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It’s Common Sense mate…

8 December, 2011

 

There will never be shortage of arguments over the meaning of contract wording either in construction or in commercial life generally. Of course, where wording is unambiguous as to its meaning the courts will apply it even if the result may seem improbable and the court will not rescue a party from bad bargain. However, where contractual wording is ambiguous some different considerations may come into play. One of these is the extent to which "business common sense" can affect interpretation. This was considered by the English Supreme Court in November 2011 in Rainy Sky S.A. and others (Appellants) v. Kookmin Bank (Respondent) [2011 UKSC 50]. The case concerned shipbuilder's refund guarantees issued by a bank to cover interim payments made to a shipbuilder who had been contracted to build a number of ships. The shipbuilder became insolvent and the buyers understandably wanted the bank to refund their interim payments under the guarantees. A dispute arose because on one reading the guarantees did not cover repayments due on insolvency yet on another reading they did. Suffice to say the bank did not pay out and the customers, who had neither ships nor their money back, went to court. After conflicting decisions at first instance and in the Court of Appeal the matter came before the Supreme Court (the successor to the House of Lords).

 

The Supreme Court held that where 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. It was not necessary to show that one of the interpretations produced an absurd or irrational result before having regard to the commercial purpose of the agreement. In the case in question the insolvency of the shipbuilder was the very situation when the buyers of the ships would most need the protection of the guarantees and so the interpretation which made the guarantees cover the repayments on insolvency was to be preferred as it was "consistent with the commercial purpose of the [guarantees]…". The Supreme Court regarded the interpretation which excluded repayments on insolvency as one which flouted common sense.

 

This case did not make new law but reviewed and applied previous authority. Commercial organisations will perhaps be encouraged by the fact that the courts seek to establish commercial intent and apply business common sense in interpreting contracts. However, it is important to remember that the first port of call will always be the words themselves – are they unambiguous? If they are you are generally stuck with them. Only where there is ambiguity and more than one possible meaning are the courts likely to see commercial intent and business common sense as key drivers to proper interpretation and even then business common sense means different things to different people. It remains as important as ever to carefully review and negotiate contractual wording to try and ensure that it is both unambiguous and that it properly reflects the bargain struck between the parties.

 

 

For further information, please contact:

 

Peter Clayton, Pinsent Masons

peter.clayton@pinsentmasons.com

 

 

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