Rainy Sky SA v Kookmin Bank [2011]

Court: Supreme Court

Facts: Rainy Sky SA, a ship-owning firm, contracted with Jinse Shipbuilding for the purchase of vessels. To secure their payments, Rainy Sky received an indemnity bond from Kookmin Bank, which stated that payments would be refunded "upon rejection of the Vessel… or upon a Total Loss of the Vessel." When Jinse became insolvent, Rainy Sky called on the bond for repayment of the instalments they had made. Kookmin Bank contested, arguing that the bond only covered specific events like vessel rejection or total loss, and not insolvency.

Issue: Whether the indemnity bond covered repayment to Rainy Sky due to Jinse’s insolvency.

Held: The Supreme Court ruled in favour of Rainy Sky, concluding that the bond did cover insolvency-related repayment claims. Lord Clarke emphasised that, where a contract term is ambiguous, the interpretation that aligns with business common sense should be preferred.

Key Judicial Statement: Lord Clarke: “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.” However, “where parties have used unambiguous language, the court must apply it, even if the results it produces are commercially improbable.”

💡 Leveluplaw: This case reaffirms the principle that in cases of ambiguity, courts should favour the interpretation that aligns with business common sense. However, it also emphasises that courts cannot override unambiguous language, even if it results in an outcome that appears commercially irrational. This case is essential for those drafting contracts to ensure that the language used is clear and avoids creating ambiguity, as the courts will defer to commercial common sense only when necessary.