Rainy Sky SA & Others v Kookmin Bank [2011] UKSC 50
This case concerned a demand against Kookmin Bank under a number of advance payment bonds issued in connection with a series of ship building contracts. The Korean ship builder became insolvent and the buyers claimed under the bonds for repayment of advance payments made towards purchase of the ships. Kookmin Bank refused payment on the grounds that the bonds were not triggered by insolvency of the ship builder. The case turned on the wording of the bonds. The High Court found in favour of the buyers. The Court of Appeal reversed the decision on the grounds that, if the buyers' argument was correct, one of the paragraphs in the advance payment bond would not be capable of meaning, and that could not be the case. The buyers appealed to the Supreme Court.
The Supreme Court unanimously allowed the appeal. Lord Clarke gave the judgment. He reviewed recent cases on the construction of contracts and found as follows:
- he overruled the dictum of the Court of Appeal that "unless the most natural meaning of the words produces a result so extreme as to suggest that it was unintended, the court must give effect to that meaning".
- instead, 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.
- however, where the parties use unambiguous language, the court must apply it. The courts cannot rewrite the language which the parties have used in order to make a contract conform to business sense.
- as the language in the relevant paragraph was capable of two meanings, the court could apply the commercial common sense test in resolving the question what a reasonable person would have understood the parties to have meant. In this case, excluding insolvency from the occasions when the bonds could be called made no commercial sense. It was indeed the situation when the security of an advanced payment bond was most likely to be needed.
This case is likely to be cited frequently in future. It is yet another case confirming the ascendency of the "purposive" construction of contracts over the "literal" construction. To recap, if there is unambiguous wording, the courts will apply it. If the wording is capable of more than one meaning, the courts will apply the interpretation that conforms with business common sense – there is no need for the more natural meaning to be "so extreme as to suggest that it was unintended" before the courts can consider other meanings.
The case has already been applied in the Family Mosaic Housing –v- Pimlico School Housing Association. Here there was a dispute as to the meaning of a contract which permitted termination on 3 months notice and with mutual consent. The question arose whether both three months' notice of termination and mutual consent were required to terminate or whether it was one or the other. The High Court cited the Rainy Sky decision and held that the business common sense approach led to either party being able to terminate the contract on three months' notice without the consent of the other party.
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