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

The Supreme Court has held that first an ambiguous term in an insurance contract ought to be construed harmoniously by reading it in its entirety and if still vague the rule of contra proferentem must be applied and the term must be interpreted against the drafter of the policy, i.e in favour of the insured.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,...

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

Sohini Chowdhury

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

Sohini Chowdhury

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