Contractual status of worked examples confirmed by the High Court

Summary

Where parties include wording in contracts to calculate or determine certain quantitative aspects of their relationship (for example, payment calculations or other mechanics), they might also include worked examples of how the calculations should apply in practice. The English courts have recently grappled with the issue of what happens where the contractual wording conflicts with the parties' worked examples. Which one prevails?

The Court held in Altera Voyageur Production Limited v Premier Oil E&P UK Ltd that sums due under a contract can be calculated in accordance with worked examples contained in the contract, even if those worked examples include steps that are not set out in the narrative of how the amount should be calculated.

Whilst the interpretation of each contract depends on its fact and the relevant contractual terms, this case emphasises the following:

• Parties should certainly consider including worked examples in their contracts to clarify how they intend contractual calculations / machinery to operate in practice. Indeed, the Court commented in this case that "it is often only when narratives and formulae are worked through that their true effect can properly be seen".

• Given that the Court was minded in this case to defer to the worked examples, rather than the contractual wording, to understand the parties' objective intentions, parties should ensure that their examples are as accurate as they can be, in order to avoid any ambiguity about how the calculations / machinery are intended to operate.

• In order to avoid any interpretation issues (and potentially a dispute) later on, parties should ensure that their worked examples do not conflict with the contractual wording.

Facts of Altera v Premier Oil

Altera concerned a charterparty between an oil company and a vessel operator for developing and producing oil reserves in the North Sea.

The charterparty provided that the daily amount payable by the oil company to charter the vessel would be adjusted upwards or downwards in the event that the vessel's availability increased or decreased. This was calculated according to a formula contained in an appendix to the charterparty which comprised a narrative and two worked examples (the Hire Adjustment Formula).

Following a number of amendments made to the charterparty, there was a discrepancy in the Hire Adjustment Formula; its worked examples contained two additional steps that were not included in the narrative. Broadly speaking, if the Hire Adjustment Formula included the two additional steps, this would entitle the vessel operator to a greater upward adjustment.

A dispute arose between the oil company and the vessel operator as to whether the Hire Adjustment Formula should be interpreted so as to include the two additional steps set out in the worked examples:

• The oil company argued that the Hire Adjustment Formula should be interpreted as per the narrative and not the worked examples.

Applying the formula as per the worked examples would be contrary to the parties' intentions; it was inconsistent with the narrative set out in the Hire Adjustment Formula and the rest of the charterparty. It was also commercially illogical to award an upward adjustment given that the vessel operator's production systems were below their availability target (the contract imposed penalties on the vessel operator for failing to achieve target availability. It was therefore argued that it would be illogical for the contract to penalise them on the one hand, but award them an upward adjustment at the same time).

• The vessel operator argued that the Hire Adjustment Formula should be applied as per the worked examples, including the two additional steps.

It would not be contrary to the parties' intention to apply the formula as per the worked examples. The fact that the parties had not thought through the consequences of what they had agreed was not grounds to disregard to contents of the worked examples.

Decision

The High Court awarded the vessel operator the claimed upward adjustment by interpreting the Hire Adjustment Formula according to the worked examples. In determining the objective meaning of the contractual language, the Court would look at the terms of any provision in its commercial context rather than focussing on the dictionary wording of each individual word and phrase.

The Court accepted the "commercial illogicality" of allowing an upward adjustment in circumstances where the vessel operator's production systems were below target. However, this commercial illogicality did not go far enough to justify the Court's interference with the contractually agreed terms, reflected in the worked examples.

Indeed, the Court did not consider there to be any real inconsistency between the narrative and the worked examples in the Hire Adjustment Formula; whilst the worked examples included two steps not included in the narrative, this did not mean that those further steps should be disregarded.

The Court confirmed that it was more probable that parties' true intentions can be found in a worked example rather than a narrative explanation; the whole point of worked examples is to demonstrate with clarity the consequences of a formula when applied.