Altera, a vessel operator, entered into a vessel chartering contract with Premier Oil, an oil exploration company. The contract allowed for certain sums payable by Premier Oil to Altera to be adjusted in line with any increase or decrease in the oil production operations of the chartered vessel to be calculated using a formula set out in the contract. In the dispute, Altera claimed that it was due $12 million based on its interpretation of the formula, whilst Premier Oil claimed that it had actually overpaid $3.8 million based on its own different interpretation of the formula.

The question for the Court was simply one as to the correct construction of the contract. The relevant formula consisted of wording in the main body of the contract (the “Formula Narrative”), and two worked examples set out in an appendix. The worked examples added a further two steps to the formula which were not expressly set out in the Formula Narrative, and the inclusion of which would result in the higher sum being payable to Altera. Altera of course argued that the formula should be applied as set out in the worked examples, whilst Premier Oil contended that the Formula Narrative should take precedence over the worked examples because the examples were inconsistent not only with the Formula Narrative in the main body of the contract but also with other provisions in the contract and also because the application of the Formula Narrative would be what “a reasonable person would say was the intention of the parties as conveyed by the words which they have used in the [contract], taken as a whole”.

The Court preferred Altera’s interpretation and ruled that the parties’ true intention had been for the formula to apply as set out in the worked examples, despite these including additional steps to what was set out in the Formula Narrative. The Court concluded that the Formula Narrative did not itself provide for how the adjustment to the sums due was to be carried out; instead, it expressly stated that the adjustment was to be made as provided in the Appendix which set out the worked examples. Consequently, the worked examples were not simply “optional extras” but “integral parts” of the Contract. The Court acknowledged that there were certain inconsistencies between the Formula Narrative and the worked examples, but these were not enough to conclude that the inclusion of the additional steps in the worked examples meant that something had gone wrong in the drafting of the worked examples. The Court believed that its conclusion was supported by the fact that the additional steps had been consistently included in not just one but both worked examples, firmly indicating a deliberate intention for the additional steps to form part of the formula.

The ruling not only upholds the previous approach taken by the courts regarding the practical importance of worked examples in financial contracts but extends it to lengthy and detailed commercial contracts.

The key points arising from this case are:

• A complex formula set out in narrative form in a contract may not always be as accurate as intended when applied in practice (in this case the Court drily observed that “it is often only when narratives and formulae are worked through that their true effect can properly be seen“. Consequently, worked examples in the contract can be helpful to clarify and confirm how a formula is intended to work in practice. Depending on the complexity of the formula, it may be that more than one worked example should be included.
• Care should be taken to ensure that any worked examples are consistent with both the narrative description of the formula in the contract and, if more than one example, each other!
• If a contract includes an ‘order of priority’ or similar provision to seek to resolve any conflicts or inconsistencies in the contract, then the selection of the correct order of priority should take account of any worked examples. This case also serves as a reminder that, to be inconsistent, a provision in a contract must actually contradict or be in conflict with another provision and it is not enough if one simply qualifies or modifies the effect of another. In this case the Court held that the drafting of the Formula Narrative permitted the “finer details” of the formula to be addressed in the worked examples and consequently, the ‘order of priority’ provision (which said that “in the event of any conflict between an Appendix and the [main body of the Contract], the latter shall prevail”) “had no part to play in the interpretation of these provisions, because there [was] no real inconsistency between them”.

Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm) (17 July 2020).