Supreme Court applies business common sense

Rainy Sky –v- Kookmin Bank [2012] BLR Supreme Court

Kookmin Bank issued an advance payment bond to Rainy Sky which had entered into a shipbuilding contract with Kookmin Bank’s customer, Jinse Shipyard.  Jinse went into insolvency and could not perform the contract so Rainy Sky called on the bond but the Kookmin Bank refused to pay.

Kookmin argued that the proper interpretation of the bond did not extend to non-payment by Jinse Shipyard in the event of insolvency.  The Court of Appeal agreed with this interpretation but Rainy Sky appealed.

The Supreme Court Held:

1. When interpreting a contract the Court has to decide what the parties meant by the language which they used.  What would a reasonable person who has all the relevant background knowledge available to the parties who signed the contract have understood them to mean?
2. If there are 2 possible interpretations it is generally better to prefer the interpretation which is consistent with business common sense.
3. Although the wording of the bond was ambiguous and could be given 2 alternative interpretations, to adopt an interpretation which deprived the beneficiary of the benefit of the bond, where the shipbuilder was insolvent, would deprive the beneficiary of protection in one of the principal situations for which the bond was required.
4. Accordingly Kookmin Bank’s interpretation was rejected by the application of business common sense.

Comment

If the parties use clear and unambiguous language then no difficulties as to interpretation arise even if the outcome is odd or unfair.  BUT where there is more than one potential interpretation then the Courts ought to adopt the interpretation which is most consistent with business common sense.

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