It is not uncommon for complex calculation formulae in commercial contracts to be accompanied by worked examples of the calculations in an appendix. These worked examples can often provide clarity to an intricately worded definitions clause. Bringing clarity in this way was even encouraged by the commercial courts in Chartbrook Ltd v Persimmon Homes Ltd (2009).
However, what happens if the worked example designed to bring clarity actually differs from the strict interpretation of the terms of the main contract? Should the main contract be adhered to, following rules of strict construction, or should the worked example be given effect as evidence of the intention of the parties? Which one prevails?
This issue was considered in Altera Voyageur Production Limited v Premier Oil E&P UK Ltd (2020). Under the contract between the parties (Altera and Premier) Premier was required to pay a daily rate to Altera, with the daily rate varied on a yearly basis, and with a further variation effectively to reflect the service level provided.
The contract had an appendix containing two worked examples of the daily rate calculation formula, but both worked examples added two further steps to the calculation formula expressed in the main contract. One of these further steps would have meant a significant uplift in the amount payable by Premier to Altera.
Naturally, Altera therefore sought to rely on the calculation following the worked example. Premier sought to apply the lower rate provided by the calculation defined in the main contract, relying on a clause in the main contract which provided that the terms of the main contract should prevail in the event of conflict with the appendices.
The High Court decided that the worked examples should prevail and indicated that the worked examples were crucial to the agreement and the operation of the pricing structure.
This ruling raises three points to consider for businesses:
- Do your contracts contain worked examples? If not, they may be a helpful addition to bring clarity and reduce the risk of lengthy litigation. Consider instructing a member of our expert commercial team to review and update your contracts.
- Do the worked examples align with the terms of the main contract? As the court can defer to the worked examples rather than the contract wording, it is essential to ensure that the examples are accurate and that any ambiguities are identified and addressed as part of contract negotiations. If not, lengthy interpretation issues and expensive litigation may arise which will inevitability damage the relationship between the parties.
- The ruling is an important reminder that the strict words of a contract may not always be applied and that the court may rule that the true intentions of the parties were in fact different.