The defendant bank appealed against summary judgment given on a claim on its obligations under an advance payment bond given to support ship-building contracts.
Sir Simon Tuckey (dissenting) said: ‘There is no dispute about the principles of construction to be applied in order to answer this question. The court must first look at the words which the parties have used in the bond itself. The shipbuilding contract is of course the context and cause for the bond but is nevertheless a separate contract between different parties. If the language of the bond leads clearly to a conclusion that one or other of the constructions contended for is the correct one, the Court must give effect to it, however surprising or unreasonable the result might be. But if there are two possible constructions, the Court is entitled to reject the one which is unreasonable and, in a commercial context, the one which flouts business common sense.’
He went on to discuss whether in the particular circumstances of the case the Judge should have had regard to considerations of commercial and business common sense, and said: ‘But should the judge’s approach in this case have been more restricted as Mr Philipps contends? I do not think so. The title to Article X as a whole is ‘Payment’ but it contains an assortment of different terms. Article X.8 is drafted on the basis that the form of guarantee which the parties contemplated would be annexed to the agreement. That would be the document to look at if one was trying to discover from the contract what the Buyer was looking for, not the reference back to Article X.5. This reference back is poorly drafted and quite capable of referring simply to the opening sentence of paragraph 5. It is difficult to construe it in a way which restricts the refund obligations which the bond was to cover, not least because there is no reference to the Article X.6 obligation to a refund following total or constructive loss of the vessel which both parties agree was to be covered by the bond. By the same token, no significance should be attached to the omission of the Article XII.3 refund obligation. Nor do I think there is anything in Mr Philipps’ further point. On the happening of an Article XII.3 event the Buyer was entitled to a refund of its advance payments ‘immediately’. If that did not happen the contract was in a state of limbo: neither party could terminate at that stage. If the Builder did not proceed with the construction of the vessel, as would be extremely likely if it was insolvent, the Buyer could terminate for delay under Article XII.l but, under the terms of this article, only after 90 days plus 14 days notice. Only then could it call on the Bond. I cannot see how any Buyer (or its financiers) could possibly be satisfied with this as a remedy in the situation where the Builder was insolvent or nearly so.’ and
‘On the Bank’s construction the Bonds covered each of the situations in which the Buyers were entitled to a return or refund of the advance payments which they had made under the contracts apart from the insolvency of the Builder. No credible commercial reason has been advanced as to why the parties (or the Buyers’ financiers) should have agreed to this. On the contrary, it makes no commercial sense. As the judge said, insolvency of the Builder was the situation for which the security of an advance payment bond was most likely to be needed. The importance attached in these contracts to the obligation to refund in the event of insolvency can be seen from the fact that they required the refund to be made immediately. It defies commercial common sense to think that this, among all other such obligations, was the only one which the parties intended should not be secured. Had the parties intended this surprising result I would have expected the contracts and the bonds to have spelt this out clearly but they do not do so.’
Patten LJ said: ‘Before I turn to the language of the bond and the judge’s construction of paragraph (3) it is necessary to say something about the principles to be applied. In paragraph 18(iii) of his judgment Simon J describes the Bank’s construction of the bond as having the surprising and uncommercial result of the guarantee not being available to meet the shipbuilders’ repayment obligations in the event of insolvency. He appears to have taken this factor into account as an indication in favour of the Buyer’s construction of paragraph (3) and Sir Simon Tuckey has adopted the same approach in paragraph 19 of his judgment in deciding between the alternative constructions which are advanced.
I will come in a moment to the question whether there is any real ambiguity in the language of the bond and how evenly balanced the alternative constructions are, but the circumstances in which the Court can confidently declare that one or other possible meaning of the words used is uncommercial needs to be defined with some care. In a commercial contract (like any other contract) the parties have chosen to define the limits of the obligations which they have undertaken by the language they have used. The purpose of the contract is to provide an objective record of what has been agreed so as to regulate the legal relationship between them. The Court’s function is to give effect to those obligations by respecting the terms in which they are cast. When a dispute arises as to the meaning and scope of the contract the Court can only resolve it by construing the words used in a way which gives them the meaning which the document would convey to a reasonable person knowing all the background knowledge which would have been available to the parties in the situation they were in at the time of the contract: see ICS Ltd v West Bromwich Building Society  1 WLR 896 per Lord Hoffmann at page 912H. . .
In some cases this reference back to the matrix of fact may enable the Court to make sense of language which, as written in the contract, is either misused or ungrammatical. Most of the recent cases in which the House of Lords has re-stated the principles of contractual interpretation have been ones in which there has been some detectable error in the drafting of the document which has required the Court to ignore the precise language used in order to arrive at the meaning which the parties appear to have intended: see Mannai Investments Company Ltd v Eagle Star Life Assurance Co Ltd  AC 749 . .
In this case (as in most others) the Court is not privy to the negotiations between the parties or to the commercial and other pressures which may have dictated the balance of interests which the contract strikes. Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the Court has no alternative but to give effect to its terms. To do otherwise would be to risk imposing obligations on one or other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part of the Court . .
For the reasons which I have given, I do not regard the alternative constructions of paragraph (3) advanced on this appeal as being in any way evenly balanced. I also agree with Mr Philips that it is impermissible to speculate on the reasons for omitting repayments in the event of insolvency from the bond. Although the judge is right to say that cover for such event was, objectively speaking, desirable, that is not sufficient in itself to justify a departure from what would otherwise be the natural and obvious construction of the bond. There may be any number of reasons why the Builder was unable or unwilling to provide bank cover in the event of its insolvency and why the Buyer was prepared to take the risk. This is not a case in which the construction contended for would produce an absurd or irrational result in the sense described in the cases I have referred to and merely to say that no credible commercial reason has been advanced for the limited scope of the bond does, in my view, put us in real danger of substituting our own judgment of the commerciality of the transaction for that of those who were actually party to it’.
Thorpe, Patten LJJ, Sir Simon Tuckey
 1 All ER (Comm) 18, 130 Con LR 19,  1 CLC 829,  EWCA Civ 582
England and Wales
Appeal from – Rainy Sky SA and Others v Kookmin Bank ComC 29-Oct-2009
The claimants sought summary judgment under an advance payment bond issued by the defendants in connection with certain shipbuilding contracts. . .
Cited – F L Schuler AG v Wickman Machine Tools Sales Limited HL 4-Apr-1973
The parties entered an agreement to distribute and sell goods in the UK. They disagreed as to the meaning of a term governing the termination of the distributorship.
Held: The court can not take into account the post-contractual conduct or . .
Cited – Antaios Compania Naviera SA v Salen Rederierna AB (‘the Antaios’) HL 1984
A ship charterer discovered that the bills of lading were incorrect, but delayed withdrawal from the charter for 13 days. They now sought leave to appeal the arbitration award against them.
Held: Though he deprecated extending the use of the . .
Cited – Co-operative Wholesale Society Ltd v National Westminster Bank plc CA 1995
The court considered the proper construction of rent review clauses in several cases. The underlying result which the landlords sought in each case was the same.
Held: It was a most improbable commercial result. Where the result, though . .
Appeal from – Rainy Sky Sa and Others v Kookmin Bank SC 2-Nov-2011
Commercial Sense Used to Interpret Contract
The Court was asked as to the role of commercial good sense in the construction of a term in a contract which was open to alternative interpretations.
Held: The appeal succeeded. In such a case the court should adopt the more, rather than the . .
Cited – Sugarman and Others v CJS Investments Llp and Others CA 19-Sep-2014
The parties were apartment owners in a development, each owning shares in the management company. They disputed the interpreation of the Articles as to whether the owner of more than one apartment was still restricted to one vote at member meetings, . .
These lists may be incomplete.
Updated: 17 January 2021; Ref: scu.416104