The Supreme Court has ruled that vague and ambigious terms in an Insurance Contract must be first interpreted harmoniously in its entirety and if still unclear, principle of 'contra proferentem' should be applied.
The full-judge bench of Justice U.U. Lalit, Justice S. Ravindra Bhat and Justice P.S. Narasimha observed that obscurity in Insurance Contract cannot go against the insured and allowed appeal against NCDRC's decision wherein insurer succeeded to safeguard its interest.
Brief Facts of the Case
The appellant is an exporter of fish meat and fish oil, whereas the respondent is a government company providing a range of credit risk insurance cover to exporters. The policy purchased by the appellant covered foreign buyer’s failure to pay for goods exported.
On one occassion, when buyer defaulted on payment and claim was filed, the respondent denied the same citing DGFT Guidelines to state that date of ‘despatch / shipment' was not clearly defined. For containerized cargo, the same was to be interpreted as the date of ‘Onboard Bill of Lading’, which in the present case was 13.12.2012, a day prior to the effective date of the Policy, i.e., 14.12.2012. It was therefore reasoned that the appellant was not entitled to the claim amount.
Aggrieved, the appellant approached NCDRC contending deficiency in service.
By the impugned order, NCDRC upheld the rationale of the IRC and rejected the appellant’s contention that in absence of a clearly specified provision in the Policy, it was entitled to the benefit of the rule of verba chartarum fortius accipiuntur contra proferentem.
Submissions and Supreme Court's Analysis
The Counsel for the appellant submitted that the date of ‘Onboard Bill of Lading’ had no application to the present facts, as no Letter of Credit was issued. Further it was contended that in any event, such an interpretation of an unspecified term was contrary to consensus ad idem arrived at by the parties. The unjustness of such an interpretation was compounded by the fact that the appellant was not in a position to negotiate the standard terms of the Policy issued by the respondent, and thus ECGC could not have unilaterally relied on such a definition, she averred.
She further submitted that as the policy was silent on the date of ‘despatch’ or ‘shipment’, an insurance policy being a commercial contract, had to be strictly interpreted in terms of the clauses it contained, which reflected the intentions of the parties, and not secondary sources. In the event that a contract contained an ambiguous term, which could be interpreted in more than one way, the wellrecognized rule of contra proferentem must be made available to the appellant, i.e., it must be interpreted against the drafter of the contract who is deemed to be aware of the consequences of imprecise drafting, she advanced.
Reliance was placed on Rulings such as United India Insurance Co.Ltd. Vs. M/S.Harchand Rai Chandan Lal, 2004 Latest Caselaw 537 SC, LIC of India Vs. Insure Policy Plus Services Pvt. Ltd. & Ors, 2015 Latest Caselaw 843 SC, M/S. Industrial Promotion & Investment Corporation of Orissa Ltd. Vs. New India Assurance Company Ltd. & ANR, 2016 Latest Caselaw 576 SC
The Counsel for the insurer submitted that coverage was denied on a contextual interpretation of the term, including placing reliance on the definition of ‘factory’ under Section 2(m) of the Factories Act, 1948 and under the Law Lexicon, to exclude goods destroyed by fire placed outside the plant premises but within the factory-cum-godown wall. He contended that in absence of an express definition of a term, other relevant laws cannot be ignored. He argued that court could not alter the interpretation of terms of the policy by reading in something which did not exist and cited Export Credit Guarantee Corpn. Of India Ltd. Vs. M/s Garg Sons International, 2013 Latest Caselaw 55 SC
The Court at the outset noted that ECGC, being a government insurance company specifically providing coverage for exports, has to abide by the DGFT Guidelines, including the definitions contained in them and therefore for ‘despatch / shipment’, the date construed was 13.12.2012, which was a day prior to the effective date of the Policy.
Principle of 'Business Common Sense'
Noting that reconciliation of ambiguous terms in commercial contracts has been a contentious issue across jurisdictions, it mentioned UK Supreme Court ruling in Rainy Sky SA v Kookmin Bank which was concerned with the interpretation of refund guarantees given by a ship builder to the buyers, and whether the same was triggered when the ship builder started facing financial difficulties and was subjected to a debt workout procedure. Allowing the appeal, the UK Supreme Court provided the guiding principle for resolution of such ambiguity, keeping the ‘business common sense’ as central.
It had been observed that language used by the parties will often have more than one potential meaning and therefore the court must consider the language used and ascertain what a reasonable person. The court must have regard to all the relevant surrounding circumstances an if there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
Further citing more cases approving the principle, the Court noted that it is a decisive method to construe the ambiguity of a term used in a commercial contract.
In view of the above, the Court opined that the date of loading goods onto the vessel, which commenced one day prior to the effective date of the policy, is not as significant as the date on which the foreign buyer failed to pay for the goods exported, which was well within the coverage period of the Policy. Thus, the claim could not be dismissed simply on such basis, especially given that the date of loading the goods onto the vessel was immaterial to the purpose for which the policy was taken by the appellant.
Rule of contra proferente
The Court noted that it is entrenched in our jurisprudence that an ambiguous term in an insurance contract is to be construed harmoniously by reading the contract in its entirety. If after that, no clarity emerges, then the term must be interpreted in favour of the insured,i.e., against the drafter of the policy. It referred to General Assurance Society Ltd. Vs. Chandumull Jain & ANR, 1966 Latest Caselaw 36 SC, United India Insurance Co. Ltd. Vs. M/S. Pushpalaya Printers, 2004 Latest Caselaw 118 SC, SUSHILABEN INDRAVADAN GANDHI vs. NEW INDIA ASSURANCE COMPANY LIMITED, 2020 Latest Caselaw 311 SC
Evolution of the rule of contra proferentem: Halsbury's Laws of England
“Contra proferentem rule.—Where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application.”
The rule of contra proferentem thus protects the insured from the vagaries of an unfavourable interpretation of an ambiguous term to which it did not agree. The rule assumes special significance in standard form insurance policies, called contract d’ adhesion or boilerplate contracts, in which the insured has little to no countervailing bargaining power, the Court stated.
It thus noted that the above consideration is highlighted in the facts of this case, since the risks that ECGC is mandated to cover is its business, and other insurers rarely foray into the field.
A plain reading of the policy in question demonstrates that it was taken to protect against failure of the foreign buyer in paying the Indian exporter for goods exported. It was not a policy taken to cover in-transit insurance, and the cause of action triggering the claim arose much later, i.e., on 14.02.2013, well within the coverage of the policy, the Court observed citing M/S. Peacock Plywood Pvt. Ltd. Vs. The Oriental Insurance Co. Ltd, 2006 Latest Caselaw 844 SC to stress that while interpreting insurance contracts, the risks sought to be covered must also be kept in mind.
"The term ‘despatch’ -contained in the policy implied ‘completion’ of handing over of possession of the goods to the first carrier (the ship herein), and not the date on which the loading ‘commenced’ – such an interpretation would give rise to an absurdity. On harmoniously construing the documents of this policy, it is the in fact the date on the Bill of Lading, and not the Mate’s Receipt / date of shipment which ought to be considered as the date of ‘despatch / shipment’, for the Bill of Lading is the legal document conferring title and possession of the goods to the carrier."
The Court also dealt with Insurer's contention DGFT Guidelines are enforceable against the present facts and noted that provision 9.12 showing that the date on the Bill of Lading has to be considered as the date of despatch / shipment goes against the claim.
The appeal was allowed and NCDRC's impugned order was set aside.
Case Title: HARIS MARINE PRODUCTS Versus EXPORT CREDIT GUARANTEE CORPORATION (ECGC) LIMITED
Case Details: CIVIL APPEAL NO. 4139/2020; April 25, 2022
Coram: Justice U.U. Lalit, Justice S. Ravindra Bhat and Justice P.S. Narasimha
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