Rainy Sky SA v Kookmin Bank [2011] UKSC 50

Facts

• Rainy Sky SA entered into a shipbuilding contract, making advance payments to a shipbuilder.
• Kookmin Bank issued a guarantee to cover the repayment of these installments if the shipbuilder failed to deliver the ship.
• When the ship was not delivered, Rainy Sky SA sought repayment of the installments under the guarantee.
• The shipbuilder refused to return the paid installments.
• The dispute centred on whether the guarantee terms covered the specific installments paid by Rainy Sky SA.
• The High Court and Court of Appeal determined that the guarantee covered the paid installments, favouring alignment with standard commercial practice.
• Kookmin Bank appealed to the Supreme Court, contesting the interpretation of the guarantee’s wording.

Issues

1. Whether the language of the guarantee required repayment of the specific installments paid by Rainy Sky SA when the ship was not delivered.
2. Whether commercial common sense could justify departing from the unambiguous wording of the guarantee.
3. How courts should balance textual analysis with commercial context in interpreting contractual terms, particularly guarantees.

Decision

• The Supreme Court determined the wording of the guarantee was of utmost importance and should be upheld where unambiguous.
• Lord Clarke concluded that, if alternative interpretations exist, courts may prefer one consistent with business common sense, but cannot override unambiguous terms.
• The court emphasised that commercial common sense is only relevant when there is genuine ambiguity in contractual language.
• The appeal was dismissed and the decision that the guarantee covered the paid installments was upheld.

Legal Principles

• Where contractual language is unambiguous, courts must give effect to its literal meaning, irrespective of perceived commercial impracticality.
• Commercial common sense may guide interpretation only where the language permits more than one reasonable construction.
• In interpreting guarantees and other commercial agreements, textual preciseness is critical, and ambiguity can be construed strictly against the guarantor.
• The quality and formality of contract drafting influence whether textualism or contextualism predominates in interpretation.
• Courts are not to improve or revise contracts retrospectively to achieve what might now seem a more commercially sensible result.

Conclusion

Rainy Sky SA v Kookmin Bank [2011] UKSC 50 establishes that the plain and unambiguous wording of a contract takes precedence in interpretation, limiting recourse to commercial common sense unless genuine ambiguity is present. The case highlights the importance of careful contract drafting and strengthens legal certainty in commercial agreements.