In Rainy Sky v. Kookmin Bank, decided by the Supreme Court on 2 November, it was held that, where a term in a contract is open to more than one interpretation, it is generally appropriate to adopt the one which is most consistent with business common sense. The case related to the interpretation of bonds and guarantees in a commercial context and an earlier Court of Appeal decision was overturned.

In this case bonds had been given by the defendant Bank in favour of Claimant purchasers under a shipbuilding Contract. The shipbuilder entered the Korean equivalent of insolvency proceedings and the purchasers sought reimbursement of advance payments already paid to the shipbuilder. The issue between the parties concerned the interpretation of the bonds and both sides accepted that it was arguable that their meaning was ambiguous. The obligations in the bonds could either refer to the event of insolvency or a narrower definition of circumstances which would trigger payment. It was crucial to determine which interpretation applied.

In the Court of Appeal it was held that the Court would ascertain the natural interpretation of the words used without considering commercial issues unless to do so produced a result which was so extreme as to suggest that it was unintended. In the Supreme Court, this approach was not followed. The Court described its task as ascertaining what a reasonable person, who had all the background knowledge reasonably available to the parties at the relevant time, would have understood the parties to have meant. The result of this approach is that where the terms of the Contract are clear and unambiguous, effect will be given to them. However if there are two possible interpretations, the interpretation which is most consistent with commercial common sense will generally be adopted.

Applying this approach the court considered that it was unlikely in the commercial context that the parties would have intended the bonds to be ineffective in an insolvency situation, since that was precisely where the purchasers would be most in need of security.

Nothing in this decision will relieve a party who has made a bad bargain from the implications of his decisions where the wording of the Contract is clear and unambiguous. However the case is an indication from the highest level of the judiciary that commercial considerations will be invoked to interpret terms which are capable of more than one meaning.

There is, of course, no substitute for clear drafting in the first place, avoiding the need for judicial interpretation.