It is often the case that in contracts setting out the calculations governing various financial charges, the narrative within the body of the contract setting out such details are illustrated by the inclusion of worked examples in the appendices. In a recent dispute over monies due to the claimant, the outcome of the calculations differed significantly depending on whether the payment was calculated according to the narrative, or according to the worked examples. Despite the court agreeing with the defendant that using the narrative rather than the worked examples produced a more commercially sensible outcome, it ruled that the worked examples more accurately reflected the original intentions of the parties.
Altera, a vessel operator (the “Claimant”), brought a claim of approximately USD 12 million against Premier Oil, an oil exploration company (the “Defendant”), regarding adjusted hire of a vessel under a charter agreement. The Defendant disputed the claim and made a counterclaim for approximately USD 3.8 million for overpaid hire charges.
The court was required to interpret how the payment of hire charges should be calculated using a formula. This formula was set out over two parts; the narrative (in the main body of the agreement) and the examples (in an appendix). However, the examples contained extra steps which were not set out in the narrative. The question was whether the provisions in the main body of the agreement (the narrative) took precedence over the examples in the appendix.
The Defendant’s view was that that narrative should prevail because this made more commercial sense and the Claimant’s interpretation would be inconsistent with the terms of the agreement. In particular, there was a term which stated that the main body of the agreement would take precedence over the appendix. However, the court said that this was not relevant, as it was clear that the examples allowed for the finer details of the calculation to be set out.
As both examples were consistent (in this case the inclusion of the missing step), this strongly suggested that this was a deliberate choice by the person who drafted them.
The court granted judgment in favour of the Claimant, stating that the hire charges were to be calculated by following the steps in the examples.
As a result of this ruling, it should be noted that:
- "worked examples" are integral parts of a commercial contract;
- the worked examples are more likely to reflect the parties' true intentions. The court’s view was that a narrative explanation may disguise (or, at least, not make clear) its consequences. The whole purpose of the worked examples is to clearly demonstrate the consequences of the formula; and
- these principles apply equally to other detailed commercial contracts and not just financial contracts.
Application to different types of contracts:
Importantly, this ruling will apply to other commercial contracts which use worked examples, for instance, to calculate surcharges, service payments, service credits or equipment downtime.
An example would be a logistics contract which uses worked examples to demonstrate the calculation of a fuel surcharge enabling transport companies to pass on some of fuel costs to their customers. For example, where a manufacturer of certain products engages a transport company to deliver the goods to its customers.
The surcharge applies when fuel costs exceed a certain, predetermined level. As there are lots of different methods for calculating a fuel surcharge, a worked example can help to clarify. The specific fuel surcharge calculation is important as it dictates when and how much of the fuel costs can be passed on to the customer.
It is also common to see worked examples and a narrative, used in NHS contracts to demonstrate how payments should be calculated. This will also be relevant to other complex health sector agreements e.g. for the calculation of service credits or equipment downtime.
The Altera case highlights the power of worked examples. In light of this, drafters of logistics contracts and health sector agreements (for example) should be aware of the following when drafting:
- to avoid disputes it is important that the worked examples are correct and correlate to the narrative i.e. what is stated in any narrative should be accurately reflected in the worked examples;
- for clarity use worked examples where complex calculations are required;
- to avoid confusion consider including more than one worked example where appropriate; and
- ensure that conflict clauses are carefully drafted to ensure they do not contribute to any confusion concerning the precedence of worked examples.
As with all contracts, the devil is in the detail. As the judge in the Altera case pointed out, when detailed charging arrangements are being incorporated into contracts it is crucial that those drafting check, and double check, that the narrative covering these arrangements does not contradict the worked examples. Although he acknowledged that carrying out a detailed review of a contract under a significant time constraint was difficult, it was necessary in order to avoid a future dispute. As ever, if you need any advice on your contractual arrangements please do not hesitate to contact a member of the commercial team who will be happy to help.