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As a business owner regularly entering contractual agreements, you must establish each party’s intentions in the contract. Contractual ambiguities can cause disputes and hinder your commercial agreement. If this dispute escalates to litigation, you may resort to a Court interpreting your contract. One such rule of interpretation is the contra proferentem rule. This article will explain the contra proferentem rule and how Australian Courts currently apply it to contract law.
What is the Contra Proferentem Rule?
The contra proferentem rule is a principle Courts apply in construing or interpreting a contract. Contra proferentum is a Latin term which translates to “against the offeror”.
The contra proferentem rule stems from the case of Canada Steamship Lines Ltd v R [1952]. In this case, a party negligently burned a freight shed to the ground and attempted to rely on a clause stating that they had no liability for damage to goods in the shed. Ultimately, the court determined the clause was ambiguous as it did not clearly exclude liability for negligence. Under the contra proferentem rule, it was interpreted against them.
How Does the Contra Proferentem Rule Work?
The contra proferentem rule commonly applies to exclusion clauses. Concerning commercial contracts, exclusion clauses limit or restrict a party’s liability for losses under the contract. Whilst the contra proferentem rule was historically significant, it is now a rule of last resort. Courts are only likely to apply it after exhausting all other avenues. Furthermore, Courts now suggest limiting the use of contra proferentem, especially where the parties have equal bargaining power.
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General Principles of Interpretation
Generally, when interpreting a contract, a court will:
- attempt to give effect to what the parties intended;
- assess the parties’ intention objectively, not subjectively; and
- interpret the meaning of words in a commercial contract by considering what a reasonable business person would understand those words to mean.
Practical Steps to Relying on the Contra Proferentem Rule
For the contra proferentem rule to apply, the court must determine that the words in the contract are ambiguous. Courts generally attempt to give the contract a commercial interpretation where the contract is ambiguous.
As mentioned before, Courts will rarely apply contra proferentem rule. This is because of the growing recognition that parties to a commercial contract, particularly between parties with equal bargaining power, should be free to allocate their risks as they please. There is a general understanding that parties intended to achieve a commercial result. Thus, interpreting against a party simply because they seek to rely on a particular provision may be contrary to the ultimate commercial results.
Key Takeaways
In summary, the contra proferentem rule states that where a contract provision is ambiguous, the court should interpret that provision against the party who seeks to rely on it. This is an old rule of interpretation, which Courts generally do not apply anymore. Courts recognise that by entering a commercial contract, parties likely intended to achieve a commercial outcome and negotiate a commercial position that suits them. The contra proferentem rule only comes into play when a contract is ambiguous. Ideally, you can avoid this by ensuring that your contract clearly sets out each party’s intentions.
If you need help drafting a contract that clearly sets out each party’s intentions, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The contra proferentem rule states that an ambiguous provision in a commercial contract should be interpreted against the party who sought to include the provision in the contract.
The contra proferentem rule has limited applicability in modern courts as it is used only as a rule of last resort. Courts recognise that parties to a commercial contract should be free to allocate their risks and liabilities and therefore tend to give greater weight to the natural meaning of the words used when interpreting a contract.
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