpretations.

For example, a contract between an Australian company and a company from the United States may have referenced a dollar amount for an Australian insurance contract. The word “dollar” is ambiguous because it can mean either Australian dollars or US dollars. The contra proferentem rule exists to encourage contract drafters to be diligent in ensuring clarity, and avoiding ambiguity, and to carefully consider foreseeable circumstances.

Application of the contra proferentem rule

The contra proferentem rule is most commonly applied in the interpretation of exclusion clauses. In the case of Halford v Price, the High Court was asked to decide an appeal involving a claim for breach of professional duty against a partner in a law firm, as to whether the firm’s insurance policy covered the partner. The insurance contract contained an ambiguous indemnity clause. In dismissing the insurer’s appeal, Fullager J stated:

“The document on which liability depends is involved and obscure and, in my opinion, ambiguous. It is the insurers’ document, prepared and delivered by the insurers. It cannot, I think, be denied that it is fairly susceptible of the construction attributed to it by the respondent, and the case seems to me to be a case par excellence for the application of the contra proferentem maxim. If, when the ambiguity is resolved by the application of that maxim, we miss the real intention of the insurers, they have only themselves to blame.”.

Parol evidence rule

Parties arguing their interpretation of a particular term in a contract must also contend with the effect of the parol evidence rule. This rule limits the evidence that is admissible for identifying and interpreting terms of a written contract.

The parole evidence rule is concerned with the raw material that contracting parties are entitled to put before the courts in interpreting their contract. It imposes two restrictions:

1. it prevents extrinsic evidence from being presented to add to, vary or contradict the terms of the written contract; and
2. it limits the evidence that can be presented to explain the terms of the written contract.

The parol evidence rule may only be used to as an aid to interpret the language and to explain a party’s intention. It cannot be used, however, to add, change or contradict any terms of the original contract agreement.

How Gibbs Wright Litigation Lawyers can help

If you have a contract dispute regarding ambiguous terms that you need assistance with, call Gibbs Wright Litigation Lawyers today. We offer a confidential consultation to discuss your matter.