Article by Charlotte Walker-Osborn Head of TMT Sector and Laura Friend, Solicitor, Commercial.

What? In Rainy Sky SA and others v Kookmin Bank [2011], the courts will favour the interpretation most consistent with business common sense.

So What? It is good practice to have a cold read-through of a contract before signature to look out for potential errors, inconsistencies and ambiguities.

In overturning a Court of Appeal decision, the Supreme Court has reviewed existing case law on interpretation of contract terms including Investors Compensation Scheme and Chartbrook v Persimmon:

  • Where the parties have used unambiguous language then the court must apply it.

  • In cases where the language used has more than one potential meaning, the court must adopt the interpretation which is most consistent with business common sense, looking at what a reasonable person with all the background knowledge reasonably available to the parties at the time they entered the contract would have understood the clause to mean. 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.

In this case, the Bank’s liability to pay turned on interpretation of the phrase “all such sums due to you under the Contract”. This phrase was capable of two alternative meanings because of the ambiguous word “such”. It could mean all the “pre-delivery instalments under the Contract” referred to at the beginning of the same clause. Alternatively, it could mean those pre-delivery instalments referred to in the preceding clause (being those instalments refundable upon termination of the Contract or rejection or loss of the vessel). The distinction was crucial because whilst the former interpretation would allow the buyers to recover the monies paid, the latter would not.

The Supreme Court held that the interpretation most consistent with business common sense was the one that entitled the buyers to a refund on the insolvency of the builder, being the situation for which the security of a bond was most likely to be needed.

This case highlights how difficult it can be to interpret ambiguous contract terms and therefore how important it is to draft clearly in the first place. It is good practice to have a cold read-through of a contract before signature to look out for potential errors, inconsistencies and ambiguities.

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