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A Common Sense Conclusion! [January 2012]

The Supreme Court has finally ruled in the case of Rainy Sky v Kookmin Bank [2011] UKSC 50, finding in favour of the buyers, Rainy Sky.

This long-running dispute related to the refund of pre-delivery instalments paid by the buyer, Rainy Sky (and others) to a shipbuilder who subsequently became insolvent. The terms of the shipbuilding contract provided that insolvency triggered the repayment of any advance instalments paid. However, when the buyers attempted to claim against the guarantees underwritten by Kookmin, the bank argued that whilst advance payments were refundable on certain conditions, insolvency was not specified as one of these conditions.
In the original trial, the judge held that the bond did cover the insolvency since the bank’s argument as to the meaning of the clause in question would have “the surprising and uncommercial result” that the purchaser of the guarantee would not be able to call on it in the event of insolvency – which is the opposite of the normally expected commercial purpose of such a bond.
This view was overturned by a 2-1 verdict in the Court of Appeal where it was concluded that there may have been a number of reasons why the builder was unable or unwilling to provide bank cover in the event of its insolvency and that to find otherwise “would be to risk imposing obligations on one or the other party which they were never willing to assume.
The Appeal ruling was frustrating to the industry as a whole, since refund guarantees are used to underpin almost all commercial shipbuilding projects. The purchaser appealed to the Supreme Court.
The Supreme Court unanimously held with the original judgement that “If a clause is capable of two meanings……. it is much more appropriate to adopt the more, rather than the less, commercial construction” - in this case, the decision that upholds what would normally be expected from a guarantee.
This case is important in that it confirms that the English courts will take the view that if there are two possible interpretations in a case, the court is right to opt for the one which is consistent with business common sense.
Once again, however, the case highlights what can happen when contracts have ambiguous wording that is open to interpretation.
If you would like further advice or assistance relating to contract drafting or other issues please do not hesitate to contact us:  email or telephone 0151 647 8862.  
The information provided in this article is not a comprehensive analysis of the law and must not be treated as a substitute for legal or professional advice.  To the extent permitted by law, Kerrigans will not accept or otherwise be held liable for any loss or damage incurred in relying upon the contents of this article. Should you require any legal or professional advice about any of the topics covered in this article we recommend that you contact Kerrigans.


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