Contract disputes: Don’t leave it to chance or common sense

Last year I posted a blog that highlighted the importance of ensuring terms and conditions are properly drafted to minimise the risk of contract disputes arising over the interpretation of such clauses at a later date.

This is a scenario all businesses could well do without in the current economic climate, particularly as the Supreme Court recently provided some clarification on how it would interpret such clauses.

The case of ‘Rainy Sky S.A. & Ors v Kookmin Bank’ confirms that where language used in a contract has more than one potential meaning, the courts are to adopt what it considers to be the construction most consistent with business common sense.

The case involved a dispute over whether a clause in a contract to finance the purchase of a ship, which required the defendant bank to repay pre-delivery instalments to the claimant purchaser, applied in the event of the insolvency of the shipbuilder.

Lord Clarke concluded that the court’s task was to determine what a reasonable person, who had all of the background knowledge reasonably available to the parties at the relevant time, would have understood the parties to have meant by the words they used.

The Supreme Court held that a construction which excluded the shipbuilder’s insolvency from situations that could trigger the bank’s refund obligations would make no commercial sense as it was a scenario that the claimant would have expected to be protected against.

While this was good news for the claimant in this case, it would be dangerous to rely on what the court may regard as business common sense in a given set of circumstances.

The only way to ensure that contracts are interpreted with certainty is to adopt clear and unambiguous wording at the drafting stage and to leave nothing to chance when negotiating terms.

For further information on dispute resolution issues, please contact our team on 01772 258321.