Jamila Khan Partner
Charterparty hire adjustment terms upheld despite apparent commercial illogicality
Altera Voyageur Production Limited v. Premier Oil E&P UK Ltd (Voyageur Spirit)  EWHC 1891 (Comm)
An oil exploration company bareboat-chartered a FPSO vessel. The parties disagreed on the amount of hire owed due to the apparent inconsistency of the charterparty provisions on hire adjustment. The ‘worked examples’ in the charterparty contained additional steps which were not included in the narrative part of the hire adjustment formula, resulting in the Charterers having to pay an increased daily hire when the Vessel’s productivity was below or at target levels.
Despite this “apparent commercial illogicality”, the Court was unwilling to “re-write” the charterparty terms in the absence of clear evidence that something had gone wrong with the contractual language. The Court also held that there was no real inconsistency in the hire adjustment provisions to justify disapplication of the additional steps in the ‘worked examples’.
The background facts
The Defendant (“Premier”) bareboat chartered the floating production, storage and loading vessel Voyageur Spirit (the “Vessel”) from the Claimant (“Altera”) by a charterparty dated 9 November 2010 (the “Charterparty”). On the same date, the parties entered into a Service Agreement, whereby Altera agreed to operate the Vessel, but on the basis that it “will subcontract a significant part of the Services to a third-party manager”.
The Charterparty came to an end and was replaced with a different agreement on 13 April 2018.
Article 17 of the Charterparty provided for the reduction or upward adjustment of the daily hire based on the Vessel’s performance (i.e. production of oil measured in barrels), while Appendix M contained a formula detailing how the adjustment was to be calculated. The formula consisted of a narrative and two worked examples.
The parties disputed how much hire was owed as the worked examples in Appendix M contained two further steps that were not expressly provided for in the narrative part. The effect of those further steps was to lower the ‘pivot point’ above which there would be an upwards adjustment in the daily hire. This resulted in Premier having to pay increased daily hire even when the Vessel’s productivity was below the target or at target level.
Altera, therefore, claimed US$ 12,108,072.50 plus contractual interest by way of adjusted hire for the Vessel, while Premier disputed Altera’s claim and counterclaimed US$ 3,837,580.91 for allegedly overpaid hire.
The Court considered the correct interpretation of the hire adjustment formula in Appendix M and, more specifically, whether the additional steps in the Appendix were actually intended by the parties.
In essence, Altera contended that the formula should be applied precisely in the way set out in the worked examples. Premier argued that Altera’s interpretation produced a result which was inconsistent, not only with the preceding narrative, but also with the other terms of the Charterparty and with commercial common sense; they claimed that it was illogical for there to be an upward adjustment of hire when the Vessel’s productivity was at or below target levels.
Premier submitted, therefore, that the narrative ought to be preferred to the worked examples because it gave effect to what a reasonable person would say was the parties’ intention as conveyed by the words that they had used in the Charterparty, taken as a whole.
The Commercial Court decision
The Court found in favour of Altera. In trying to ascertain the objective meaning of the Charterparty language, the Court looked at the terms of the various provisions in their commercial context and against the landscape of the instrument as a whole, instead of focusing too narrowly on the dictionary meaning of individual words and phrases.
The Court recognised that various changes were made to the Charterparty provisions in the course of drafting, without the consequences always being followed through with rigorous consistency. Moreover, it expressed sympathy for Premier’s arguments and admitted that it made better commercial sense to reward performance only if it was above the specified target.
However, despite this apparent commercial illogicality, the Court made it clear that it was not willing to re-write the contract where, while it was undoubtedly possible, it was not absolutely clear that something had gone wrong with the language that the parties had used.
The extra steps in the worked examples of Appendix M could not be characterised as an “obvious nonsense” and, in the Court’s view, the parties’ true bargain was reflected in the worked examples which were integral parts of the contract terms and explained how the hire adjustment was to be calculated. To disregard them would have the effect of re-writing the contract that the parties had made.
The Court cited with approval Starbev GP Ltd v. Interbrew Central European Holdings BV , in which it was held that: “it could be said in the context of lengthy contracts in financial transactions with much boiler plate that illustrations or examples deserve particular attention as something to which the parties particularly turned their minds.” While the Court in that case was speaking specifically of financial contracts, the principle could apply equally to the type of lengthy and detailed commercial contract concluded in this case. In this Court’s view, it was often only when narratives and formulae were worked through that their true effect could properly be seen.
Finally, there was no real inconsistency between the provisions of Appendix M and the narrative. While the narrative part did not specifically provide for the calculations in the further two steps of the Appendix, this did not mean that the latter should be dis-applied.
Those drafting commercial contracts should be meticulous in ensuring that the provisions reflect what the parties intend. The English courts will be reluctant to rewrite a contract in a way that interferes with the parties’ express bargain, even if it seems surprisingly unfavourable to one party.
Further, when using illustrations or examples in their contracts, parties should be mindful of the fact that the courts are inclined to attribute particular weight to them.
This article was co-authored by Trainee Solicitor, Ioanna Mitsaki.