UKSC 50
On appeal from:  EWCA Civ 582
Rainy Sky S. A. and others (Appellants) v Kookmin Bank (Respondent)
Lord Phillips, President
JUDGMENT GIVEN ON
2 November 2011
Heard on 27 July 2011
Mark Howard QC
Michael Ashcroft QC
(Instructed by Ince & Co LLP)
Guy Philipps QC
(Instructed by Linklaters LLP)
LORD CLARKE, (WITH WHOM LORD PHILLIPS, LORD MANCE, LORD KERR AND LORD WILSON AGREE)
Introduction and factual background
" We refer to the … Contract entered into between … the Builder and yourselves for the construction and delivery of … the 'Vessel' to be delivered before [31 July 2009]. Other terms and expressions used in this Bond shall have the same meaning as in the Contract, a copy of which has been provided to us.
 Pursuant to the terms of the Contract, you are entitled, upon your rejection of the Vessel in accordance with the terms of the Contract, your termination, cancellation or rescission of the Contract or upon a Total Loss of the Vessel, to repayment of the pre-delivery instalments of the Contract Price paid by you prior to such termination or a Total Loss of the Vessel (as the case may be) and the value of the Buyer's Supplies delivered to the Shipyard (if any) together with interest thereon at the rate of ... (7%) per annum (or ... (10%) per annum in the case of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund.
 In consideration of your agreement to make the pre-delivery instalments under the Contract and for other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged), we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the Contract (or such sums which would have been due to you but for any irregularity, illegality, invalidity or unenforceability in whole or in part of the Contract) PROVIDED THAT the total amount recoverable by you under this Bond shall not exceed US $[26,640,000] ... plus interest thereon at the rate of ... (7%) per annum (or ... (10%) per annum in the case of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund.
 Payment by us under this Bond shall be made without any deduction or withholding, and promptly on receipt by us of a written demand (substantially in the form attached) signed by two of your directors stating that the Builder has failed to fulfil the terms and conditions of the Contract and as a result of such failure, the amount claimed is due to you and specifying in what respects the Builder has so failed and the amount claimed. Such claim and statement shall be accepted by us as evidence for the purposes of this Bond alone that this amount claimed is due to you under this Bond.
 Our liability under this Bond shall not be affected by … (v) any insolvency, re-organisation or dissolution of the Builder, or (vi) any other matter or thing which may operate to discharge or reduce our liability hereunder.
"ARTICLE X: PAYMENT
5. REFUND BY THE BUILDER
The payments made by the Buyer to the Builder prior to delivery of the Vessel shall constitute advances to the Builder. If the Vessel is rejected by the Buyer in accordance with the terms of this Contract, or if the Buyer terminates, cancels or rescinds this Contract pursuant to any of the provisions of this Contract specifically permitting the Buyer to do so, the Builder shall forthwith refund to the Buyer in US dollars, the full amount of total sums paid by the Buyer to the Builder in advance of delivery together with interest thereon as herein provided within thirty (30) banking days of acceptance of rejection.
... The interest rate of the refund … shall be seven per cent (7%) per annum …
If the Builder is required to refund to the Buyer the installments paid by the Buyer to the Builder as provided in this Paragraph, the Builder shall return to the Buyer all of the Buyer's Supplies as stipulated in Article XIII which were not incorporated into the Vessel and pay to the Buyer an amount equal to the cost to the Buyer of those Buyer's Supplies incorporated into the Vessel.
6. TOTAL LOSS
If there is a total loss or a constructive total loss of the Vessel prior to delivery thereof, the Builder shall proceed according to the mutual agreement of the parties hereto either:
(a) to build another vessel in place of the Vessel so lost ... provided that the parties hereto shall have agreed in writing to a reasonable cost and time for the construction … or
(b) to refund to the Buyer the full amount of the total sums paid by the Buyer to the Builder under the provisions of Paragraph 2 of this Article and the value of Buyer's Supplies delivered to the Shipyard, if any, together with interest thereon at the rate of ten percent (10%) per annum ...
If the parties hereto fail to reach such agreement within two (2) months after the Vessel is determined to be a total loss or constructive total loss, the provisions of (b) hereinabove shall be applied."
8. REFUND GUARANTEE
The Builder shall as a condition precedent to payment by the Buyer of the first installment deliver to the Buyer an assignable letter of guarantee issued by a first class Korean Bank .... to Buyer's Financiers for the refund of the first installment, and at the same time, together with the letter of guarantee relating to the first installment, Builder shall also deliver to the Buyer an assignable letter of guarantee issued by a first class Korean Bank .... for the refund of the respective installments following the way of the payment stipulated in this Article. The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery installments plus interest as aforesaid to the Buyer under or pursuant to paragraph 5 above in the form annexed hereto as Exhibit 'A' which is yet to be agreed…
In the event that the Refund Guarantees, for all installments, have not been provided to the Buyer in a form acceptable to the Buyer's financiers and have not been issued by an entity acceptable to Buyer's financiers, by the 31st of August 2007 then the Buyer may cancel this Contract without penalty on either side."
It is common ground that no form of guarantee was in fact annexed to the Contracts.
"ARTICLE XII: BUILDER'S DEFAULT
3. If the Builder shall apply for or consent to the appointment of a receiver, trustee or liquidator, shall be adjudicated insolvent, shall apply to the courts for protection from its creditors, file a voluntary petition in bankruptcy or take advantage of any insolvency law, or any action shall be taken by the Builder having an effect similar to any of the foregoing or the equivalent thereof in any jurisdiction, the Buyer may by notice in writing to the Builder require the Builder to refund immediately to the Buyer the full amount of all sums paid by the Buyer to the Builder on account of the Vessel and interest thereon at seven percent (7%) per annum on the amount to be refunded to the Buyer, computed from the respective date such sums were paid by the Buyer to the date of remittance of the refundable amount to the Buyer and immediately upon receipt of such notice the Builder shall refund such amount to the Buyer. Following such refund the Builder may, but shall not be obliged to, by notice in writing to the Buyer given within ten (10) business days terminate this contract. If the Builder does not so terminate the Contract the Buyer's obligation to pay further installments prior to delivery of the Vessel under Article X 2(a),(b),(c) and (d) shall be suspended and the full Contract price shall be paid to the Builder upon delivery of the Vessel in the manner contemplated by Article X paragraph 2(e)."
The correct approach to construction
"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. This follows from the House of Lords decisions in Wickman Machine Tools Sales Limited v Schuler AG  AC 235, where at 251 Lord Reid said:
'The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.'
and The Antaios  AC 191, where at 201 Lord Diplock said:
'If detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense it must yield to business common sense.'"
"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 it 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."
"This robust declaration does not, however, mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement."
"For my part, I would accept that the more obvious reading of both favours the landlord's construction. I am persuaded, however, that they are capable of being, and therefore, for the reasons already given, should be, construed differently."
That case is therefore an example of the adoption and application of the principle endorsed by the Judge and by Sir Simon Tuckey. See also International Fina Services AG v Katrina Shipping Ltd, The Fina Samco  2 Lloyd's Rep. 344, where Neill LJ said at page 350 it was necessary when construing a commercial document to strive to attribute to it a meaning which accords with business common sense.
"Often there is no obvious or ordinary meaning of the language under consideration. There are competing interpretations to be considered. In choosing between alternatives a court should primarily be guided by the contextual scene in which the stipulation in question appears. And speaking generally commercially minded judges would regard the commercial purpose of the contract as more important than niceties of language. And, in the event of doubt, the working assumption will be that a fair construction best matches the reasonable expectations of the parties."
I agree. He said much the same judicially in Society of Lloyd's v Robinson  1 All ER (Comm) 545, 551:
"Loyalty to the text of a commercial contract, instrument, or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language".
"13. Construction, as Sir Thomas Bingham MR said in Arbuthnott v Fagan  CLC 1396 at p 1400 is thus 'a composite exercise, neither uncompromisingly literal nor unswervingly purposive'. To para (5), one may add as a coda words of Lord Bridge in Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14, cited in my judgment in Sinochem International Oil (London) Ltd v Mobil Sales and Supply Corp  CLC 878 at p 885. Speaking of a poorly drafted and ambiguous contract, Lord Bridge said that poor drafting itself provides:
'no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.'
16 ... in my judgment the subclause has no very natural meaning and is, at the least, open to two possible meanings or interpretations - one the judge's, the other that it addresses two separate subject-matters. In these circumstances, it is especially important to undertake the exercise on which the judge declined to embark, that is to consider the implications of each interpretation. In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning. In intermediate situations, as Professor Guest wisely observes in Chitty on Contracts (28th edn) vol 1, para. 12-049, a 'balance has to be struck' through the exercise of sound judicial discretion."
"the rule to which Lord Halsbury LC alluded in Glynn v Margetson & Co  AC 351, 359, 'that a business sense will be given to business documents. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document."
"25. The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards. ...
26. The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction."
Application to the facts
"The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery instalments plus interest as aforesaid to the Buyer under or pursuant to paragraph 5 above in the form annexed hereto as Exhibit 'A' which is yet to be agreed."
"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."
I agree with Sir Simon Tuckey and prefer his approach to that of the majority in the Court of Appeal.
"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."
"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 Philipps 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."
"But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement."
See also the quotation from Longmore LJ at para 29 above, where he said that, if a clause is capable of two meanings, it is quite possible that neither meaning will flout common sense, but that, in such a case, it is much more appropriate to adopt the more, rather than the less, commercial construction.