Careless drafting is “such” a waste of money: Rainy Sky v Kookmin Bank

A recent case in the UK Supreme Court, Rainy Sky S. A. and others v Kookmin Bank [2011] UKSC 50,  boils down to a simple question of contract interpretation: to what does the word “such” refer, in clause 3 below?  Only the relevant parts of the following clauses have been quoted here.  Key words are highlighted in bold text:

[2] … 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 to 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)…

[3] In consideration of your agreement to make the pre-delivery instalments under the Contract …we hereby …undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the Contract …

Screaming Lord Sutch: an (unsuccessful) candidate at many UK General Elections

The Buyers (Appellants) argued that “such sums” in clause 3 referred back to “pre-delivery instalments” in the first line of clause 3.  At first instance in the High Court, the judge agreed with their interpretation, as did one of the judges in the Court of Appeal.

The Bank (Respondents) argued that such sums referred back to the sums referred to in clause 2, highlighted in bold text above.  A majority of the three judges in the Court of Appeal agreed with the Bank.

Lord Clarke, who gave the only judgment in the Supreme Court, set out the principles to be followed when interpreting contract wording, analysing both the case law and the lower judges’ interpretation of that case law. In a nutshell, Lord Clarke considered that, where analysis of the wording yields two possible interpretations, the court should adopt the one that makes more sense commercially.

In the present case both parties’ interpretations were arguable.  The Bank’s argument is summarised by Lord Clarke at paragraphs 32-33.  In essence, the argument is that the only purpose of including clause 2 was to identify the scope of clause 3, and therefore one should read back to clause 2.

Lord Clarke considered the arguments to be finely balanced, but on grounds of both analysis of the wording, and considering the commercial purpose of the Bonds, he concluded that the Buyer’s interpretation was correct.  The other 4 judges in the Supreme Court agreed with him. “Such sums” referred back to the first line of clause 3.

Because of other clauses in the contract (particularly 12.3), which were quoted in the Supreme Court judgment, it made a big difference which interpretation was correct.  This may not be obvious if you read just the text above.

This is a classic case of imprecise drafting.  “Such” is being used as a shorthand, to avoid repeating text.  If you are going to use the word “such”, make sure there is no ambiguity about what it is referring to.  You cannot assume that it must refer back to an earlier statement in the same paragraph, even though that is what the Supreme Court decided in this case.  The Court of Appeal came up with a different interpretation.  As Lord Clarke said in his judgment, the arguments were finely balanced.

Possible ways of dealing with this issue include not saying “such” at all, and instead identifying which payments are intended, or add some wording to “such sums” to make clear that it is the sums referred to earlier in clause 3.  Our preferred approach (assuming that a quick fix rather than a complete rewrite is required) would probably be to set up a defined term, as in the following example:

[3] In consideration of your agreement to make the pre-delivery instalments under the Contract (the “Pre-payments”) …we hereby …undertake to pay to you, your successors and assigns, on your first written demand, all the Pre-paymentssuch sums due to you under the Contract

Finally, a postscript.  Notice the word “all” before “such sums”?  IP Draughts’ first instinct was to cross this word out, as it adds nothing to the meaning, but his second thoughts got the better of him and he left the word in, when writing the redraft above.  On reading the judgments in the High Court and Court of Appeal, he is surprised to see that Mr Justice Simon in the High Court felt that this word before “such” meant that the payments were not limited to those in clause 2.  In the Court of Appeal, Sir Simon Tuckey agreed with him.  Both judges felt that this word was significant in the interpretation of the clause.

IP Draughts is relieved to see a dismissal of this fallacious reasoning in the judgment of Lord Justice Patten in the Court of Appeal.  He commented:

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.