Construction of commercial contracts

In Rainy Sky SA v Kookmin Bank [2011] UKSC 50 the UK Supreme Court prescribed the use of ‘business common sense’ when interpreting commercial contracts.

Edward Yang Liu Legal Assistant, Reed Smith Richards Butler

Introduction

It is always a crucial task for English commercial judges to decide the meaning of the binding terms of a commercial contract and, in particular, whether and how those terms apply to the disputes arising out of that contract. Since Lord Hoffmann (the majority of the House of Lords agreeing) in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 summed up the common sense principles for interpreting contractual documents, the literal approach gave way and the ‘background’ or ‘surrounding circumstances’ or ‘matrix of facts’ took on a prominent position in the interpretation of contracts so as to achieve ‘their natural and ordinary meaning’ (per Lord Bingham, Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, at para 8).