Ince seals Supreme Court victory in Rainy Sky contracts case

Ince & Co has scored a victory in the Supreme Court after it ruled that business sense should be applied when interpreting commercial contracts.

In Rainy Sky SA & Ors v Kookmin Bank, the Supreme Court accepted arguments put forward by appellant Rainy Sky that construing commercial contracts was a “unitary exercise” in which courts must consider what a reasonable person would have understood the parties to mean (see judgment).

Giving his substantive judgment Lord Clarke stated: “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.”

Ince & Co partner Paul Herring instructed Brick Court’s Mark Howard QC and 20 Essex Street’s Michael Ashcroft QC to represent the appellants.

They faced Fountain Court’s Guy Philipps QC, who led James Cutress of the same set having been instructed by Linklaters.

In May 2007, the appellants entered into shipbuilding contracts with Jinse Shipbuilding each priced at $33.3m. In each case a Korean bank provided the buyer with a refund guarantee.

A bank guarantee was provided by Kookmin Bank in favour of the buyer under which the bank agreed to pay them “such sums due to you under the contract” if the manufacturer failed to pay.

In January 2009 the shipbuilder entered a form of insolvency under Korean law and the buyers demanded an immediate refund of all the instalments plus interest. This was refused.

Clarke SCJ said the court preferred the buyer’s construction of the contract “because it is consistent with the commercial purpose of the bonds in a way which the bank’s construction is not”.

The ruling overturned a decision delivered by Court of Appeal judges Lord Justices Thorpe and Patten in which Lord Justice Tuckey dissented.