Business Common Sense And The Interpretation Of Commercial Contracts

What role does business common sense play in the interpretation of commercial contracts? This issue was recently addressed by the Supreme Court of the United Kingdom in Rainy Sky S.A. v. Kookmin Bank. The answer: "where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense". Since there is currently some uncertainty in Canada on the point, Rainy Sky is an important case to consider.

Decision

At issue was the proper interpretation of a performance bond that had been issued in support of a contract to construct a ship. The shipbuilder had defaulted on the contract by entering into insolvency proceedings. The ship buyers called on the performance bond. The bank that had issued the bond refused to pay, arguing that insolvency of the shipbuilder was not a risk covered by the bond. The operative sentence of the bond was an undertaking to pay "all such sums