The contra proferentem rule is a Latin term that means “against the offeror” which is a doctrine of contractual interpretation. In case of ambiguity or uncertainty in contracts, Courts will interpret it against the party that drafted or proposed it. This doctrine is often applicable to situations involving contracts where the parties are of unequal bargaining power.
However, this principle has largely fallen away, particularly in relation to commercial contracts made between sophisticated parties. The contra proferentem rule is universally applicable. It states that ambiguous words in an insurance policy will be strictly interpreted against the insurer. In this article, we will discuss the application of the rule in Australia and highlight the importance of the rule.
Application of the Rule in Australia
In Australia, the contra proferentem rule is well-established and is often applicable in contract law disputes. The principle applies in various cases, including insurance, employment, and consumer contracts.
The basis of the rule is the idea that the party in the best position to avoid ambiguity in the contract is the drafting party. Therefore, that party should bear the consequences of any ambiguous provision that arises.
The Contra Proferentem Rule in Insurance Contracts
One of the areas where the rule is applicable in Australia is in insurance contracts. Consider the case of Zurich Australia Insurance Ltd v Metals & Minerals Insurance Pte Ltd. The High Court of Australia held that the rule finds application in reasonable interpretations of insurance contracts.
It is a common law rule that if a question in a proposal for insurance is ambiguous, parties understand it in a way that resolves the ambiguity contra proferentem. This means using a less favourable meaning to the insurer.
In this case, the Court held that any ambiguity in an insurance contract should be resolved in favour of the insured. This is because the insurer was the party that drafted the contract.
What the Contra Proferentem Rule States in Consumer Contracts
The rule also applies to consumer contracts in Australia. Consider the case of Australian Competition and Consumer Commission v Chrisco Hampers Australia Ltd. The Federal Court of Australia held that the rule also finds application in the interpretation of consumer contracts.
Justice Edelman evaluated:
- the contract as a whole,
- the term’s transparency, and
- whether the term created a sizable imbalance in the rights and obligations between Chrisco [the company] and its customers flowing from the agreement before concluding that it was an unfair contract provision.
Here, the Court held that the interpretation of any ambiguous terms in a consumer contract is against the party that drafted the contract, which was the seller in this case.
The design of the rule is to protect consumers who may be at a disadvantage when entering into a contract. If a dispute arises, the contra proferentem rule ensures that the insurance company will be responsible for any ambiguity or confusion in the policy rather than the policyholder. This helps to level the playing field and ensures that consumers do not face any unfair disadvantages in legal disputes.
The Contra Proferentem Rule in Employment Contracts
The rule also applies to employment contracts. In the case of Byrne v Australian Airlines Ltd, the High Court of Australia, the Court held that this rule could apply to the interpretation of employment contracts. Statutes may imply a term in an employment contract, but it is uncommon. However, the Court held that the rule would only apply if the contract was ambiguous and the interpretation could not be resolved by referencing other parts of the contract or by common sense.
The Contra Proferentem Rule in Construction Contracts
The case of Mann v Paterson Constructions Pty Ltd [2019] HCA 32 is a recent example of the rule’s application. In this case, Mr. Mann entered into a building contract with Paterson Constructions Pty Ltd for the construction of a home. The contract contained exclusion clauses stating that the builder would not be liable for any loss or damage suffered by the owner due to any defects or omissions in the construction work.
During the construction process, Mr. Mann noticed that the building work was not up to standard, and there were several defects in the work. He made a claim against the builder for the cost of rectifying the defects. The builder relied on the exclusion clause in the contract stating that it would not be liable for any loss or damage suffered by the owner due to any defects or omissions in the construction work.
The High Court of Australia interpreted the clause against the builder and held that the clause did not apply to the defects in the construction work. As a result, the builder was liable for the cost of rectifying the defects.
Exception to the Rule
While contra proferentem is a well-established principle in Australia, there are some exceptions to the rule.
The Principle of Good Faith
The rule cannot apply in cases where both parties are on equal footing and negotiating in good faith. This principle of good faith means that both parties should act honestly and fairly toward each other throughout the negotiation process.
If both parties intended to negotiate in good faith, then any ambiguity in the contract will be interpreted according to the intentions of the parties and the general purpose of the contract rather than against the party who drafted it.
The exception to the rule has significant implications for contract negotiations and drafting. It means that both parties must be clear and transparent in their negotiations. In addition, there must be a prior resolution of any ambiguities in the contract before parties sign it.
It also means that parties must act in good faith throughout the negotiation process. This is because other parties can use any unfair or dishonest behaviour against them if a dispute arises.
The Importance of Legal Advice
Given the complexities of contractual transactions in Australia, parties must seek legal advice before entering into any contract negotiations. A contract lawyer can help ensure that parties draft the contract. They should draft it in good faith and they can advise on any potential ambiguities or issues.
JB Solicitors has a team of attorneys who can help you avoid any disputes or legal challenges. They can ensure that both parties are happy with the terms of the contract.
Contact us today if you need help with contra proferentem matters in your insurance, consumer, construction, or commercial contract.
