The Supreme Court Adopts A Purposive Approach To The Construction Of A Commercial Contract

Article by Paul Herring, Jamila Khan and Reema Shour

Rainy Sky S.A. and others v. Kookmin Bank [2011] UKSC 50

"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". This seemingly straightforward statement by Lord Clarke of the Supreme Court in the judgment handed down in this case belies the considerable amount of English judicial discussion there has been regarding the construction of commercial contracts where one or more provisions in the contract is ambiguous and the language used by the parties lends itself to more than one potential meaning. In favouring a purposive over a literal approach, where a term of a contract is open to more than one interpretation, the Supreme Court unanimously held that it is generally appropriate to adopt the interpretation which is most consistent with "commercial common sense".

The dispute in this case related to the proper meaning of certain provisions in advance payment bonds issued pursuant to shipbuilding contracts in order to guarantee the buyers' pre-delivery instalments. The significance of their Lordships' unanimous decision, however, is much wider in scope and extends beyond the construction of refund guarantees and advance payment bonds to the construction of commercial contracts in general.

The background facts

This litigation arose out of six identical shipbuilding contracts, pursuant to which the builder agreed to build and sell one vessel to each of the buyers. The price of each vessel was payable in five equal instalments due at specified times, with the final instalment payable on delivery. Under the shipbuilding contracts, the builder was obliged to obtain refund guarantees to guarantee the buyers' pre-delivery instalments ("Article X.8 REFUND GUARANTEE"). Each contract gave the buyer the right to a full refund in the event that the buyer exercised its right to reject the vessel or to terminate, cancel or rescind the contract ("X.5 REFUND BY THE BUILDER"). Each buyer also had a further right to repayment of instalments in the event of a default by the builder ("Article XII:BUILDER'S DEFAULT"), one such event of default being insolvency (Article XII.3). Insolvency was not, however, expressed to be an event entitling the buyers to reject the vessel under Article X.5.

Kookmin Bank ("the...