Importance of worked examples in commercial contracts

Importance of worked examples in commercial contracts following the High Court decision in Altera Voyageur Production Limited V Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm)

On 17 July 2020, the High Court ruled that two worked examples in a commercial contract took priority over the corresponding narrative. This case confirms that worked examples not only form part of a commercial contract but that they can be seen to best reflect parties’ commercial intentions especially where more than one worked example is included and where (in the case of complicated drafting) the worked example is included to demonstrate “with clarity the consequences of” the narrative drafting [Mr Richard Salter Q.C.].

The Defendant, Premier Oil E&P UK Ltd (“Premier”), entered into a contract with the Claimant, Altera Voyageur Production Limited (“Altera”), to hire a vessel.

An appendix to the contract contained various formulae for calculating and adjusting the daily hire fee that Premier would pay Altera for the vessel. The formulae consisted of drafting narrative and two worked examples. However, the narrative and the worked examples were inconsistent as the worked examples contained two steps not expressly included in the narrative.

Due to the inconsistency each party claimed that differing fees were due under the contract: using the methodology in the worked examples, Altera claimed it was owed an additional c. US$12 million, whereas using the narrative methodology, Premier argued it had overpaid Altera c. US$3 million.

Salter J found in favour of Altera, confirming the two worked examples and not the narrative should be used to calculate the daily hire fee. In his judgment Salter J cited Blair J in the previous case Starbev¬†GP Ltd v Interbrew Central European Holdings BV [2014] EWHC and noted: “in the context of lengthy contracts ... illustrations or examples [may] deserve particular attention as something to which the parties particularly turned their minds”.

In ruling for Altera, Salter J confirmed that the Court should look at the commercial context of terms in an agreement and at the document as a whole, rather than just focus on the plain meaning of words and phrases when determining the objective meaning of contractual language.

Worked examples in commercial contracts can be helpful additions to ensure parties have achieved commercial agreement and to check that narrative drafting works in practice. However, where worked examples are included in contracts, these examples should be consistent with narrative drafting and the parties should negotiate the worked examples as they would any other clause. If there is inconsistency between narrative drafting or worked examples it is likely that worked examples will be construed as the parties’ true intentions.

1 October 2020

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