Kookmin Bank v Rainy Sky SA & Ors

In construing a commercial guarantee, the court must identify the meaning conveyed by the words read in their contractual and factual context. A term is not to be recast merely because its allocation of risk appears one-sided or commercially unattractive. The natural meaning may yield only where it produces consequences so extreme, absurd or irrational that the parties cannot reasonably have intended them. An advance payment bond referring to particular repayment provisions was therefore construed as covering repayments arising in those specified circumstances, not a separate refund obligation triggered by the builder’s insolvency. The majority treated the omission as a contractual allocation of risk, not an error the court could repair by speculation about commercially desirable security. The dissent would have reached the opposite conclusion.

Six vessel buyers paid pre-delivery instalments under shipbuilding contracts. The builder later entered a Korean debt work-out procedure. The buyers demanded refunds under Article XII.3 and then called on materially identical on-demand bonds issued by Kookmin Bank. The Commercial Court granted summary judgment to the assignee of the buyers’ rights, holding that the bonds covered the insolvency-triggered refunds. The Bank appealed on construction. The central question was whether paragraph (3)’s reference to sums due under the contract covered every repayment obligation for the instalments or only the repayment circumstances recited in paragraph (2).

1. Disposition. By a majority, the appeal was allowed. Patten LJ gave the leading reasoning and Thorpe LJ agreed. Tuckey LJ dissented and would have dismissed the appeal.
2. Contractual construction. The court must construe the words as they would be understood by a reasonable person with the relevant background knowledge, including the contractual matrix: ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896, Prenn v Simmonds [1971] 1 WLR 1381 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989. A drafting error or an extreme consequence may justify departing from precise language: Mannai Investments Company Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] AC 191, Wickman Machine Tools Sales Ltd v Schuler AG [1974] AC 235 and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101. But a merely one-sided, unfair or commercially unattractive bargain does not permit the court to reformulate relatively clear terms.
3. Meaning of the bond. Article X.8 of the shipbuilding contract contemplated guarantees for repayment of the pre-delivery instalments and interest under or pursuant to paragraph 5. Paragraph (2) of the bond recited the repayment obligations arising on rejection, termination, cancellation, rescission or total loss. In paragraph (3), the words referring to sums due under the contract referred to instalments repayable in those specified circumstances, rather than to every contractual obligation to refund them.
4. Insolvency provision. Article XII.3 required an immediate refund following the builder’s insolvency but did not itself give the buyer a right to terminate. The omission of that obligation from paragraph (2) could not be supplied by judicial speculation that insolvency was the situation in which security would be most desirable. The Bank’s construction did not produce the absurd, irrational or extreme result required to displace the natural meaning of the bond.
5. Tuckey LJ considered both constructions possible and regarded the Bank’s interpretation as commercially implausible because insolvency was the event most likely to require security. That reasoning did not command the majority.

1. Court of Appeal (Civil Division): By a majority, allowed the Bank’s appeal in [2010] EWCA Civ 582.
2. Commercial Court: Simon J granted summary judgment for the Seventh Claimant, holding that the advance payment bonds covered the builder’s insolvency-triggered repayment obligations. No separate citation for that decision is stated.