England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		27 May 2011

Mr Justice Burton :

1. The Claimant company ("Hess") is a US Oil and Gas company. The Defendants ("Stena") are companies registered in Bermuda and Hungary, part of the same group. Hess entered into a Mobile Offshire Drilling Unit Contract No 4600006399 ("the Contract") with the First Defendant on 21 September 2007, which Contract was novated to the Second Defendant, and nothing turns on the identity of the particular Stena group entity. By the Contract, Stena agreed to carry out work by means of a Mobile Offshore Drilling Unit ("MODU"), for a primary term of 60 months from the Commencement Date, with an option to extend. It was anticipated that the Commencement Date would be delayed, because, at the time of the Contract, the MODU was under construction at the Samsung Yard in Korea, and the Commencement Date was therefore fixed as the date of delivery of the MODU from the Samsung Yard, following the completion of the rig acceptance test provided for in the Contract. In the event, the MODU was delivered, and the Contract commenced, on 13 August 2009 ("the Commencement Date"), almost two years after the date of the Contract. By Clause 17.3 of the Contract, it is governed by English law, and the London courts have exclusive jurisdiction.
2. The facts are not in issue in this case, and, indeed, have been the subject of an Agreed Statement of Facts. The claim arises out of a dispute between the parties as to the construction of a number of clauses relating to the remuneration of Stena by Hess. By order of Gloster J on 2 February 2011, five preliminary issues were to be tried, of which the fifth has not remained contentious. The four issues before me arise primarily by virtue of the substantial alteration in the exchange rate, as between dollars and sterling, since September 2007, when the Contract was entered into. The calculations were made for the purposes of the Contract in relation to those sums which required to be converted from sterling into dollars, by reference to the then exchange rate of US$2 to £1. By the time the first invoice was rendered by Stena in September 2009, the rate was £1 = US$1.61, and the rate has not materially changed since then. The Contract continues in operation, and will do until at least 2014, and the monetary difference between the positions of the two parties is already more than US$5m.
3. By Clause 3.2 of Schedule III to the Contract, an Operating Rate of $498,500 per day (based upon "Option A") was provided for, it being common ground that, of the four options there set out, Option A was what the parties elected for; and by Clause 3.14 of the Schedule (hereafter "Clause 3.14"), it was provided that the Operating Rate consisted of two elements, a fixed capital element, which was to remain "firm and fixed for the entire term of this Contract", and an operating cost element. As will be seen when I set out the terms of the contract more fully below, the operating cost element was said to be "USD152,869 (comprised of USD67,009 and GBP42,930) as of September 14 2007, being the date of [Stena's] commercial proposal for the provision of work … subject to adjustment as defined below". Those figures of $67,009 and £42,930 consisted of eight cost elements, to which I shall refer below, some in dollars and some in sterling, and it is apparent that the sterling element was converted at $2 to £1 in order to arrive at the total of $152,869. Because the operating cost element was $152,869, it is clear, once Option A was agreed, that the fixed capital element was $345,631, being the balance of the Option A Operating Rate of $498,500.
4. There are, as will be seen, express provisions in the Contract for (various expressions are used), correction/variation/adjustment/amendment of the operating cost element. The issue between the parties is whether the effect of the Contract is, as Hess contends, to recalculate, at the date of each invoice, the operating cost element, taking into account variations in those costs (up or down), converting the costs in sterling to dollars at the rate provided in the Contract (Clause 13.3.5) for such conversion, and then to add the corrected or adjusted operating cost element to the fixed capital element, so as to arrive at a new Operating Rate, or, as Stena submits, to leave the Operating Rate unchanged, but to recalculate the items of the operating cost element, then, insofar as an increase (or decrease) is revealed over the base line figure of $152,869, for the increase (or decrease) to be separately calculated, with the sterling component of the increase/decrease only converted into dollars (there is a subsidiary argument as to what rate should be used), and for the resultant sum to be separately invoiced as a Day Rate Adjustment. Leaving aside the subsidiary argument, it can be seen that the monetary value of the dispute is represented by whether the up-to-date exchange rate should be applied to all the costs elements, or only to the variations in them.
5. I now set out the provisions of the Contract relevant to this dispute, beginning first with the terms contained in the main body of the Contract which, by virtue of Clause 2.3, are said to take precedence over the terms in the Schedule. References to COMPANY are to Hess and to CONTRACTOR are to Stena:

"13. TERMS OF PAYMENT

13.1 SCHEDULE III Amounts: For the performance and completion of the WORK, the COMPANY shall pay, or cause to be paid, to the CONTRACTOR the amounts provided in SCHEDULE III — REMUNERATION, at the times and in the manner specified therein and in this Clause 13 …

…

13.3 Invoicing:

13.3.1 Each invoice shall show separately the individual amounts owing under each of the headings in SCHEDULE III — REMUNERATION. (including, with regard to each of the various applicable day rates, itemizations of the respective amounts invoiced for the capital and operating cost elements, including the respective components contained therein, as particularly described in SCHEDULE III, Clause 3.14 …

…

13.3.4 Each invoice shall be accompanied by a complete set of supporting documentation …

13.3.5 Except as specifically otherwise provided herein, all invoices shall be rendered in United States Dollars, and invoices for expenses incurred in other currencies shall state the currency in which the expense was incurred and the rate of exchange used to convert to U.S. Dollars. All rates of exchange shall be determined by reference to the London Financial Times edition published immediately prior to the date of the invoice. For expenses incurred by the CONTRACTOR and reimbursable by the COMPANY, the COMPANY reserves the right to reimburse the CONTRACTOR in the same currency in which any expense was incurred."

6. The relevant provisions in Schedule III – Remuneration are as follows – I have numbered, as did the parties in the course of submissions, the (previously in part bullet-pointed) subparagraphs of Clause 3.14:

"1.1 All Inclusive Price/Rate/Charge

Excepting as otherwise provided in Clauses 2.2, 11.2, 14, SCHEDULE III Clause 3.14 and any other applicable provisions of this CONTRACT, all of the charges, rates and prices set forth in this CONTRACT, which are to be paid to the CONTRACTOR, shall include, without limitation, all costs, expenses, profits, taxes and other GOVERNMENT assessments of whatsoever kind incurred by the CONTRACTOR and its SUBCONTRACTORS in performing the WORK for the COMPANY hereunder or otherwise arising out of this CONTRACT, unless otherwise expressly agreed in writing to be borne by the COMPANY.

…

2. CONTRACT PRICE

…

2.2. All costs charged to the COMPANY by the CONTRACTOR must be specifically identified in this CONTRACT as being borne by the COMPANY. All other costs shall be the responsibility of the CONTRACTOR.

2.4 As full compensation for the WORK and other services^- provided on a day rate basis by the CONTRACTOR under this CONTRACT, the COMPANY shall pay to the CONTRACTOR, as hereinafter provided, the Day Rates calculated pursuant to and in accordance with the rates set out in this Schedule III, Clause 3.

…

3. RATES AND CHARGES

The following rates shall be applicable under this CONTRACT:

3 . 1 Mobilization Fee

The MOBILIZATION Fee shall be comprised of 80% of Operating Rate USD / Day for the time period from the COMMENCEMENT DATE until MOBILIZATION COMPLETION.

3 . 2 Operating Rate

The [Operating Rate] listed below shall apply, as particularly provided for in Clause 2 of this SCHEDULE III … of this CONTRACT, except when the Moving Rate, Standby Rate, Repair Rate, Force Majeure Rate, or Zero Rate is applicable for such period, unless otherwise expressly provided in this CONTRACT.

3.2.1 Option A [this is what was chosen by the parties] Operating Rate: $498,500 USD/Day

…

3.3 Standby Rate

The Standby Rate (With Crew) set forth below shall apply in the circumstances set forth in Clause 2.8.1 of this SCHEDULE III — REMUNERATION:

3.3.1 Standby Rate (With Crew) 98% of Operating Rate USD/Day …

3 . 4 Repair Rate

The Repair Rate set forth below shall be payable as calculated in the provisions of Clause 2.9 of this SCHEDULE III — REMUNERATION.

3.4.1 Repair Rate: 100% of Operating Rate USD/Day

…

3 . 6 Moving Rate

The Moving Rate set forth below shall apply in the circumstances defined in Clause 2.7 of this SCHEDULE III — REMUNERATION.

3.6.1 Moving Rate: 98% of Operating Rate USD /Day

3.7 DEMOBILIZATION Rate …

The DEMOBILIZATION Rate … shall be applicable as provided for in Clause 2.12 of this SCHEDULE III — REMUNERATION.

3.7.1 DEMOBILIZATION Rate: 98% of Operating Rate USD/day …

3 . 8 Re-drill Rate:

3.8.1 Re-drill Rate … 98% of Operating Rate USD/day.

3.9 Force Majeure Rate:

19.1 Force Majeure Rate … 98% of Operating Rate USD/day.

3.10 Incentive Rate:

3.10.1 Incentive Rate for Key Performance Indicators … shall be applied in addition to the other applicable DAY RATES …

3.11 Other Costs

…

3.12 Handling Charge (application of handling rate to be agreed by the Parties) …

3.13 Fuel Cost:

…

3.14 Day Rate Adjustment

1. The Operating Rate is comprised of two elements: (1) the capital element, which, dependent upon the application of the relevant Operating Rate in accordance with Clause 3.2 above, shall remain firm and fixed for the entire TERM of this CONTRACT; and (2) the remaining part, the operating cost element, including the operating cost components itemized below, which operating cost element totals USD 152,869 (comprised of USD 67,009 and GBP 42,930) as of September 14, 2007, being the date of CONTRACTOR'S commercial proposal for the provision of WORK utilizing the MODU pursuant to this CONTRACT. The operating cost element (including its respective components) is subject to adjustment as defined below:

2. The adjustments shall be made on the basis of any variation, whether an increase or a decrease, of duly documented and actually incurred operating costs, with the exception of the ADMINISTRATION cost component as set forth below, which shall vary according to the change in the U.K. Retail Price Index commencing from September 2007 (206.1), and the REPAIR AND MAINTENANCE cost component, which shall be adjusted according to the change in the U.S. Department of Labor Producer Price Index for Oil and Gas Field Machinery and Equipment Series ID 333132 (having a preliminary value of 227 for September 2007) for the same period.

3. Adjustment for PERSONNEL costs shall be capped at 8% per year for the BASIC PROGRAM AREA. For WORK outside the BASIC PROGRAM AREA, although no caps have been established, CONTRACTOR undertakes that no geographical uplifts will be paid by CONTRACTOR to PERSONNEL working elsewhere without COMPANY'S prior written agreement other than in West Africa, where a "hardship" allowance will be paid.

4. In the event any of the foregoing indices are replaced or rebaselined, both Parties shall mutually agree upon an appropriate substitute index.

5. The base line operating cost element, including its respective itemized cost components, forming part of the Operating Rate as of September 14, 2007, are set out below and shall be either verified or corrected on or about the COMMENCEMENT DATE and thereafter as subsequent adjustments occur, subject to COMPANY'S audit rights pursuant to Clause 23 of the CONTRACT. The first amendment/variations of the operating cost element shall be effective as of the COMMENCEMENT DATE and shall encompass all actual cost changes commencing as of September 14, 2007, with regard to each of the respective cost components other than ADMINISTRATION and REPAIR and MAINTENANCE costs, for which the initial set of cost changes shall be measured from the applicable indices for September 2007, as referenced above.

6. On a calendar quarterly basis following the COMMENCEMENT DATE, the operating cost element referred to above and forming part of Operating Rate will be increased or decreased, on the basis of actual costs incurred during the preceding calendar quarter with regard to all of the operating cost components other than ADMINISTRATION and REPAIR AND MAINTENANCE costs, which shall be subject to the rate changes for the respective indices referenced above, all in order to reimburse either the CONTRACTOR or COMPANY as appropriate. The final quarter payment to CONTRACTOR under this CONTRACT in respect of operating costs shall take the form of a lump-sum payment within three (3) months from termination of the CONTRACT.

7. During the TERM of this CONTRACT, Contractor shall use reasonable endeavors to maintain all components of the operating cost element, as itemized below, at reasonable levels, in accordance with costs normally incurred by experienced drilling contractors utilizing comparable equipment and personnel in the applicable PROGRAM AREA. For the avoidance of doubt, the adjustments in CONTRACTOR'S PERSONNEL costs pursuant to this Clause 3.14 shall be deemed to encompass all of CONTRACTOR'S payroll and employment burdens, including employment and payroll taxes.

BY CURRENCY

	DAILY USD	DAILY GBP
PERSONNEL		30,846
TRAVEL		3,236
CATERING	8,238
FREIGHT	6.575
INSURANCE	14,244
REPAIR AND MAINTENANCE	34,075
SHORE BASE COSTS		1,797
ADMINISTRATION		7,051
TOTAL	67,009	42,930

7. I now set out the first four issues, as ordered to be tried. They can be summarised on the basis that the main issue is whether, for the purposes of Stena's invoices, once the up-to-date cost elements have been calculated, the sterling costs should be converted into dollars (but at what rate?) and then invoiced as part of an increased Operating Rate, or whether the Operating Rate should remain unchanged, and the increases in the cost elements (with the amount of the sterling increases (or decreases) being converted into dollars – but at what rate?) should be separately invoiced as a Day Rate Adjustment. The issues are as follows. I shall add after each question which side supports the answer suggested:

"1. From 13 August 2009 to 30 September 2009 (and so prior to any Day Rate Adjustment), at what rate was the Claimant liable to pay the First or Second Defendant per day. In particular:

1.1 Was the applicable day rate a fixed rate in USD; [Stena] or

1.2 Did the applicable day rate include a variable element. [Hess]

2. If the applicable day rate contained a variable element, were the GBP elements of the variable element to be calculated:

2.1 on the basis of £1 : $2; [Stena: but only because the conversion had already taken place as part of the (fixed) Operating Rate]

2.2 by reference to the London Financial Times edition published immediately prior to the date of the invoice (the FT rate); [Hess] or

2.3 by reference to some other rate.

3. Following the first Day Rate Adjustment on 1 October 2009:

3.1 was the Operating cost element to be re-calculated such that all cost components incurred in GBP were to be converted into USD at a particular rate; [Hess] or

3.2 was the Operating cost element a fixed sum, but subject to calculation of a separate Day Rate Adjustment based on actual or index-linked costs (as appropriate) in the immediately preceding period, any sterling element of which was to be converted into USD at a particular rate. [Stena]

4. What was the rate referred to in paragraph 3 above to be:

4.1 the FT rate; [Hess]

4.2 the average exchange rate over the previous quarter. [Stena]."

8. There is a preliminary pleading point to be resolved, namely whether the Claimant has sufficiently pleaded, and is entitled to have resolved as part of (indeed as fundamentally underlying) Issues 1 and 2, a case that the operating cost element, and, on its case, hence the Operating Rate, is to be recalculated, not only as part of the exercise required in the sixth paragraph of Clause 3.14 (on a calendar quarterly basis following the Commencement Date (i.e. after 30 September 2009 and quarter days thereafter), but also in the first invoice (in the event rendered on 4 September 2009, for the period from Commencement Date on 13 August 2009 to 31 August 2009) in respect of the earlier period. I am satisfied that the Claimant's case is sufficiently pleaded in that regard.
9. What I have been calling the subsidiary issue arises out of Clause 13.3.5, set out above. Hess asserts that, by reference to it, whatever exercise Stena is obliged to carry out, i.e. whichever of the two parties' cases is correct, the conversion rate from sterling to dollars must be carried out at the rate of exchange there provided. Stena submits that, again in relation to whichever exercise is found to be correct, either recalculation and invoicing of the entirety of the operating cost element, or simply the variations to it, Clause 13.3.5 has no application, and Stena has been entitled to operate, in good faith and reasonably, a rate of exchange of its choice, being that spelt out in Issue 4.2.
10. The experienced QCs for each party, Mr Jonathan Hirst QC for Hess and Mr Mark Templeman QC for Stena, have made their submissions, in writing and orally, concisely and persuasively, and I shall seek to summarise them below.

The Claimant's Case

11. The Claimant's case is as follows:

i) The Contract was not intended to give, and should not be construed as giving, a windfall in relation to currency exchange fluctuation to either party. At the date of the Contract, the rate of exchange was US$2 to £1, but it was not spelt out as a term of the Contract that this exchange rate be applied, it was simply that that informed the calculations carried out "as of September 14 2007". In a contract which provided for adjustments/amendments/corrections, it should not be concluded that the parties were agreeing that the exchange rate applicable in September 2007 should be applied not only at the Commencement Date, which was itself anticipated to be at some considerably later date (in fact two years), but for at least the five-year duration of the Contract. This would not be commercially sensible, nor the agreement which commercial parties are likely to have made.

ii) The exercise proposed by Stena, to be effected (and effected only) in the calendar quarterly recalculations, is an elaborate (and therefore less likely) exercise, as can be seen from Stena's calculations, informed by the need to apply an up-to-date rate of exchange only to that proportion of the sterling cost elements which exceeded the figures contained in the Contract.

iii) Mr Hirst relied upon the description in the first paragraph of Clause 3.14 as being "as of September 14 2007", which suggested that it was only a temporary calculation, capable of the subsequent adjustment which was indeed referred to in the balance of the Clause.

iv) Mr Hirst relied on the fifth paragraph of Clause 3.14 to substantiate the Claimant's case that (as discussed in paragraph 8 above) the recalculation of the operating cost element and thus, on his case, of the Operating Rate, was required to be carried out in the first invoice after the Commencement Date, even prior to the subsequent calendar quarterly adjustments. He relied on the requirement that "the base line operating cost element, including its respective itemized cost components, forming part of the Operating Rate as of September 14 2007 … shall be either verified or corrected on or about the Commencement Date". He submitted that this could only mean that the figures had to be updated as of the Commencement Date, which would include, at a time when no work would yet have started, their verification or correction as against the prevailing exchange rate. Once the operating cost element was verified or corrected, because it "forms part of the Operating Rate", it must inevitably involve an alteration to the Operating Rate.

v) Thereafter, on the calendar quarterly basis following the Commencement Date, the operating cost element would be increased or decreased, as provided for in the sixth paragraph of Clause 3.14. Once again he relies upon the statement, repeated in this paragraph, that the operating cost element 'forms part of the Operating Rate'.

vi) It is made clear in that sixth paragraph that the purpose of this exercise is to "reimburse either [Stena] or [Hess] as appropriate". This, Mr Hirst submits, emphasises that the purpose of the procedure is intended to reimburse and not either to give a windfall or impose a detriment. This, Mr Hirst submits, is consistent with the seventh paragraph of Clause 3.14, which imposes an obligation on Stena to "use reasonable endeavours to maintain all components of the operating cost element … at reasonable levels".

vii) If, as Mr Templeman submits, the operating cost element may change but only so as to generate a separately invoiced claim, while the Operating Rate remains fixed and immutable, then it is difficult to comprehend, or at any rate comprehend the equity of, Clauses 3.1 ("Mobilisation fee"), 3.3 ("Standby Rate"), 3.4 ("Repair Rate"), 3.6 ("Moving Rate"), 3.7 ("Demobilization Rate"), 3.8 ("Re-drill Rate") and 3.9 ("Force Majeure Rate"), all of which provide for payment, throughout the five-year Contract, starting in September 2009, on the basis of a percentage of an Operating Rate which, if Stena be right, would remain immutable as of September 2007. This might be appropriate for Mobilization (at the outset of the Contract), but surely not for Repair Rates or Demobilization Rates, as the Contract continues and concludes.

viii) The Claimant's case is that the effect of the recalculation of the operating cost element, which forms part of the Operating Rate, is to increase the Operating Rate (both with regard to the claim for the rate itself and to Stena's claims for the other Rates as above which depend upon a percentage of the Operating Rate). The Operating Rate would thus alter, by virtue of the capital element remaining fixed, but the operating cost element fluctuating by reference to the calculations provided for in Clause 3.14. Insofar as necessary, Mr Hirst relies upon the words of Clause 3.2 which, after specifying the Operating Rate as $498,500 per day, adds "unless otherwise expressly provided in this Contract".

ix) For the purpose of the recalculation (adjustment/correction/ amendment) of the operating cost element and thus of the Operating Rate, all expenses incurred in sterling are to be converted in accordance with Clause 13.3.5, namely "by reference to the London Financial Times Edition published immediately prior to the date of the invoice." This is either because they are, within the first sentence of Clause 13.3.5 "expenses" (either being calculated or recalculated) or because, even if the exercise which is being carried out is simply that for which Mr Templeman contends, namely calculating the increases or decreases, then even if such exercise would fall strictly outside the ambit of the first sentence of Clause 13.3.5 (which Mr Hirst does not accept), nevertheless the second sentence "All rates of exchange shall be determined …" expressly governs the position.

The Defendants' Case

12. Mr Templeman's submissions are as follows:

i) The parties agreed upon a fixed Operating Rate, consisting of an immutable capital element and an operating cost element calculated as at 14 September 2007, and provided for variations to the latter to be separately invoiced. If it is now said to be unfair and costly to Hess, it could have been unfair and costly to Stena had the exchange rate moved in the other direction, and this is what the parties agreed, which cannot be said to be uncommercial. He said the following, in paragraph 2.18 of his skeleton argument:

"The effect of C's construction of the day rate adjustment provisions, however, is to convert the Contract into a pure cost reimbursement contract, so far as operating costs are concerned. That is both contrary to the nature of the Contract as a whole, and a subversion of the commercial purpose of the day rate adjustment provisions, which are merely to provide a mechanism by which variations between the base line OCE and the actual costs incurred by Ds may be reimbursed."

ii) The Contract is not one strictly of cost reimbursement. The parties agreed a formula for a day rate. As for the adjustments to such day rate, even those did not all reflect accurate reimbursement. The adjustment to personnel costs was, by the third paragraph of Clause 3.14, capped at 8% per year, with the exceptions there set out, and the repair and maintenance and administration costs were to be adjusted by reference to Price Indices.

iii) It is clear from Clauses 1.1 and 2.4 of the Schedule in particular that the Day Rate agreed is inclusive of all costs and expenses (with certain specified exceptions). The Operating Rate was fixed, without mechanism to change it. The variations came in only by reference to the Day Rate Adjustment provided for in Clause 3.14. Mr Templeman relies particularly on the reference in the fifth paragraph of Clause 3.14 to the operating cost element being a "base line", so that in the reference in the sixth paragraph to the "operating cost element referred to above and forming part of [the] Operating Rate [being] increased or decreased", the words "referred to above" emphasises that on every subsequent occasion there must be reference to the base line, i.e. that 'as of 14 September 2007', with separate calculation and assessment of the increases/decreases. Whereas Mr Hirst relies upon the reference to adjustment/amendment/variations of the operating cost element as indicating a change to that operating cost element (and hence to the Operating Rate), Mr Templeman submits that what is being referred to is those adjustments themselves, which will then be separately invoiced.

iv) There is no provision for any such adjustments to be made prior to the Day Rate Adjustment to be carried out on the calendar quarterly basis and continuing. If that is right, as he submits it is, such that the Operating Rate invoiced in September 2009 is entitled to be the same as that contained in the Contract 'as of 14 September 2007', and so that there is no room for reconsideration of the exchange rate, then there is no reason for any such consideration thereafter. The provision upon which Mr Hirst relies, in the fifth paragraph of Clause 3.14, that the operating cost element "shall be either verified or corrected on or about the Commencement Date" (see paragraph 11(iv) above) does not involve any updating of the operating cost element, but simply provides for the need for a check as at the Commencement Date that the figures were accurate as of 14 September 2007.

v) Mr Templeman relies heavily upon Clause 13.3.1, which provides that each "invoice shall show separately the individual amounts owing under each of the headings in Schedule III - Remuneration". He points to those headings, under each of which, he submits, there could be a charge in a given month, and since all the other headings would lead to a sum claimed in the invoice, so too, he submits, in relation to Clause 3.14, "Day Rate Adjustment". It is under this paragraph that Stena is entitled, indeed obliged, to charge for the adjustment/variations to the operating cost element. Hence, Stena has submitted invoices containing the fixed Operating Rate and then, under a separate heading (and with the increase/decrease calculated by reference to Stena's chosen conversion rate) a separate Day Rate Adjustment, in every invoice except the first invoice, when there was no Day Rate Adjustment, because they were not obliged or entitled to carry out such exercise prior to the calendar quarterly invoice (see subparagraph (iv) above). There is no reference in the Contract to the operating cost element being invoiceable, except as a subset to the Operating Rate, so that the only way in which the variations can be invoiced is for Stena to claim the Operating Rate pursuant to Clause 3.2 and a Day Rate Adjustment pursuant to Clause 3.14. If, which he does not accept, the exercise is more elaborate, that is what is required by the Contract.

vi) As to the conversion rate provided for in Clause 13.3.5, it does not arise in respect of the invoiced Operating Rate (which includes the baseline operating cost element) which is not a claim for expenses, but a claim for a Day Rate, which is required to be charged in dollars. As for the variations, Mr Templeman's written submissions address the fact that the exercise that was there being carried out did not result in "invoices for expenses incurred", because they amounted to an invoicing of a Day Rate Adjustment, and the expenses there referred to were, Mr Templeman contended, a reference to expenses or costs which were claimable by Stena/reimbursable by Hess as an exception to the all-inclusive Day Rate figure, under certain other clauses of the Contract. He did not address, not least because it had not been previously articulated, Mr Hirst's alternative argument, set out in paragraph 11(ix) above, that the second sentence in Clause 13.3.5 is self-standing, and he did not dedicate much if any of his oral submission to address that point, which, if it was limited to his case on Day Rate Adjustments, if it were otherwise successful, would not, in the overall context of this case, result in a substantial sum of money.

Mr Hirst's Reply

13. With regard to this last point, Mr Hirst submitted that it was wholly unlikely, in such a detailed Contract, which actually provided in Clause 13.3.5 for a conversion rate, that the parties could have intended to leave open the applicability of exchange rates, or that some wholly different exchange rate, dependant upon discretionary reasonable decisions of Stena, should apply. As to the major issues between the parties:

i) He submitted that Mr Templeman's interpretation of the obligation of the parties in the fifth paragraph of Clause 3.14 to verify or correct the base line operating cost element on or about the Commencement Date was untenable. There had been two years for such verification or correction, if it were simply a matter of checking whether the figures contained in the Contract as of 14 September 2007 were said to be accurate, and in any event it is difficult to see why the parties should be in any, or certainly any better, position to take such action two years later. He submitted that the only proper construction was that such an exercise would result in a recalculation "effective as of the Commencement Date". If Stena did not carry out such exercise, which could have included an update of the Administration and Repair and Maintenance Costs by reference to the relevant Indices, then the consequence of Stena's not having done so could be addressed. One thing that was clear was that such correction/ verification would and should take in the prevailing exchange rates as at the Commencement Date. This would thus be the first such recalculation, and would be followed "thereafter as subsequent adjustments occur" by the subsequent calendar quarterly adjustments.

ii) The use of the words "base line" does not support Mr Templeman's argument. It simply means "starting point", essential in any event for the calculation of the price indices, and is in any event at best neutral in the argument.

iii) Clause 13.3.1 requires that the invoices must separately itemise any sums claimed by reference to the relevant headings. It does not need to be interpreted as requiring that there must be a sum due under each of the headings in Schedule III. On Mr Hirst's case, Clause 3.14 does not lead to a sum being due called "Day Rate Adjustment", but describes a mechanism for adjustment of the Day Rate, i.e. of the Operating Rate, both as at Commencement of the Contract and subsequently.

iv) Such construction is far more consistent with the provisions of those subclauses of Clause 3 of the Schedule which provide for payments of percentages of the Operating Rate. Otherwise (as he had submitted as set out in paragraph 11(vii) above), the Defendants would not be properly remunerated.

Mr Templeman's Rejoinder

14. Mr Templeman submitted that, on a proper construction of the Contract, the applicable Rates in those other subclauses of Clause 3 of the Schedule would amount to, and be calculated by reference to, a percentage not only of the Operating Rate, but, where relevant, of the Day Rate Adjustment.

Conclusion

15. It is obvious that there are powerful arguments on both sides, as summarised above. However, I am persuaded by Mr Hirst's arguments, and each of them, to which I refer, and in particular:

i) I much prefer his interpretation as to the meaning of the obligation to verify/correct as at the Commencement Date. This then leads to the need, imposed by the fifth paragraph of Clause 3.14, to carry out an adjustment, as at the Commencement Date, even before work has started. Thus, the first "Day Rate Adjustment", pursuant to Clause 3.14, takes place, and it must inevitably lead to a change in the Operating Rate, which is not dependent upon work having been commenced and proving more costly than anticipated. This then makes it far more difficult to support Mr Templeman's case that the Operating Rate should, after the first and the subsequent calendar month recalculations, be invoiced unchanged together with a Day Rate Adjustment. Even in the first invoice, it is likely that a different figure is to be invoiced, and in my judgment that should be done by altering (adjusting) the Operating Rate or, in my judgment the same thing, the Day Rate.

ii) The provisions as a result of the fifth and sixth paragraphs of Clause 3.14 that the "Operating cost element … forming part of [the] Operating Rate will be increased or decreased" to my mind lead inevitably to the fact that the Operating Rate must be changed, because the capital element remains fixed; and the Operating Rate is arrived at by adding the fixed capital element to the increased or decreased Operating cost element. All justifying documentation is then supplied with Stena's invoice pursuant to Clause 13.3.4.

iii) It seems to me clear that only by there thus being a change in the Operating Rate will Stena be able to receive its due payment, possibly five years after the Commencement Date of the Contract, under the other subclauses of Clause 3 of the Schedule, Demobilisation, Repair, Moving Rates etc, by reference to a percentage of that Operating Rate. I do not see how, if the Day Rate Adjustment is a sum (and not a mechanism) Stena would become entitled to a percentage of that sum.

16. Accordingly I conclude that both as at Commencement Date and in the invoices thereafter, the expenses in sterling must be totted up and converted to dollars, so that the Operating Rate can be adjusted. The applicable conversion rate is, by reference to either or both of Mr Hirst's arguments, that contained in Clause 13.3.5.
17. In the light of my conclusions, the list of issues needs to be amended in relation to the first question, so that the parenthesis reads "(and so prior to any calendar quarterly Day Rate Adjustment)". Subject to that, I would answer the following paragraphs of the four issues "Yes": paragraphs 1.2, 2.2, 3.1, 4.1 and all the other questions "No".