Case Law: Worked examples – an integral part of the contract

In Altera Voyageur Production Limited v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm), an inconsistency within the agreement called into question whether the parties should rely on a formula set out in the main body of the agreement or the worked example provided in the annex.

FACTUAL BACKGROUND

The case involved a dispute of payment between a vessel operator (the “Claimant”) and an oil exploration company (the “Defendant”).

The parties entered into a charterparty (a deed for the hire of vessel) on 9 November 2010. The contract set out the daily amount the Defendant would pay the Claimant, which was subject to adjustment if there was a change in the availability of the required vessel. Such payment and adjustment would be calculated with reference to the main body of the agreement, which set out the calculation in word form, and the appendix to the contract, which contained a formula.

However, the worked examples provided in both places were not exactly identical, in that the formula in the appendix contained two additional steps, which were not reflected in the wording set out in the main body of the contract.

THE CASE AT THE HIGH COURT

On 8 July 2020, the Claimant brought a claim against the Defendant for over USD 12 million (plus contractual interest) for hire charges for floating production, storage and offloading vessel.

The Claimant asserted that the payment should have been made in accordance with the worked example set out in the appendix to the agreement between the parties.

In response, the Defendant issued a counterclaim for around USD 3.8 million of overpayment, arguing that calculations should have been made in accordance with the formula contained in the main body of the agreement instead. The Defendant further contented that the main agreement should have taken precedence, reasoning that it made more commercial sense to do so.

As a result of the inconsistency, the High Court was asked to consider which approach was in fact the correct method in determining the payment for the charges.

THE HIGH COURT’S RULING

The court noted that, on the facts of the case, the worked examples were integral to the contract terms in explaining how the adjustments were to be made.

The court also explained that the additional steps set out in the worked examples were not commercially illogical simply because it was not included in the main body of the agreement. In fact, worked examples should have been taken into account, as often formulae can only be seen as truly effective when they are worked through, and detailed steps offer greater insight as to the parties’ intentions and clarify the drafting.

Finally, it is important to note that the contract had referred to the worked examples and specifically explained that adjustments were to be made “as provided in the Appendix”. This further reinforces the court’s judgment in finding worked examples to be an integral part of the overall contract between the parties.

For the reasons above, the court held that the calculations should have been made in accordance with the worked examples provided in the Annex, instead of by reference to the method set out in the main body of the agreement, thus granting judgment in favour of the Claimant.

CONCLUSION

As evident in the court’s decision in Altera, worked examples are undoubtedly useful in assisting the parties in understanding the contracts and interpreting the original negotiators’ intentions, especially in highly complex or long-term contracts. They are often used to illustrate complicated formulae or even the parties’ intended practical consequence. Worked examples can also help parties to confirm their shared view in the way the contract is meant to operate. As such, when including worked examples in any agreement, it is strongly advisable to bear in mind the importance and weight the court has given to worked examples, favouring them over the main body of an agreement in case of uncertainty, as in the case at hand.

PRACTICAL TIPS

In commercial contracts, worked examples are often used when there are complex formulae in the agreement setting out how payments should be calculated. When using worked examples, it is useful to bear in mind the court’s approach to interpreting them in contracts. Special care should be taken to ensure that any references to worked examples or consequential changes made in the appendices are not contradicting what is already set out in the main body of the agreement.

Please see this case here: Altera Voyageur Production Limited v Premier Oil E&P UK Ltd.

For more information, and any guidance or advice on commercial contracts and on how best to incorporate worked examples into your contracts, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.

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