Rainy Sky SA v Kookmin Bank
Citations:  UKSC 50;  1 WLR 2900;  1 All ER 1137;  1 All ER (Comm) 1;  Bus LR 313;  1 Lloyd’s Rep 34;  2 CLC 923.
A shipbuilder contracted to build and sell a vessel to the claimants. The claimants would pay in five instalments, the final one being due on delivery. The contract imposed several refund guarantees on the shipbuilder relating to the instalments. To comply with these, the shipbuilder issued the claimants advance payment bonds.
A clause of the bond stated at paragraph 2 that the claimants are ‘are entitled, upon your rejection of the vessel in accordance with the terms of the contract, your termination, cancellation or rescission of the contract or upon a total loss of the vessel, to repayment of the pre-delivery instalments’.
Paragraph 3 stated that ‘we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the contract (or such sums which would have been due to you but for any irregularity, illegality, invalidity or unenforceability in whole or in part of the contract)’.
The shipbuilder fell into financial difficulties. By this point, all the claimants had paid the first instalment, and one had paid the second. The shipbuilder refused to refund the instalments paid.
The claimants brought an action against the bank claiming repayment of the bonds. The bank also refused to pay. Their justification was that the parties’ contract, properly construed, did not cover the refunds sought. Rather, it only covered cases where the contract was terminated or the vessel was totally lost – neither of which had occurred. The claimant responded that their rights under paragraph 3 should not be limited to the situations explained in paragraph 2.
- How should the clauses be interpreted?
The Supreme Court held in favour of the claimants. The bank’s proposed construction would have an uncommerciable result. This was because the most likely situation in which a refund would be required was if the defendant had financial difficulties. It would be surprising if the parties had intended to exclude repayment in such a case. As such, the court preferred the claimants’ construction. The claimants were entitled to repayment of the bonds.
This Case is Authority For…
A contract should be interpreted in light of its ultimate purpose to determine what a reasonable person would think the language used meant. The reasonable person is one who has all background knowledge reasonably available to the parties at the time of contracting.
Where there are two possible constructions, the court is entitled to prefer the one which better accords with business common sense, even if the other does not produce an absurd or irrational result.