Use the formula for success

It is common for leases and other property documents to incorporate formulae, worked examples and illustrations to help “explain “ complicated provisions. Typical examples can be found in such documents as (i) leases that reserve turnover rents; (ii) leases where the rent is calculated on a rent sharing basis; (ii) development and forward funding agreements and (iv) Section 106 Agreements. Often these worked examples and illustrations are incorporated for the benefit of third party interpretation e.g. to assist a surveyor, valuer or accountant. As important as these worked examples and illustrations are, the legal effect of incorporating the same in legal agreements has been open to question.

Seemingly, the first time such provisions were judicially considered was six years ago in the case of Starbev GP Ltd v Interbrew Central European Holdings BV [2014] EWHC 1311 (Comm). In that case, Blair J considered the correct approach to interpreting an “illustration” within a contract, where that “illustration” does not exactly correspond to the text which it is supposed to be illustrating. In his judgement, Blair J included the following dicta, in the context of financial contracts:

• “there is in my view no reason why illustrations or examples should be construed differently than any other term in a contract…”;
• “…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”; an
• “ultimately, it depends on the terms of the illustration read in context”.

This approach to illustrations and worked examples has now been considered again and confirmed in the High Court in the recent case of  Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm) (17 July 2020).  The Altera case involved a dispute between the parties and a difference in interpretation between the operative provisions set out in the body of a bareboat charter agreement (relating to the hire of a floating production, storage and offloading vessel) and two worked examples as set out in an appendix to that charter agreement.

The High Court was asked to resolve, as a matter of construction, the question whether the operative provisions in the body of the agreement took precedence over the two worked examples in the appendix to the agreement as the worked examples in the appendix included two steps which were not described in the operative provisions of the main body of the agreement.

In his judgement in the Altera case, Richard Salter QC, sitting as a deputy judge in the Commercial Court (whilst also commenting on the poor quality of some of the drafting in the agreement) decided:

1. Notwithstanding that in the main agreement there was wording to the effect that unless otherwise expressly provided, in the event of any conflict between an appendix and the main body of the agreement then “the latter shall prevail”; it was held that this “inconsistency clause” had no part to play in the interpretation of the agreement because there was no real inconsistency between them – simply that the worked examples contained additional steps and showed the finer details of the relevant calculation to be made.
2. “In my judgment, the operation of those “Worked Examples” cannot be characterised as “arbitrary and irrational” or as an “obvious nonsense”.
3. That the “Worked Examples” in the appendix to the agreement “do not appear, in their context, to be mere optional extras, but rather to be integral parts of the contract terms which explain how that adjustment is to be calculated.  Each of those two “Worked Examples” specifically provides for what I have referred to as “Step 6”.  To disregard them would, in my judgment, be to re-write the contract that the parties have made; “it seems to me to be inherently more probable that the parties’ true bargain is that to be found in the “Worked Examples”.

Accordingly, there are some important “takeaways” from this judgement for real estate lawyers and their clients to consider when drafting complex arrangements:

1. “illustrations” and “worked examples” are integral parts of a commercial contract and due weight will be given in such examples when interpreting a relevant agreement  – accordingly, it is recommended where complex arrangements are agreed to include such examples and illustrations
2. Even where there might be “apparent commercial illogicality” in terms of applying additional steps set out in a worked example which are not mentioned in the main text; on the facts of this case, the worked examples were preferred as they could not be characterised as “arbitrary and irrational” or as an “obvious nonsense”.
3. Multiple illustrations or worked examples should be included because where, as in the Altera case, there is more than one “worked example”, all of which are consistent, this will  strongly suggest that the worked examples do represent the deliberate intention of the person who drafted those examples.
4. The relevant test that will be applied by a court is; would a reasonable person with all the relevant knowledge say that the worked examples represented what the parties intended should happen.
5. Care should always be taken to ensure that boilerplate construction and interpretation clauses do not cause any confusion as to which provisions of the agreement should prevail where there are worked examples and illustrations incorporated.

If you have any queries about this topic, please contact Joanne McIvor or any member of the Property team.

 

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