Business common sense in contract terms.
The Supreme Court has held that business common sense should prevail when interpreting contract terms. How does this affect your terms? In Rainy Sky S.A. & Ors v Kookmin Bank [2011], the UK Supreme Court held that where language used in a contract has more than one potential meaning, it is generally appropriate to adopt the construction that is most consistent with business common sense.
In that case, the key issue between the parties concerned the proper construction of two paragraphs in a Bond document. The second paragraph of each Bond provided that Rainy Sky was entitled to “repayment of the pre-delivery instalments” upon their “rejection of the vessel…termination, cancellation or rescission of the Contract…”. The third paragraph of each Bond stated that, in consideration of each Rainy Sky’s agreement to make the pre-delivery instalments, Kookmin Bank undertook to pay “all such sums due to you under the Contract”. Kookmin Bank argued that “such sums” referred only to the limited circumstances referred to in the second paragraph, which did not include where repayment was triggered by an insolvency event. Rainy Sky argued that “such sums” simply meant any sums however they may became repayable.
Contrary to the view taken by the Court of Appeal, the UK Supreme Court agreed with Rainy Sky, and concluded that the long line of case law in this area had established that the Court’s task was to determine what a reasonable person, who had all of the background knowledge reasonably available to the parties at the relevant time, would have understood the parties to have meant by the words that they used.
The question for the Court was the role to be played by considerations of business common sense in determining what the parties meant. The Court held that where the terms of the contract were clear and unambiguous, effect would be given to them without any consideration of business common sense, even if the result is improbable. However, where there were two possible constructions of the language used (as would often be the case), the construction that was most consistent with business common sense would generally be adopted. It will therefore often be the case that, where a contractual dispute has arisen, considerations of business common sense will come into play.
Therefore if you face, or potentially face a situation where the application of business common sense may need to apply in respect of the construction of the language used in a contract term or in conflicting contract terms, then you need to contact our office for advice
In that case, the key issue between the parties concerned the proper construction of two paragraphs in a Bond document. The second paragraph of each Bond provided that Rainy Sky was entitled to “repayment of the pre-delivery instalments” upon their “rejection of the vessel…termination, cancellation or rescission of the Contract…”. The third paragraph of each Bond stated that, in consideration of each Rainy Sky’s agreement to make the pre-delivery instalments, Kookmin Bank undertook to pay “all such sums due to you under the Contract”. Kookmin Bank argued that “such sums” referred only to the limited circumstances referred to in the second paragraph, which did not include where repayment was triggered by an insolvency event. Rainy Sky argued that “such sums” simply meant any sums however they may became repayable.
Contrary to the view taken by the Court of Appeal, the UK Supreme Court agreed with Rainy Sky, and concluded that the long line of case law in this area had established that the Court’s task was to determine what a reasonable person, who had all of the background knowledge reasonably available to the parties at the relevant time, would have understood the parties to have meant by the words that they used.
The question for the Court was the role to be played by considerations of business common sense in determining what the parties meant. The Court held that where the terms of the contract were clear and unambiguous, effect would be given to them without any consideration of business common sense, even if the result is improbable. However, where there were two possible constructions of the language used (as would often be the case), the construction that was most consistent with business common sense would generally be adopted. It will therefore often be the case that, where a contractual dispute has arisen, considerations of business common sense will come into play.
Therefore if you face, or potentially face a situation where the application of business common sense may need to apply in respect of the construction of the language used in a contract term or in conflicting contract terms, then you need to contact our office for advice
posted by Melbury at
14:05
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