“If a clause is capable of two meanings…it is much more appropriate to adopt the more, rather than the less, commercial construction”
In Rainy Sky S.A. and others v Kookmin Bank the Supreme Court considered the correct approach to the construction of contractual wording that was capable of two meanings, both of which meanings were possible and arguable.
The point at issue was the interpretation of a clause contained in a bond (a “refund guarantee bond”) given by a bank to a purchaser, by instalments, of a ship. The bond would pay out on the occurrence of certain events. If the bank’s argument was successful, the bond would not refund instalments paid by the purchaser of the ship in the event of the insolvency of the shipbuilder. If the purchaser’s argument was successful, the wording of the bond meant that the bank would have to pay out if the shipbuilder entered insolvency. The shipbuilder became insolvent.
At first instance, the court found for the purchaser but this was overturned by a 2-1 verdict in the Court of Appeal. The purchaser appealed to the Supreme Court.
The Supreme Court judgment
The SC unanimously found for the purchaser. In giving the SC’s judgment, Lord Clarke gave a useful overview of the recent approach of the courts to interpreting ambiguous contractual clauses – particularly clauses that are capable of two arguable meanings – and drew particularly from Lord Hoffman’s judgments in Mannai Investment v Eagle Star Life Assurance, Investors Compensation Scheme v West Bromwich Building Society and the leading case of Chartbrook Ltd v Persimmon Homes Ltd, cases which
“…show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case…, the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract .”
In considering a clause with two possible constructions, Lord Clarke stated that:
“…the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. 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.”
And approved the dictum of Longmore LJ in Barclays Bank plc v HHY Luxembourg SARL:
“If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction.”
Lord Clarke quoted with approval the view of Lord Steyn in a 1997 article (“Contract Law: Fulfilling the reasonable expectations of honest men”) where there are competing interpretations of contractual wording:
“Often there is no obvious or ordinary meaning of the language under consideration. There are competing interpretations to be considered. In choosing between alternatives a court should primarily be guided by the contextual scene in which the stipulation in question appears. And speaking generally commercially minded judges would regard the commercial purpose of the contract as more important than niceties of language. And, in the event of doubt, the working assumption will be that a fair construction best matches the reasonable expectations of the parties.”
In finding for the purchaser, Lord Clarke applied these principles and drew particular attention to the findings of the first instance judge (with whom the dissenting minority at the Court of Appeal had agreed) that the Bank’s argument as to the meaning of the clause would have “the surprising and uncommercial result” that the purchaser of the ship would not be able to call on the bond in the event of the shipbuilder’s insolvency – which would be the opposite of what one would expect to be the commercial purpose of the bond.
Agreeing with the dissenting judgment in the Court of Appeal that there was “no credible commercial reason” for the limited scope of the bond being advanced by the bank, Lord Clarke preferred the purchaser’s construction of the wording of the bond “because it is consistent with the commercial purpose of the bonds in a way in which the bank’s construction is not”.
Friendly Corporate PSL
To subscribe for our free weekly update e-mail, click here.
