Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50

The Supreme Court has ruled on the correct approach to take when addressing ambiguous contractual provisions.

The case concerned the construction of a shipbuilder’s refund guarantee given by Kookmin Bank pursuant to shipbuilding contracts. The shipbuilder encountered financial difficulties and the buyers claimed under the guarantee. Kookmin argued that in interpreting the contract correctly its guarantee obligations were not triggered by the shipbuilder’s insolvency. Insolvency was not specifically mentioned in the refund guarantee but other events were. The High Court ruled in favour of the Claimants’ construction but its decision was overturned by the Court of Appeal.  

The Claimants appealed to the Supreme Court, which held that Kookmin’s construction of the refund guarantee produced the uncommercial result that the buyer would not be able to act on the refund guarantee on the insolvency of the shipbuilder. Furthermore, Kookmin did not advance any credible commercial reason as to why the parties would have agreed to such a construction. The Claimants’ construction was to be preferred as it was consistent with the commercial purpose of the refund guarantee.  

This decision indicates that the correct approach in construing a provision in a commercial contract is to look at the language used to determine what the parties meant. This involves ascertaining what a reasonable person who had all the background knowledge available to the parties in the situation at the time of the contract would understand the parties to have meant.

If the language used has more than one potential interpretation, the court must prefer the construction which is consistent with business common sense and reject the other.