CONTRACT LAW 3: Limitation of Contra Proferentem in Commercial Laws

This report provides an in-depth analysis of the doctrine of Contra Proferentem within the framework of contract law, specifically examining its evolving application and limitations in the context of commercial contracts. The report begins by defining Contra Proferentem as a principle where ambiguous contract clauses are interpreted against the party who drafted them. It then explores the circumstances necessitating contract construction, such as resolving ambiguities and determining contractual intent. The core of the report focuses on the doctrine's diminishing relevance in commercial law, particularly in contracts negotiated between parties with equal bargaining power. Through examination of key cases like Persimmon Homes Limited and Others v Ove Arup & Partners Limited, the report highlights how courts are increasingly prioritizing the literal meaning of contract terms and the allocation of risk, thereby restricting the application of Contra Proferentem. The report concludes that the doctrine's limited applicability reflects a judicial trend toward upholding freedom of contract and determining the commercial intent of contractual clauses, emphasizing the importance of clear and unambiguous wording in commercial agreements. The report also references the Unfair Contract Terms Act 1977 and provides a comprehensive list of references.

Running head: CONTRACT LAW
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Limitation in the applicability of Doctrine of Contra proferentem in commercial laws
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

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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.
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.

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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

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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 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.

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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.

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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

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