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Contractual interpretation: the dangers of inconsistency between formulae and worked examples

Published on 02 November 2020

Altera Voyageur Production Limited v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm)

The question

If a contract includes both a written formula and worked examples, which method of calculation will a Court uphold if they produce different results?

The key takeaway

Worked examples are helpful to include in contracts, but should always be double-checked for consistency with the underlying terms.

The background

The Defendant (Premier) hired an oil vessel from the Claimant (Altera). Under the terms of their charterparty contract (Contract), Premier were required to pay a daily hire rate to Altera. The daily rate was adjusted on a yearly basis, depending on the proportion of time when certain systems on the vessel were available. Whether the adjustment was upwards or downwards, depended on whether availability met the target of 95%. 

As set out in the Contract, the adjusted hire rate was to be calculated as follows: 

  • If actual availability of the system was more than 95%, the formula was: “(100% + (Actual Availability % - 95%) x2) x Weighted Factor)” 
  • If actual availability of the system was less than 95%, the formula was: “(100% + (Actual Availability % - 95%) x1) x Weighted Factor)”.

An appendix to the Contract contained two worked examples of the hire adjustment formula: However, these included a number of steps that were not set out in the written formula – namely:

  • Step 5: adding the figures for the different systems together to provide a total percentage, and 
  • Step 6: dividing the actual availability figure by the target availability.

The parties agreed that Step 5 was intended to have been part of the formula, however they disagreed about the inclusion of Step 6 (which would have a significant impact on the adjusted hire rate). Altera sought to enforce the worked example interpretation of adjusted rate and brought a claim against Premier for the resulting amount. 

Premier highlighted a clause that stated the main body would prevail over the appendix in the event of a conflict. Premier asserted that it would be commercially irrational for Altera to get an uplift in the daily rate as a result of the worked examples in the appendix, given that they were facing penalties under the main contract. 

The decision

In the High Court, Mr Salter QC upheld Altera’s claim and ruled in favour of the method of calculation set out in the worked examples. He did so despite:

  • the clause which said that the main body of the contract (in which the narrative drafting was contained) took priority over the appendix – the Court took the view that the worked examples provided a more detailed interpretation of the narrative clauses;
  • the worked examples producing a result which was generally accepted as being commercially unreasonable; and 
  • the contract containing various drafting errors and redundancies which cast doubt on how much weight should be placed on any one provision (including the worked examples).

Why is this important?

Recent case law (see Chartbrook v Persimmon) has highlighted the usefulness of including a worked example to minimise ambiguity as to how complex formulae are applied. However, this case shows that expensive and lengthy litigation can still follow if sufficient care is not taken to ensure that the clause and the worked examples align. As with all contractual interpretation cases, this decision turned closely on the drafting and it isn’t out of the question that the alternative approach could have been preferred in another contract. 

Any practical tips?

Check (and doublecheck!) formulae and worked examples. Do they properly reflect the commercial deal on pricing, adjustments, etc.  Worked examples can be a great way to explain complex calculations, but make sure you always check the maths and consider the commercial implications. Consider also keeping the formulae and the worked examples in the same place (eg together in the same appendix), as the chances of inconsistency are reduced if they are read together. 

Autumn 2020