How Do Courts Interpret Ambiguity In Contracts?
Contra Proferentem is a rule of contract law stating that where a contract contains an ambiguous term, the terms should be interpreted against the drafter of the contract or the party that pushed for inclusion of the ambiguous term.
Understanding What Happens If a Contract Is Ambiguous and Could Be Interpreted In Opposite Ways
The principle of contra proferentem is a legal doctrine of contractual interpretation providing that ambiguous or conflicting terms within a contract should, generally, be construed against the party that drafted or proffered (meaning put forward) the agreement or demanded inclusion of the ambiguous terms within the contract.
Usually the contra proferentem rule applies where an ambiguous term or clause was imposed at the unilateral insistence of one party; however, this is not to say that where both (or all if more than two) parties mutually negotiated the ambiguous term or clause that the law will neutralize the clause rather than favouring one party over the other. The term or clause will still require an interpretation, that will likely result in a benefit to one party over another; however, in the scenario where both, or multiple parties, proffered the ambiguous term, the law will refrain from an automatic interpretation against the proffering party. In this way, it can be said that automatic disfavour is neutralized; however, ultimately, an interpretation will remain necessary and such an interpretation will still disfavour one party or the other.
Furthermore, the contra proferentem rule applies only when an ambiguous term exists. This existence is as determined by a court during the course of a legal dispute. The contra proferentem rule is inapplicable to disputes involving ambiguous terms within statutes; however, the rules of statute interpretation may appear to produce a similar concept and result, being that an interpretation that goes against the drafter, the drafter being the Parliament, the Legislature, or, in cases involving by-laws, the municipality.
Understanding the Rule that Ambiguity Goes Against the Party That Proffered an Ambiguous Term
The basic reasoning for the contra proferentem rule is to encourage drafters of contracts to apply diligence and seek explicit clarity and avoidance of ambiguity and to carefully consider foreseeable circumstances during the drafting process. Additionally, the contra proferentem rule embodies the law's disliking of the use of standard contract documents such as insurance policies or residential lease agreements. Courts view standard contract documents as lacking a genuine bargaining between the parties often resulting in inequitable positions. The contra proferentem rule helps to mitigate unfairness by applying the interpretation that gives benefit of doubt to the party upon whom the contract was forced.
Very importantly, the contra proferentem rule places the burden of losses caused by ambiguity upon the party best in position to avoid the harm in the first place, this being the party that drafted the contract. As above, a primary example is where ambiguous terms or clauses within standard contract documents (i.e. insurance policies) will be interpreted and applied in a manner that goes against the drafter (i.e. insurance company).
The contra proferentem doctrine was articulated well in the case of Cote v. JDR Coachworks, 2005 CanLII 6374 where it was said:
 The contra proferentem rule of construction provides that ambiguity in a contract “is interpreted as against him who has stipulated and in favour of him who has contracted the obligation. City of Toronto v. Toronto Railway Co., 1906 CanLII 5 (SCC), A.C. 315.” The Supreme Court of Canada discussed contra proferentem in Hillis Oil and Sales Ltd. v. Wynn’s Canada Ltd. where LeDain J. wrote at paragraph 17 that contra proferentem is a rule of general application:
 … It is true that [contra proferentem] has been most often invoked with reference to the construction of insurance contracts, particularly clauses in such contracts purporting to limit or exclude the insurer's liability. Statements of the rule and its application in such cases may be found in the decisions of this Court in Consolidated-Bathurst,  1 S.C.R. 888, and McClelland and Stewart,  2 S.C.R. 6. The rule is, however, one of general application whenever, as in the case at bar, there is ambiguity in the meaning of a contract which one of the parties as the author of the document offers to the other, with no opportunity to modify its wording. … [emphasis added].
 While LeDain J. only discussed contra proferentem in situations where a party has had no opportunity to modify the contract, Abella J.A. (as she then was) wrote at paragraph 93 of her dissenting judgment in Arthur Anderson Inc. v. Toronto Dominion Bank that contra proferentem applies even where a right of modification exists:
 If I am wrong in relying on the extrinsic factual context to reject the bank's interpretation of the agreement, then I would nonetheless still resolve any ambiguity against the bank's interpretation by applying the contra proferentem rule. I do not understand this rule of interpretation or its explication in Hillis Oil and Sales Ltd. v. Wynn's Canada Ltd.,  1 S.C.R. 57, as being restricted to those situations where no right of modification exists. It is a rule meant to relieve the non-authorial party to a contract from an interpretation that [a] party could not clearly discern from a plain reading of the document. This prevents the party who did draft and understand the contract from springing a hidden contractual burden on an unsuspecting signator (Anson's Law of Contract, 25th ed. (1979) at p. 151; Fridman, The Law of Contract in Canada, 2nd ed. (1986), at pp. 44-45; Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co.,  1 S.C.R. 888 [emphasis added].
An exception to the contra proferentem rule is found in section 11 of the Consumer Protection Act, 2002, S.O. 2002, Chapter 30, Schedule A which applies to many, and perhaps most, business-to-consumer transactions and dealings. Specifically, the Consumer Protection Act, 2002 states:
11 Any ambiguity that allows for more than one reasonable interpretation of a consumer agreement provided by the supplier to the consumer or of any information that must be disclosed under this Act shall be interpreted to the benefit of the consumer.
Accordingly, and despite the contra proferentem rule, where a consumer agreement is capable of more than one interpretation, an there are interpretations that would go either for, or against the consumer, the Consumer Protection Act, 2002 prescribes that the interpretation that favours the consumer applies. Interesting, section 11 states that such interpretation shall benefit the consumer when the supplier provided the agreement to the consumer; and accordingly, it would seem, that such is redundant to the contra proferentem rule; however, what actually is different is that even if the consumer negotiated or pushed for the ambiguous term that is then included within the agreement provided by the supplier, it is the consumer that receives the beneficial interpretation. In this way, the contra proferentem principle is overruled by the statute as, per the general contra proferentem rule, the interpretation usually goes against the party to the contract that pushed for inclusion of the ambiguous term.
The contra proferentem rule is a legal principle applicable to situations where contracts contain conflicting or ambiguous terms. Generally, the contra proferentem rule provides that interpretation of conflicting or ambiguous terms should disfavour the party that drafted, or demanded, the conflicting or ambiguous terms. Exceptions may apply such as where a statute, such as the Consumer Protection Act, 2002, imposes favour to the party viewed most likely as the less sophisticated or the most disempowered party - being the consumer.Learn More About