Rainy Sky SA v Kookmin Bank [2011] UKSC 50

KEY POINTS

• When the language used by the parties in a contract is clear and unambiguous, the court must enforce it as written.

• However, if there are multiple possible interpretations, the court should generally choose the one that aligns best with common business sense and reject any other less reasonable interpretations.

FACTS

• Appellants entered into shipbuilding contracts with Jinse Shipbuilding Co Ltd to purchase vessels. The contracts stipulated a payment of US$33.3m in five equal instalments, with the first instalment being conditional upon the builder providing a satisfactory refund guarantee from a Korean bank.

• To fulfil the payment condition, the respondent bank issued the buyers materially identical Advanced Payment Bonds in August 2007. The bonds stated that the buyers were entitled to a refund if they exercised their rights under the contract and the respondent promised to pay all sums due under the contract in consideration of the buyer's agreement to make pre-delivery instalments.

• The builder encountered financial difficulties in 2008 and underwent a formal debt workout procedure in January 2009. In April 2009, the buyers demanded repayment under the bonds for the instalments paid to the builder. The respondent rejected the demands, arguing that it was not liable to guarantee payment of refunds arising under Article XII.3 of the contracts.

• The issue in this case revolves around the interpretation of the bonds and whether the respondent's liability extends to the repayment of instalments paid under Article XII.3 of the contracts.

COMMENTARY

• This decision reaffirms the principle that commercial contracts should be construed in a manner that reflects business common sense.

• It also highlights the importance of focusing on the objective intentions of the parties when interpreting contractual terms.