England's highest court has come to the rescue of the buyers of six Korean newbuildings, Rainy Sky SA and five other entities. On November 2 2011(1) the Supreme Court reversed the Court of Appeal's decision(2) which rejected the buyers' claim under the refund guarantees. Rainy Sky and the other buyers had paid pre-delivery instalments under the shipbuilding contracts before the contracts were cancelled following the bankruptcy of the Korean builder, Jinse Shipbuilding Co Ltd. The refund guarantor was the Korean bank Kookmin Bank.
The disputed wording was a provision in the refund guarantee stating that the bank would pay "all such sums due to [the buyer] under the contract". In question was how to construe "all such sums due", and more specifically whether it included the situation in which sums became repayable due to bankruptcy and not due to termination of the contracts.
The buyers argued that "all such sums due" referred to pre-delivery instalments that the builder was contractually required to repay, regardless of whether the contracts were terminated. The bank argued that "all such sums due" meant a refund of pre-delivery instalments only where the right of refund arose as a result of termination of the contracts (or total loss), but not bankruptcy.
The Supreme Court reaffirmed the principle that, when construing a contract, the court must consider the wording and ascertain what a reasonable person – with the relevant background knowledge available to the parties when negotiating – would have understood the parties to have meant. The court is entitled to, and should, prefer a construction consistent with business common sense.
This does not mean that commercial common sense will prevail in every case. Where plain and unambiguous language is used, courts will give effect to the agreed wording, even when the outcome is extreme and not what the parties commercially might be thought to have intended. However, where an ambiguously worded provision can be interpreted in two different ways, the commercial purpose of the contract is more important than the legal niceties of the language.
Applying this principle to the Kookmin refund guarantees, the Supreme Court stated that since the language used had two possible meanings, it was appropriate to have regard to commercial considerations in resolving what a reasonable person would understand from the guarantee language.
The Supreme Court agreed that shipyard insolvency is a situation for which the security of a refund guarantee is required. Apart from a reliance on the language used, Kookmin Bank could provide no credible commercial reason as to why the refund guarantees would have been worded to provide security for repayment of pre-delivery instalments only in limited circumstances, and not including insolvency.
Faced with one construction that made commercial sense and one that did not, the Supreme Court showed little hesitation in upholding the buyers' appeal, allowing repayment of the pre-delivery instalments plus interest of 7%. Many will view this judgment as representing a victory for commercial common sense over the strict legal interpretation of the language used in guarantees.
For further information on this topic please contact Rob Jardine-Brown at Wikborg Rein's London office by telephone (+44 20 7367 0300), fax (+44 20 7367 0301) or email ([email protected]). Alternatively, contact Yannis Litinas at Wikborg Rein's Oslo office by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email ([email protected]).