The Supreme Court ruled that first, an ambiguous clause in an insurance contract must be interpreted harmoniously by reading it in its entirety and if it is still vague, the rule of against proferent must be applied and the term must be construed against the writer of the policy, that is, in favor of the insured.
A bench comprising Judges UU Lalit, S. Ravindra Bhat and PS Narasimha allowed an appeal lodged against the order of the National Commission for the Redress of Consumer Disputes, which had ruled in favor of the insurer. The Apex Court quashed the order and ordered the issuer to pay the claim amount of Rs. 2.45 crores with interest at the rate of 9% per annum
Considering the fact that the insurer is the only public company offering such niche services, the bench estimated –
“It is the only government-owned company offering such niche services and it is exempt from following the trade credit insurance guidelines periodically revised by the Insurance Regulatory and Development Authority of India. To dismiss the claim of the appellant concerning an incorrect interpretation of an ambiguous term, also with a delay of only one day, goes against such obligations, especially since the appellant had already transacted with the respondent on several occasions .”
The defendant (insurer) is a public company that provided a range of credit risk insurance coverage to exporters. One of these exporters was the appellant (insured), which exported fish meat and fish oil. On 13.12.2012, the appellant paid a premium for a policy which covered the foreign buyer’s non-payment for the exported goods. The ship set sail on 15.12.2012. However, on the bill of lading drawn up on 19.12.2012, the date of shipment was 13.12.2012. Eventually the goods were delivered, but the buyer failed to make payment. A claim was filed by the insured, but the insurer rejected it. Finally, on 28.03.2015, it was rejected by the Independent Review Committee (“IRC”) on the grounds that the date of dispatch as interpreted in terms of the DGFT guidelines was 13.12.2012 and the date of Effective date of the policy was 14.12.2012. The insured went to the National Consumer Dispute Resolution Commission (“NCDRC”) alleging a lack of service and seeking compensation. The NCDRC upheld the IRC’s decision confirming its rationale.
Grounds raised by the appellant
Lead Attorney, Ms. Anjana Prakash, appearing on behalf of the Appellant, argued that the term “shipment” as defined in the policy did not clarify the effective effective date of coverage. She argued that in the absence of a clear definition, the condition would be interpreted to mean the date the vessel set sail, i.e. 15.12.2012, and not the date loading of the goods started, at know on 13.12.2012. However, she pointed out that, in accordance with the definition of “shipment” in the DGFT directive, the relevant date in this case would be the date of the bill of lading or the date of receipt of the companion, whichever is later. To trust somebody United India Insurance Co. Ltd. against Harchand Rai Chandan Lal (2004) 8 SCC 644 and LIC c. Insure Policy Plus Services (P) Ltd. (2016) 2 SCC 507, she argued that since the policy was a commercial contract, it should have been interpreted solely on the basis of its own terms and not on the Guidelines drafted by a third party. Citing Industrial Promotion And Investment Corporation of Orissa Ltd. vs. New India Assurance Co. Ltd. (2016) 15 SCC 315, it has been argued that where a policy contains an ambiguous clause, it must be construed against the drafter of the contract (against proferent).
Argument raised by the defendant
Lawyer, Mr. Rajnish Kumar Jha, appearing for the defendant argued that the DGFT, an official agency for the regulation and promotion of foreign trade, had drafted the guidelines in the exercise of power under section 5 of the Foreign Trade Act 1992 ( development and regulation). required to adhere to the same. He referred to certain judgments, in particular Export Credit Guarantee Corporation of India Ltd. vs. Garg Sons International (2014) 1 SCC 686 where the Apex Court held that the doctrine of against proferent does not apply in the event of a commercial contract.
Analysis by the Supreme Court
The Court noted that the reconciliation of ambiguous terms in commercial contracts was a phenomenon in all jurisdictions. He referred to the decision of Rainy Sky SA v Kookmin Bank (2011) UKSC 50 where the UK Supreme Court was of the view that, while interpreting an ambiguous term if two constructions are possible, then the one which conforms to good business sense should be preferred. In Arnold vs. Britton (2015) UKSC 36, the UK Supreme Court had defined certain general parameters as the ordinary meaning of the clause; general purpose of the clause, facts known to the parties at the time of performance; commercial common sense, to be taken into account when interpreting a written contract. The Apex Court noted that the UK Supreme Court in Woods v. Capital Insurance (2017) UKCS 24 observed that when interpreting, the court must consider the contract as a whole.
Applying the principles to the policy, the Court held that the date of loading of the goods was less significant than the date on which the foreign buyer was in default, i.e. February 14, 2013, which was fully covered by the policy. The policy was considered to cover default and not transit. Therefore, as expected in Peacock Plywood (P) Ltd. vs. Oriental Insurance Co.Ltd. (2006) 12 SCC 673, the Court noted that the reason for entering into the insurance contract and the risk it is intended to cover must be considered on their own terms and that the policy must be interpreted in its entirety.
Referring to the Constitution Bench judgment in General Assurance Society Ltd. against Chandumull Jain (1966) 3 SCR 500, the Court noted –
“It is rooted in our case law that an ambiguous clause in an insurance contract should be interpreted harmoniously by reading the contract in its entirety. If after that no clarity emerges, then the clause should be interpreted in favor of the contract. ‘insured, that is, against the writer of the policy.’
The rule of against proferentwhich protects the insured from “the unfavorable interpretation of an ambiguous clause to which he did not agree”, found favor with the Apex Court in United India Insurance Co. Ltd. vs. Pushpalaya Printers (2004) 3 SCC 694. The rule plays an important role in blanket contracts where the insured has negligible bargaining power.
In Sushilaben Indravadan Gandhi v New India Assurance Company Limited (2021) 7 SCC 151, the Supreme Court held that –
“If there is ambiguity in the policy, the court will apply the contra proferentem rule. When a policy is produced by insurers, it is their responsibility to ensure that precision and clarity are achieved and, if they fail to do so, the ambiguity will be resolved by adopting the interpretation favorable to the insured . Likewise, with respect to language that emanates from the insured, such as the language used in response to questions in the application or in a slip, an interpretation favorable to the insurers will prevail if the insured has created an ambiguity.
Interpreting the policy documents harmoniously, the Court held that reliance on the DGFT guidelines was wrong in law. However, he noted that even if one relied on the guidelines, the date of the bill of lading should be considered the date of shipment and, therefore, would not favor the case of the insurer.
Case Name: Haris Marine Products v. Export Credit Guarantee Corporation (ECGC) Limited
Reference: 2022 LiveLaw (SC) 432
Case No. and Date: Civil Appeal No. 4139 of 2020 | April 25, 2022
Corum: judges UU Lalit, S. Ravindra Bhat and PS Narasimha