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Dealing With Ambiguities in Commercial Contracts

10 January 2012 #Dispute Resolution


English contract law is as old as the English common law itself.  Contract law is also the foundation for almost every business transaction.  It may therefore come as a surprise to learn that the English courts’ approach to the interpretation of commercial contracts continues to be subject of legal arguments. 

The latest case to consider this, in which judgment was handed down by the Supreme Court in late 2011, is Rainy Sky SA –v- Kookmin Bank.  This case related to bank bonds guaranteeing the performance of a ship building contract which the Defendant Bank argued did not cover the default for which the Claimants were seeking payment.  The dispute centred around ambiguity in the wording of the clause containing the Bank’s promise to pay.

Prior to the Rainy Sky decision the courts had been moving towards accepting that you must always take the most natural meaning of ambiguous wording unless the result produced is so extreme that it must have been unintended.  The Supreme Court in Rainy Sky rejected this approach and has now confirmed that the correct approach to interpreting ambiguities in commercial contracts is as follows: 

  1. The court’s task is to determine what the parties meant. 
  2. This is done by ascertaining what a reasonable person would have understood the parties to have meant.
  3. For this purpose a reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
  4. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business commonsense and to reject the other.

It is unlikely that this will be the last case to deal with the interpretation of ambiguous contracts, but this decision of the Supreme Court is likely to settle arguments about the correct approach to contractual ambiguities, if not the ambiguities in individual contracts themselves, for some time to come.

Clarkslegal, specialist Dispute Resolution lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Dispute Resolution matter please contact Clarkslegal's dispute resolution team by email at disputeresolution@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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Antony Morris

Antony Morris
Partner

E: amorris@clarkslegal.com
T: 0118 960 4646
M: 07768 552 356

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