Rainy Sky SA v Kookmin Bank
Where a contractual term has two possible meanings, the court should prefer the one that is more consistent with business common sense.
Facts
Rainy Sky and other buyers ordered ships from a Korean shipbuilder and paid instalments in advance. Kookmin Bank issued advance payment bonds promising to repay the instalments in certain circumstances. The shipbuilding contracts entitled the buyers to a refund if the builder became insolvent. When the builder entered an insolvency process, the buyers called on the bonds. The bank argued that, on their wording, the bonds covered refunds due on certain other events but not refunds due on the builder's insolvency, even though protection against insolvency was the main reason for having such bonds.
Legal principle
The Supreme Court held that the bonds covered refunds on insolvency. Lord Clarke said that the ultimate aim of interpretation is to find what a reasonable person, with all the background knowledge reasonably available to the parties, would have understood them to mean. If there are two possible constructions, the court is entitled to prefer the one that is consistent with business common sense and to reject the other. Here the buyers' reading made commercial sense, because insolvency was precisely the situation in which they would need the protection of a bond, whereas the bank's reading did not.
Related cases on terms of the contract
- Arnold v Britton [2015] UKSC 36, [2015] AC 1619
- Barton v Morris [2023] UKSC 3, [2023] AC 684
- Bettini v Gye (1876) 1 QBD 183
- Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 1 WLR 1661
- Bunge Corp v Tradax Export SA [1981] 1 WLR 711
- Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101
- Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623
- Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
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This summary is for study and revision and is not legal advice. Although our case summaries are checked for accuracy, we do not guarantee that they are free from errors or omissions. Always read the full judgment for the court's reasoning.
