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Business common sense rules

21 March 2012

We welcomed the recent decision that ‘business common sense’ should be upheld where contractual wording is unclear.

The court concluded that where the term of a contract could be interpreted in more than one way, business common sense should dictate which meaning was intended.

The case in question was Rainy Sky SA v Kookmin Bank in which an issue arose regarding a bond issued in support of a shipbuilding contract. The shipbuilder had entered into an insolvency procedure (under Korean law) and had defaulted on the contract. The buyer sought to rely on the bond – which included an undertaking to pay ‘all such sums due .. under the contract’. The bank refused to pay. Did the term ‘such sums’ refer only to certain specific payments or to all money owing upon insolvency?

Applying business common sense, The High Court took it to mean the latter. The Court of Appeal reversed the decision, saying the use of common sense should be limited to where it was necessary to avert extreme or irrational meanings of words.

The Supreme Court agreed with the first ruling and held that ‘all sums’ meant ‘all money owing’. Their ultimate aim was to establish what the parties meant.

The decision is reassuring as it confirms that courts should use common sense in establishing what the parties intended to agree. This may save a party from unclear contractual wording. However in practice, the case highlights the general rule that it is cheaper to address issues beforehand than to correct them. If you are concerned that contract terms may be ambiguous, it is better to ensure precise drafting at the outset rather than seek a remedy through costly litigation.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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