Kookmin Bank v Rainy Sky SA & Ors [2010] EWCA Civ 582

Case No A3/2009/2470[2010] EWCA Civ 582IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM COMMERCIAL COURT
MR JUSTICE SIMON
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 27 May 2010
Before
LORD JUSTICE THORPELORD JUSTICE PATTENSIR SIMON TUCKEY
Between
KOOKMIN BANKAppellantRAINY SKY S.A.RespondentSEILAND SHIPPING & TRADING CO.RespondentISLAY NAVIGATION INC.RespondentSEAPRIDE NAVIGATION CORP.RespondentSEABRIZE LTD.RespondentRECIF CORP.RespondentMETROBULK HOLDINGS S.A.RespondentKOOKMIN BANK Appellant (Defendant)- and -(1) RAINY SKY S.A.(2) SEILAND SHIPPING & TRADING CO.(3) ISLAY NAVIGATION INC.(4) SEAPRIDE NAVIGATION CORP.(5) SEABRIZE LTD.(6) RECIF CORP.(7) METROBULK HOLDINGS S.A.Respondent (Claimants)
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7404 1424Official Shorthand Writers to the Court)
Guy PHILIPPS Q.C. & James CUTRESS (instructed by Linklaters LLP) for AppellantAndrew BAKER Q.C. & Socrates PAPADOPOULOS (instructed by Ince & Co.) for RespondentsHearing Hearing dates: 29 April 2010
JudgmentSIR SIMON TUCKEY:Introduction
[1]This is an appeal from an order made by Simon J. in the Commercial Court in which he gave summary judgment for the Seventh Claimant against the Defendant Korean bank (“the Bank”) for a total of US$46,652,000 plus interest under the terms of six materially identical on demand advance payment bonds or guarantees issued by the Bank.[2]The bonds were issued by the Bank to secure certain obligations assumed by its Korean customer, Jinse Shipbuilding Co Ltd (“the Builder”), under six materially identical shipbuilding contracts made with the First to Sixth Claimants as buyers. The Seventh Claimant is the assignee of those Claimants’ rights under their respective bonds.[3]Each shipbuilding contract entitled the claimant (“the Buyer”) to require the Builder to refund the full amount of all advance payments made in the event of the Builder’s insolvency or the like. The issue for the judge was whether this obligation was covered by the bonds. The judge held that it was. The Bank says it was not and the judge has given the Bank permission to appeal on this point.[4]The Bank had also argued that its obligations under the bond had not been triggered by the demands which were made. The judge rejected this argument and refused permission to appeal on this point. It has not been pursued before this Court.

The bonds

[5]Each bond is in the form of a letter from the Bank to the Buyer and is dated 22 August 2007. I set out the relevant paragraphs which I have numbered in the same way as the judge did. It says: ADVANCE PAYMENT BOND “(1) We refer to the shipbuilding contract dated 11 May 2007 (as amended, varied or novated from time to time, the “Contract”) entered into between Jinse Shipbuilding Co., Ltd of ... Pusan, Korea (the “Builder”) and yourselves for the construction and delivery of a new-built ....“Vessel” to be delivered before ... . Other terms and expressions used in this Bond shall have the same meaning as in the Contract, a copy of which has been provided to us. (2) Pursuant to the terms of the Contract, you are entitled, upon your rejection of the Vessel in accordance with the terms of the Contract, your termination, cancellation or rescission of the Contract or upon a Total Loss of the Vessel, to repayment of the pre-delivery instalments of the Contract Price paid by you prior to such termination or a Total Loss of the Vessel (as the case may be) and the value of the Buyer’s Supplies delivered to the Shipyard (if any), together with interest thereon at the rate of seven per cent (7%) per annum (or ten per cent (10%) per annum in the case of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund. (3) In consideration of your agreement to make the pre-delivery instalments under the Contract and for other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged), we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the Contract (or such sums which would have been due to you but for any irregularity, illegality, invalidity or unenforceability in whole or in part of the Contract) PROVIDED THAT the total amount recoverable by you under this Bond shall not exceed US$[26,640,000] (United States Dollars Twenty Six Million, Six Hundred and Forty Thousand only) plus interest thereon at a rate of seven per cent (7%) per annum (or ten per cent (10%) per annum in the event of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund. (4) Payment by us under this Bond shall be made without any deduction or withholding and promptly upon receipt by us of a written demand (substantially in the form attached) signed by two of your directors stating that the Builder has failed to fulfil the terms and conditions of the Contract and as a result of such failure, the amount claimed is due to you and specifying in what respects the Builder has so failed and the amount clamed. Such claim and statement shall be accepted by us as evidence for the purposes of this Bond alone that the amount claimed is due to you under this Bond.” ADVANCE PAYMENT BOND Other terms followed which included an English law and Commercial Court exclusive jurisdiction clause. The shipbuilding contracts

ADVANCE PAYMENT BOND

[6]Each shipbuilding contract is dated 22 May 2007 and was for the construction of a specified vessel for a price of US$33,300,000. Article X. 2(a) of the contract required 20% of the price (US$6,660,000) to be paid within three days of signing the contract. The remainder of the contract price was to be paid by three further 20% pre-delivery instalments at various stages during the construction of the Vessel and a final payment on delivery.[7]But Article X.8 made provision for what is described as a “Refund Guarantee”, a condition precedent to such payments. This paragraph said:
“8 REFUND GURARANTEE The Builder shall as a condition precedent to payment by the Buyer of the first instalment deliver to the Buyer an assignable letter of guarantee issued by a first class Korean bank .... to Buyer’s Financiers for the refund of the first instalment, and at the same time, together with the letter of guarantee related to the first instalment Builder shall also deliver to the Buyer an assignable letter of guarantee issued by a first class Korean bank .... for the refund of the respective instalments following the way of the payments stipulated in this Article. The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery instalments plus interest as aforesaid to the Buyer under or pursuant to paragraph 5 above in the form annexed hereto as Exhibit A which is yet to be agreed.”
No form of guarantee was in fact annexed to the Contract.[8]Article X. 5 says:
“5 REFUND BY THE BUILDER The payments made by the Buyer to the Builder prior to the delivery of the Vessel shall constitute advances to the Builder. If the Vessel is rejected by the Buyer in accordance with the terms of this Contract, or if the Buyer terminates, cancels or rescinds this Contract pursuant to any of the provisions of this Contract specifically permitting the Buyer to do so, the Builder shall forthwith refund to the Buyer in US dollars, the full amount of total sums paid by the Buyer to the Builder in advance of delivery together with interest thereon as herein provided within thirty (30) banking days of acceptance of rejection. ... If the Builder is required to refund to the Buyer the instalments paid by the Buyer to the Builder as provided in this paragraph, the Builder shall return to the Buyer all of the Buyer’s Supplies as stipulated in Article XIII which were not incorporated into the Vessel and pay to the Buyer an amount equal to the cost to the Buyer of those Buyer’s Supplies incorporated into the Vessel.”
[9]Article X. 6 says:
“6 TOTAL LOSS If there is a Total Loss or a constructive Total Loss of the Vessel prior to delivery thereof, the Builder shall proceed according to the mutual agreement of the parties hereto either: (a)to build another vessel in place of the Vessel so lost . ... or (b)to refund to the Buyer the full amount of the total sums paid by the Buyer to the Builder under the provisions of paragraph 2 of this Article and the value of Buyer’s Supplies delivered to the Shipyard, if any, together with interest thereon at the rate of ten percent (10%) per annum ...”
[10]Article XII is headed “BUILDER’S DEFAULT”. Paragraph 3 of this Article says: 3. If the Builder shall apply for or consent to the appointment of a receiver, trustee or liquidator, shall be adjudicated insolvent, shall apply to the courts for protection from its creditors, file a voluntary petition in bankruptcy or take advantage of any insolvency law, or any action shall be taken by the Builder having an effect similar to any of the foregoing or the equivalent thereof in any jurisdiction, the Buyer may by notice in writing to the Builder require the Builder to refund immediately to the Buyer the full amount of all sums paid by the Buyer to the Builder on account of the Vessel and interest thereon at seven percent (7%) per annum on the amount to be refunded to the Builder, computed from the respective date such sums were paid by the Buyer to the date of remittance of the refundable amount to the Buyer and immediately upon receipt of such notice the Builder shall refund such amount to the Buyer. Following such refund the Builder may, but shall not be obliged to, by notice in writing to the Buyer given within ten (10) business days terminate this contract. If the Builder does not so terminate the Contract the Buyer’s obligation to pay further instalments prior to delivery of the Vessel under Article X paragraphs 2(a),(b),(c) and (d) shall be suspended and the full Contract price shall be paid to the Builder on delivery of the Vessel in the manner contemplated by Article X paragraph 2(e.)[11]The contract contains a number of provisions which entitle the Buyer to cancel viz. Articles III. 1 and XII. 1 (delay) and Article III. 2(b), 3(c), 4(d) and 5(d) (insufficient speed, excessive fuel consumption, deficient deadweight or cargo capacity). Some of these provisions specifically entitle the Buyer to a refund of all advance payments following cancellation: others do not although in such cases Article X .5 would apply and have the same effect.

History

[12]All six Claimants paid the first instalment due under the contracts on 29 August 2007. The First Claimant also paid the second instalment of US$6,660,000 on 29 September 2008.[13]During the course of 2008 the Builder experienced financial difficulties and in late January 2009 entered into or became subject to a “debt work out procedure” under the Korean Corporate Restructuring Programme Law 2007.[14]On 25 February 2009 the First to Sixth Claimants gave written notice to the Builder that this procedure triggered Article 12.3 of the contract and required the Builder immediately to refund the full amount of the instalments which they had paid plus interest at 7%. The Builder failed to do so.[15]On 23 April 2009 the First to Sixth Claimants demanded repayment of the instalments which they had paid from the Bank under the terms of the bond. Through its solicitors the Bank declined to do so although at first it did not do so on the ground which is the subject of this appeal.[16]These proceedings followed. The Claimants contended that the Bank guaranteed the Builder’s obligation to repay the instalments under Article 12.3. The Bank contended that the guarantee did not cover this obligation. Both parties sought summary judgment under CPR Part 24.

Simon J’s Judgment

[17]Having summarised the arguments by counsel for the parties the Judge concluded that the argument of Mr Baker QC for the Claimants was plainly correct. He went on to give the reasons for his decision as follows:(i) Paragraphs (2) – (4) of the Bond set out a clear structure. Paragraph (1) shows that the terms used in the Bond have the same meaning as the terms in the Shipbuilding Contract. Paragraph (2) is a preamble, in the sense that it sets out some (but not all) of the Claimants’ rights against the Builder. It does not set out the Claimants’ rights against the Defendant: those are contained in the next paragraph. Paragraph (3) sets out the Defendant’s obligation to pay sums due to the Buyers under the shipbuilding contract. Paragraph (4) describes both the nature of the obligation, and when and how it becomes due.(ii) The Defendant’s obligation to pay arises specifically under paragraphs (3) and (4). The phrase “all such sums due under the Contract” in paragraph (3) (emphasis added) is clear and unqualified. “Such sums” are not defined; but it makes better grammatical sense if they were intended to apply to “the pre-delivery instalments” in the same sentence, rather than the repayment obligation recited as a preamble in the preceding paragraph (2). As Mr Baker noted, “value of the Buyer’s Supplies” appears not to be covered by the Bond at all.(iii) The Defendant’s construction has the surprising and uncommercial result that the Buyers would not be able to call on the Bond on the happening of the event which would be most likely to require the first class security.

The Appeal

[18]The parties agree that the appeal raises a short point of construction. Do the words “all such sums due to you under the Contract” in paragraph (3) of the bond refer back to “thepre-delivery instalments” at the beginning of that paragraph, as the judge found, or to the repayments or payments referred to in paragraph (2) as the Bank contends?[19]There is no dispute about the principles of construction to be applied in order to answer this question. The court must first look at the words which the parties have used in the bond itself. The shipbuilding contract is of course the context and cause for the bond but is nevertheless a separate contract between different parties. If the language of the bond leads clearly to a conclusion that one or other of the constructions contended for is the correct one, the Court must give effect to it, however surprising or unreasonable the result might be. But if there are two possible constructions, the Court is entitled to reject the one which is unreasonable and, in a commercial context, the one which flouts business commonsense. This follows from the House of Lords decisions in Wickman Machine Tools Sales Limited v Schuler AG (1974) AC 235, where at 251 Lord Reid said:
“The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.” 20. andThe Antaios(1984) AC 191, where at 201 Lord Diplock said: “If detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense it must yield to business commonsense.”
[20]It is of course crucial to the Bank’s argument on construction that the words in paragraph (3) refer back to paragraph (2). This is because paragraph (2) only refers to repayments due upon rejection or total loss of the vessel, or termination, cancellation or rescission of the Contract and payments due for Buyer’s supplies. It does not refer to Article XII.3 because the builder’s insolvency etc does not give rise to a right to reject the vessel or terminate, cancel or rescind the contract under that Article.[21]Mr Guy Philipps QC for the Bank supported his submissions by pointing out that the words “due to you” were more apt to refer to paragraph (2) (repayments to the Buyer) than to paragraph (3) where the reference is to prepayments due from the Buyer. That, he says, is the grammatical sense of the words used. Mr Philipps submits that if the judge’s construction is correct, paragraph (2) serves no purpose at all. There was no need for a preamble or, if there was, it could easily have included the obligation to refund under Article XII.3 or simply referred to “all obligations to refund pre-delivery instalments contained in the Contract”, but it does not.[22]Mr Baker QC for the Buyers supported the Judge’s construction. The structure of the Bond is clear. Paragraph (2) sets out the Buyer’s rights against the Builder; not the Buyer’s rights against the Bank. The Buyer’s rights against the bank are set out in paragraph (3) and paragraph (4) completes the picture by defining the nature of the Bank’s obligations and detailing the mechanism by which it arises. The operative language of paragraph (3) is clear and unqualified. A reference back to earlier words in the same paragraph makes better grammatical sense than reading it as referring back to the previous paragraph containing the obligations of the Builder to the Bank. Mr Baker also relies on the fact that on the Bank’s construction the Bond covers the Builder’s obligation to pay for Buyer’s supplies because this obligation is referred to in paragraph (2). However, he says that one can deduce that this was not the parties’ intention from the fact that the limit of the indemnity in each bond is equal to the total of the four pre-delivery payments due under each contract and there is therefore nothing to cover Buyer’s supplies which are likely to have substantial value.[23]So these are the competing arguments based on a textual analysis of the words used in the bond. In the course of his submissions Mr Philipps accepted that the Judge’s construction, based on Mr Baker’s submissions, was a possible interpretation of the document. I think he was right to do so for the following reasons. At first sight, the Bank’s argument about the purpose of paragraph (2) is compelling but the judge accepted Mr Baker’s argument about the structure of the Bond which I think has considerable force. Paragraph (1) introduces the contract and paragraph (2) sets out some, but not all, of its terms. These are the context for the Bond but do not purport to define the Bank’s obligations under the Bond. They are to be found in paragraph (3) where the words “all such sums due to you” are quite capable of referring back to “the pre-delivery instalments” and, if they do, to all such liabilities to make repayment of pre-delivery instalments to the Buyer, including the obligation to do so imposed by Article XII.3. The “due to” “due from” point does not I think carry the matter very far. The whole point of the bond is that the pre-payment delivery instalments, once paid by the Buyer, may become due to the Buyer by way of refund under the Contract. So “all such sums due to” the Buyer “under the Contract” can be a reference to “the pre-delivery instalments” referred to in the first line of paragraph (3). Mr Baker’s point about the payment for Buyer’s supplies and the limit of indemnity also has some force.[24]But in reaching this conclusion I also accept that the Bank’s construction is possible for the reasons advanced by Mr Philipps. At this stage of the exercise, which is a single process of construction, it is not necessary to choose between the two possible constructions, or to evaluate their respective merits. I proceed directly to the third of the judge’s reasons which is whether the bank’s construction is surprising and uncommercial.[25]Mr Philipps challenges this conclusion on the basis that it was impermissible speculation in the face of the terms of the shipbuilding contracts which prescribed what the bond was to cover. In support of this submission, Mr Philipps relied on Article X.8 which imposed the obligation upon the Builder to provide the bonds which “shall be indicated pre-delivery instalments ... under or pursuant to paragraph 5 above”. He points to the second sentence of Article X.5 which he says mirrors the language of paragraph (2) of the bond by referring to the obligation of the Builder to refund pre-delivery advances following rejection, termination, cancellation or rescission by the Buyer under the terms of the contract. It also refers to Buyer’s supplies but, as with paragraph (2) of the bond, there is no reference to the obligation to refund under Article XII.3. So, Mr Philipps argues, the contract has made it perfectly clear that no bond is required to cover such an event and it is impermissible for the court to speculate about the commerciality of omitting such cover from the bond.[26]Mr Philipps goes on to point out that if the Builder fails to make a refund under Article XII.3 it is likely that the Buyer will become entitled to cancel the contract under one of its delay provisions which will then entitle it to call on the bond to recover advance payments. So, he argues, the omission from the Bond is not surprising or uncommercial.[27]In the course of his submissions Mr Philipps did not challenge the fact that a judge is generally entitled to reject a construction which he or she considers to be surprising or uncommercial. His argument was that a judge’s right to do so in this case was restricted by the terms of the shipbuilding contracts. I will come back to this argument later, but on the general point I accept that a judge should proceed with caution before concluding that some suggested contract term is surprising or uncommercial. But the books are full of cases where judges have done so, particularly in commercial cases and more particularly in the specialist Commercial Court where the judges do have relevant experience, notably in cases such as this. Here also it is important to note that the parties have given exclusive jurisdiction to that court to determine any dispute between them.[28]But should the judge’s approach in this case have been more restricted as Mr Philipps contends? I do not think so. The title to Article X as a whole is “Payment” but it contains an assortment of different terms. Article X.8 is drafted on the basis that the form of guarantee which the parties contemplated would be annexed to the agreement. That would be the document to look at if one was trying to discover from the contract what the Buyer was looking for, not the reference back to Article X.5. This reference back is poorly drafted and quite capable of referring simply to the opening sentence of paragraph 5. It is difficult to construe it in a way which restricts the refund obligations which the bond was to cover, not least because there is no reference to the Article X.6 obligation to a refund following total or constructive loss of the vessel which both parties agree was to be covered by the bond. By the same token, no significance should be attached to the omission of the Article XII.3 refund obligation. Nor do I think there is anything in Mr Philipps’ further point. On the happening of an Article XII.3 event the Buyer was entitled to a refund of its advance payments “immediately”. If that did not happen the contract was in a state of limbo: neither party could terminate at that stage. If the Builder did not proceed with the construction of the vessel, as would be extremely likely if it was insolvent, the Buyer could terminate for delay under Article XII.1 but, under the terms of this article, only after 90 days plus 14 days notice. Only then could it call on the Bond. I cannot see how any Buyer (or its financiers) could possibly be satisfied with this as a remedy in the situation where the Builder was insolvent or nearly so.[29]So for these reasons I conclude that there were no more than the usual inhibitions upon the Judge when in this case he turned to consider whether the construction contended for by the Bank produced a surprising or uncommercial result.[30]As an experienced commercial judge the judge’s conclusion that it did should be given considerable weight by this Court. I agree with his conclusion. On the Bank’s construction the bonds covered each of the situations in which the Buyers were entitled to a return or refund of the advance payments which they had made under the contracts apart from the insolvency of the Builder. No credible commercial reason has been advanced as to why the parties (or the Buyers’ financiers) should have agreed to this. On the contrary, it makes no commercial sense. As the judge said, insolvency of the Builder was the situation for which the security of an advance payment bond was most likely to be needed. The importance attached in these contracts to the obligation to refund in the event of insolvency can be seen from the fact that they required the refund to be made immediately. It defies commercial common sense to think that this, among all other such obligations, was the only one which the parties intended should not be secured. Had the parties intended this surprising result I would have expected the contracts and the bonds to have spelt this out clearly but they do not do so.[31]As the judge’s judgment is succinct it is not clear whether he would have rejected the Bank’s construction simply as a matter of textual analysis. But his decision was obviously grounded on his conclusion that the Bank’s construction should be rejected because it was surprising and uncommercial. I agree with this conclusion and would dismiss this appeal accordingly.

Lord Justice Patten:

[32]As Sir Simon Tuckey has explained, the issue of construction raised on this appeal centres on the meaning of the words “all such sums due to you under the Contract” in paragraph (3) of the advance payment bond. It is common ground that the word “such” cannot be ignored and that the draftsman therefore intended the content of this phrase to be supplied by the sums to which it refers.[33]Simon J placed emphasis in his judgment on the word “all” but, as a matter of language, that adjective adds nothing to the words which follow. Unless qualified in some way, an obligation to pay “such sums” must mean all such sums. The critical (and only) issue is to identify what “such” refers to.[34]It is clear that the word “sums” must refer to the pre-delivery instalments paid under the shipbuilding contract because the purpose of the bond was to guarantee repayment of those instalments and nothing else. That is made clear by Article X.8 of the shipbuilding contract. But the issue for the judge was whether the bond guarantees repayment of those instalments in all the circumstances specified by the shipbuilding contract or whether it is more limited than that. The Bank’s case is that the guarantee covers the repayment of the instalments only in the circumstances described in paragraph (2) of the bond. The judge thought that, grammatically, the words “such sums” refer to “the pre-delivery instalments” in the same sentence rather than to what he described as the repayment obligation recited in paragraph (2). He therefore concluded that paragraph (3) was apt to cover the repayment of the pre-delivery instalments under any of the terms of the contract which provide for their repayment, including Article XII.3.[35]Before I turn to the language of the bond and the judge’s construction of paragraph (3) it is necessary to say something about the principles to be applied. In paragraph 18(iii) of his judgment Simon J describes the Bank’s construction of the bond as having the surprising and uncommercial result of the guarantee not being available to meet the shipbuilders’ repayment obligations in the event of insolvency. He appears to have taken this factor into account as an indication in favour of the Buyer’s construction of paragraph (3) and Sir Simon Tuckey has adopted the same approach in paragraph 19 of his judgment in deciding between the alternative constructions which are advanced.[36]I will come in a moment to the question whether there is any real ambiguity in the language of the bond and how evenly balanced the alternative constructions are, but the circumstances in which the Court can confidently declare that one or other possible meaning of the words used is uncommercial needs to be defined with some care. In a commercial contract (like any other contract) the parties have chosen to define the limits of the obligations which they have undertaken by the language they have used. The purpose of the contract is to provide an objective record of what has been agreed so as to regulate the legal relationship between them. The Court’s function is to give effect to those obligations by respecting the terms in which they are cast. When a dispute arises as to the meaning and scope of the contract the Court can only resolve it by construing the words used in a way which gives them the meaning which the document would convey to a reasonable person knowing all the background knowledge which would have been available to the parties in the situation they were in at the time of the contract: see ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 per Lord Hoffmann at page 912H.[37]This is a modern re-formulation of Lord Wilberforce’s speeches in Prenn v Simmonds [1971] 1 WLR 1381, 1384-6 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 in which he explained the importance of the matrix of fact to the construction of terms used in a contract which, robbed of their context, might appear either ambiguous or obscure. The problems of interpretation can be largely overcome by construing the disputed terms in the light of what the parties knew at the time and what was the subject matter of the contract. This is not a fail-safe process but, as a matter of principle, no other approach is possible.[38]In some cases this reference back to the matrix of fact may enable the Court to make sense of language which, as written in the contract, is either misused or ungrammatical. Most of the recent cases in which the House of Lords has re-stated the principles of contractual interpretation have been ones in which there has been some detectable error in the drafting of the document which has required the Court to ignore the precise language used in order to arrive at the meaning which the parties appear to have intended: see Mannai Investments Company Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.[39]Similarly there will be cases where, although there is no apparent drafting error, the words used may, if given a particular meaning, lead to consequences which are so extreme as to make it unlikely that the parties intended them to have that effect. This was recognised by Lord Hoffmann in ICS (at page 913D):
“The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191 , 201: “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.” “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”
[40]In The Antaios the issue of construction was whether a term that “on any breach of this Charter Party, the Owners shall be at liberty to withdraw the vessel from the service of the Charterers” should be literally construed to mean any breach of the Charter Party or only one which amounted to a repudiation of the contract. Similarly in Wickman Machine Tools Sales Ltd v Schuler AG [1974] AC 235 the question was whether a provision in an agency agreement under which it was a “condition” of the agreement that the agent should send its representatives to visit certain specified customers at least once in every week meant that any breach of this obligation, however trivial, amounted to a repudiation of the contract.[41]These were therefore constructions of the contract which, on any view, led to extreme consequences such as to justify Lord Diplock’s description of them as being ones that flouted business common sense. Another example is the contractual provisions considered by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 which, if given their natural meaning, produced a result which Lord Hoffmann described as arbitrary and irrational. But, read in its context, the dictum in The Antaios provides no support for the re-formulation by the Court of contractual provisions which are relatively clear in their meaning simply because they balance the interests and obligations of the parties in a way which the judge considers to be one-sided or unfair. The starting point has to be that commercial parties can look after themselves and are sufficiently organised and well advised as to be able to ensure that the contractual documents which they sign accurately reflect their intentions.[42]In this case (as in most others) the Court is not privy to the negotiations between the parties or to the commercial and other pressures which may have dictated the balance of interests which the contract strikes. Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the Court has no alternative but to give effect it its terms. To do otherwise would be to risk imposing obligations on one or other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part on the Court.[43]These dangers were set out by Lord Wilberforce in his speech in Prenn v Simmonds (at page 1384-5) when explaining the rule against admitting evidence of pre-contract negotiations as an aid to the construction of the final agreement:- “The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get “agreement” and in the hope that disputes will not arise. The only course then can be to try to ascertain the “natural” meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party's objective — even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.”[44]Similarly in Chartbrook Lord Hoffmann (at paragraph 20) said that:- “It is of course true that the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not in exchange for some concession elsewhere or simply a bad bargain.”[45]The shipbuilding contract which is the only extrinsic evidence relied on by the parties and was the genesis of the bond requires the Builder as a condition precedent to the payment of the first pre-delivery instalment to deliver to the Buyer an assignable letter of guarantee from a first-class Korean bank relating to the first instalment and a further letter of guarantee for the refund of the subsequent instalments. Article X.8 provided for the form of the guarantee to be annexed to the shipbuilding contract and therefore to be agreed by the parties in advance of the contract. This was not done but the form of the bond was eventually agreed and the bonds were then issued to the Buyer.[46]Article X.8 provides in terms that:- “The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery installments plus interest as aforesaid to the Buyer under or pursuant to Paragraph 5 above…”[47]This is the provision headed “Refund by the Builder” under which the Builder is required to refund the pre-delivery payments if the vessel is rejected by the Buyer or if the Buyer “terminates or rescinds this Contract pursuant to any of the provisions of this Contract specifically permitting the Buyer to do so..”. Although the contract contains a number of such provisions which are referred to in paragraph 11 of Sir Simon Tuckey’s judgment, Article XII.3 is not one of them. Whilst it required the Builder to refund the pre-delivery instalment in the event of its insolvency, it gives the Buyer no right to terminate the contract in these circumstances. The clause gives the Builder the right but not the obligation to terminate the contract in such event but only if it has first refunded the pre-delivery instalment.[48]If one turns against this background to consider the terms of the bond what it does is to refer to the shipbuilding contract and then in paragraph (2) to recite the provisions under which the Buyer is entitled to repayment of the pre-delivery instalment following its rejection of the vessel, its termination, cancellation of rescission of the contract or upon a Total Loss of the Vessel. Simon J described paragraph (2) as a preamble setting out some (but not all) of the claimants’ rights against the Builder. But it is more focused than that. It reproduces the terms of Article X.5 and Article X.6 of the contract and therefore complies with the requirements of Article X.8.[49]When one comes then to consider the operative words of paragraph (3) the question is whether “all such sums due to you under the Contract” refer back to pre-delivery instalments becoming repayable in any circumstances under the contract or to their becoming repayable under the provisions referred to in paragraph (2). The reference to pre-delivery instalments occurs in both paragraphs. The judge adopted the first of these alternatives by construing “such sums” as a reference to the pre-delivery instalments mentioned in the first line of paragraph (3) so as to read the words in dispute as meaning “all (pre-delivery instalments) due to you under the Contract”. But the difficulty about this construction is that it robs paragraph (2) of any purpose or effect. If the purpose of the bond was to provide a guarantee for the repayment of the pre-delivery instalments regardless of the circumstances in which they came to be repayable, paragraph (2) could have been omitted in its entirety. As it is, the obvious purpose of this paragraph seems to me to be to give the addressee of the bond a clear statement of the Builder’s obligations under the contract which are to be covered by the guarantee and one which is consistent with the terms of the Builder’s obligations to provide the bond under Article X.8 of the contract. The fact that the bond also covers Total Loss under Article X.6 is not, in my view, a contrary indication.[50]Although the Buyer’s construction is, as lawyers say, arguable, it is not in my view the meaning which the document would convey to a reasonable person reading it with knowledge of the terms of the shipbuilding contract and I agree with Sir Simon Tuckey that the Bank’s argument about the purpose of paragraph (2) is compelling. Where I part company with him is in relation to the third of the judge’s reasons: the alleged uncommerciality of the Bank’s construction of the bond.[51]For the reasons which I have given, I do not regard the alternative constructions of paragraph (3) advanced on this appeal as being in any way evenly balanced. I also agree with Mr Philipps that it is impermissible to speculate on the reasons for omitting repayments in the event of insolvency from the bond. Although the judge is right to say that cover for such event was, objectively speaking, desirable, that is not sufficient in itself to justify a departure from what would otherwise be the natural and obvious construction of the bond. There may be any number of reasons why the Builder was unable or unwilling to provide bank cover in the event of its insolvency and why the Buyer was prepared to take the risk. This is not a case in which the construction contended for would produce an absurd or irrational result in the sense described in the cases I have referred to and merely to say that no credible commercial reason has been advanced for the limited scope of the bond does, in my view, put us in real danger of substituting our own judgment of the commerciality of the transaction for that of those who were actually party to it.[52]I would therefore allow this appeal. Lord Justice Thorpe[53]I find myself in the invidious position of expressing a decisive opinion in a field that is completely foreign. With considerable trepidation I support the judgment of Patten LJ. I found that Mr Philipps’ submissions had turned me from my preliminary position that Simon J was right for the reasons he gave. I would allow the appeal for the reasons stated by Patten LJ.

Cited in 12 later judgments

and 3 more of the most senior