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Business Common Sense: Rainy Sky SA & Ors v Kookmin Bank [2011] UKSC 50

R were the buyers of six ships to be built by J. R were to pay by a series of instalments as the build progressed. It was a condition precedent to payment of the first instalment that J would deliver refund guarantees from a bank (“K”) in a form satisfactory to R’s financiers.

K provided guarantees which were accepted as being suitable and the instalment payments began. Unfortunately, prior to the completion of the build, J became insolvent. R requested repayment of the instalments from J and, when not forthcoming, sought payment under K′s guarantee.

Common sense suggested one of the main dangers R required the guarantees to guard against was J′s insolvency. However, the guarantee was open to the construction that it only bit if the refund was sought under the shipbuilding contracts on certain specific bases such as total loss of the vessel and did not include the occurrence of an insolvency.

At first instance, Simon J considered K Bank′s construction, i.e. that the guarantee did not cover repayment on J′s insolvency and gave summary judgement. The Court of Appeal, in a split decision, reversed that and gave summary judgment for K.

The Supreme Court unanimously restored Simon J′s order. Business common sense strongly suggested that J′s insolvency would have been one of the very dangers against which R was seeking protection by guarantee. Lord Clarke, giving the judgment of the Court, took a broader view of the business common sense aid to construction than had the Court of Appeal. Paragraph [21] reads "If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other." The Court of Appeal had been too narrow in considering that business common sense only applied when the most natural reading of the words would "produce a result so extreme as to suggest it was unintended".

The clarified widening of this aid to construction is welcomed in enabling the Courts to reflect what sensible commercial parties are likely to have intended.

Richard Hayes / 1st Jun 2012


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