Supreme Court advocates common sense
Anyone working daily with courts and judges will know only too
well how out of touch they can seem, particularly when construing
the meaning of a commercial contract. However, there have over the
past few years been welcome signs that in the higher courts at
least, a more realistic approach is being taken. This trend is
demonstrated nicely by the recent Supreme Court decision in
Rainy Sky SA v Kookmin Bank [2011] UKSC 50. The facts of
the case are not particularly important; suffice to say that the
parties disagreed over the interpretation of one identical clause
in a number of refund guarantees issued by Kookmin to support ship
building contracts entered into by the claimants. What is important
though, is the succinct review of recent decisions on the
interpretation of contracts, and the unequivocal decision by the
Supreme Court that business common sense was not just a factor, but
perhaps the primary factor in construing a commercial contract.
At one time, the courts took a highly restrictive approach to
construction. The meaning of a contract had to be based almost
solely on the words used by the parties, and the introduction of
extraneous evidence to "explain" the intentions of a party was
strictly controlled. No floodgates have opened, but step by step a
more holistic approach has been adopted. It is unquestioned that
the courts will always apply the unambiguous use of language; to do
otherwise would result in commercial anarchy. However there seems
now to be a greater recognition by judges of the flexibility of
language, and of the need to look at the wider context in order to
decide which of two conflicting interpretations should prevail. It
has for some time been accepted that the commercial purpose of a
contract is more important than the niceties of language; further
that where a strict use of language would produce a nonsensical
result, an alternative common sense reading should be preferred.
Rainy Sky v Kookmin takes that approach a stage further by
clearly stating that where a term of a contract is capable of more
than one interpretation, neither of which is inherently
nonsensical, it is still appropriate to adopt the interpretation
which is most consistent with business common sense.
As it happens, this approach is not without its risks, as it
does require the application of commercial common sense. Judges
sitting today in the higher courts are generally far better
equipped to make sensible commercial decisions than they used to
be; unfortunately the same cannot be said for the lower courts
where the majority of decisions are made daily. That being said,
this is still a judgment that is on balance likely to promote
better decisions overall and, perhaps more importantly, a more
realistic approach by parties to early commercial settlement. In
theory at least, it will now be more risky for a party to pursue a
line of argument that ignores obvious commercial common sense,
simply because their lawyers believe they can twist the wording of
a badly drafted contract to suit.
