Rainy Sky SA v Kookmin Bank [2011] UKSC 50

Key point

  • The courts should not alter the wording of contracts in service of commercial common sense where the words have an unambiguous meaning

Facts

  • Kookmin Bank (D), gave a guarantee in connection with a shipbuilding contract to C
  • The guarantee covered the repayment of certain advance instalments of the price by C to the shipbuilder in the event that the ship as not delivered by the shipbuilder
  • The ship was not delivered, and the shipbuilder refused to refund the instalments paid
  • Dispute arose as to whether the terms of the guarantee covered the instalments that were paid
  • The High Court and Court of Appeal both held that the guarantee covered the paid instalments on the basis that a contrary interpretation would not make commercial common sense

Held (Supreme Court)

  • Judgment was made in favour of C, the full guarantee was due

Lord Clarke

Commercial common sense: when should it apply?

  • 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: [21]
  • But where parties have used unambiguous language, the court must apply it, even if the results it produces are commercially improbable: [23]
  • It is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement: [43]

Current case

  • There is no credible commercial reason for excluding the limited scope of guarantees advanced by D: [44]
  • Of the two arguable interpretations the interpretation of C is to be preferred as it is consistent with the commercial purpose of the guarantee: [45]

Commentary

  • Lord Clarke emphasised that the object of apply commercial common sense was to understand rather than override the language of the contract