Hess Corp v Stena Drillmax III Ltd. & Anor

Where a contract divides a day rate into a fixed capital element and an operating cost element, and provides that the latter will be verified, corrected, increased or decreased, those adjustments alter the overall day rate where the operating cost element forms part of it. The adjustment mechanism applies from the commencement date, including the first invoice, and thereafter at the specified intervals. Currency components must be converted using the contractual exchange-rate provision where that provision governs invoices and rates of exchange.

Hess contracted with Stena for the provision of a mobile offshore drilling unit. The contract provided for a fixed daily Operating Rate comprising a capital element and an operating cost element, with the latter subject to adjustment under Schedule III, clause 3.14.

Following a substantial change in the sterling-dollar exchange rate between the contract date and commencement, the parties disputed whether the Operating Rate remained fixed and variations were separately invoiced as a Day Rate Adjustment, or whether the operating cost element had to be recalculated and incorporated into the Operating Rate. They also disputed the applicable exchange rate and whether recalculation was required for the first invoice.

1. Construction of the adjustment mechanism. The obligation in Schedule III, clause 3.14 to verify or correct the baseline operating cost element on or about the commencement date required an adjustment as at that date, even before work began. It was not merely a check of whether the figures stated at the contract date had then been accurate.
2. Effect on the Operating Rate. The operating cost element formed part of the Operating Rate. Since the capital element remained fixed, an increase or decrease in the operating cost element necessarily changed the Operating Rate. The mechanism therefore adjusted the day rate itself, rather than producing only a separately invoiced sum alongside an unchanged Operating Rate.
3. Related percentage rates. This construction was also required to give effect to provisions calculating mobilisation, standby, repair, moving, demobilisation, re-drill and force majeure rates by reference to a percentage of the Operating Rate. Those provisions would not operate coherently if adjustments were treated as separate sums that did not alter the Operating Rate.
4. Currency conversion. Sterling operating costs had to be added and converted into dollars for the purpose of adjusting the Operating Rate. The applicable conversion rate was the rate specified by clause 13.3.5, namely the rate determined by reference to the London Financial Times edition published immediately before the invoice date.
5. The preliminary issues were answered Yes in relation to paragraphs 1.2, 2.2, 3.1 and 4.1, with the remaining questions answered No. The first issue was amended so that it referred to the period before any calendar-quarterly Day Rate Adjustment.

not stated in the judgment.