What role does business common sense play in the interpretation
of commercial contracts? This issue was recently addressed by the
Supreme Court of the United Kingdom in Rainy Sky S.A. v.
Kookmin Bank. The answer: "where a term of a contract is
open to more than one interpretation, it is generally appropriate
to adopt the interpretation which is most consistent with business
common sense". Since there is currently some uncertainty in
Canada on the point, Rainy Sky is an important case to
At issue was the proper interpretation of a performance bond
that had been issued in support of a contract to construct a ship.
The shipbuilder had defaulted on the contract by entering into
insolvency proceedings. The ship buyers called on the performance
bond. The bank that had issued the bond refused to pay, arguing
that insolvency of the shipbuilder was not a risk covered by the
bond. The operative sentence of the bond was an undertaking to pay
"all such sums due to you under the [shipbuilding
contract]". The bank argued that the phrase "such
sums" referred to certain specifically enumerated payments,
which did not include amounts due upon an insolvency. The ship
buyers argued that the phrase applied to all sums owing to them
under the shipbuilding contract, including those triggered by the
The bank's argument failed at first instance, with a judge
of the Commercial Court in London holding that it made no
commercial sense for the parties to exclude from coverage the very
event for which coverage was most needed, namely the
The English Court of Appeal reversed, in a split
decision that squarely raised the issue to be decided by the
Supreme Court. The majority held that commercial sense was not to
be considered in interpreting a contract unless "the most
natural meaning of the words produces a result which is so extreme
as to suggest that it was unintended". Without such an
approach, reasoned the majority, there would be too much risk of
the court imposing a contract on the parties rather than simply
applying what they had agreed. The dissenter would have imposed a
much lower threshold, applying business common sense whenever the
text of the contract is susceptible of more than one meaning.
In a unanimous decision, the Supreme Court reversed again and
restored the decision at first instance. Calling contractual
interpretation "essentially one unitary exercise" and
"an iterative process, involving checking each of the rival
meanings against other provisions of the document and investigating
its commercial consequences", the Supreme Court favoured the
dissenting view in the Court of Appeal. Noting that no credible
commercial reason had been advanced for excluding insolvency from
the scope of the bond's coverage, the Supreme Court found that
the text of the bond supported both competing interpretations, and
preferred the buyers' interpretation as more consistent with
the commercial purpose of the bond.
Rainy Sky is important in Canada because the question
of the role of commercial sense in contractual interpretation is a
live one, with the Ontario Court of Appeal having sent mixed
messages over whether contractual ambiguity is a precondition to
the consideration of sound commercial principles (the apparent
approach in Ventas, Inc. v. Sunrise REIT, at para.
24) or not (Scanlon v. Castlepoint Development Corporation
(1992), 11 O.R. (3d) 744 (C.A.) at 770, Kentucky Fried Chicken v. Scott's Food
Services Inc. at para. 27 and Schneeberg v. Talon International Development
Inc.). When the time comes for the Ontario Court of Appeal
to clarify this conflicting case law – and it will
– Rainy Sky will be an important authority for
it to consider.
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