Hess Corporation v Stena Drillmax III Ltd & Ors

In a long-term contract containing fixed and variable remuneration elements, describing the capital element as firm and fixed does not make the whole operating rate fixed. Where the operating cost element is expressly subject to adjustment, the operating rate changes accordingly.

A day-rate adjustment clause may establish a process rather than a separate payment. Where that process recalculates operating costs by reference to actual costs, a current contractual exchange rate applies to the adjusted sterling components as a whole, not merely to the net variation from the original estimate. Invoice itemisation does not alter that construction.

Hess Corporation sought repayment of hire from Stena under a mobile offshore drilling unit contract. The contract expressed remuneration in United States dollars and divided the operating rate into a capital element and an operating cost element. Part of the latter was denominated in sterling and was subject to a day-rate adjustment mechanism based on actual costs and specified indices.

Burton J determined preliminary issues of contractual construction in Hess’s favour, holding that the operating rate contained a variable element and that the sterling components were to be converted at the Financial Times exchange rate applicable to the invoice. His decision is reported at [2011] EWHC 1340 and [2011] 2 All ER (Comm.) 1011. Stena appealed, contending that the operating rate remained fixed and that the exchange rate applied only to a separate adjustment sum.

1. Appeal dismissed. Lord Justice Rix gave the judgment. Lord Justice Moses and Mr Justice Briggs agreed, making the decision unanimous.
2. The contract distinguished between the capital element and the operating cost element of the operating rate. Only the capital element was expressly stated to remain firm and fixed for the term. The operating cost element was expressly subject to adjustment. It followed that the operating rate itself could not remain wholly fixed. This construction also accommodated the other daily rates expressed by reference to the operating rate.
3. The day-rate adjustment was a process, not a separate sum distinct from the operating rate. The verification or correction of the baseline operating cost element at the commencement date was the first stage of an iterative process. Subsequent quarterly adjustments increased or decreased the operating cost element by reference to actual costs, subject to the specified indexation and cap provisions. The reference to a lump-sum payment concerned only the final quarter, when no future daily rate could be adjusted.
4. The exchange-rate provision required invoices for expenses incurred in other currencies to use the Financial Times rate immediately before the invoice date. It applied to the sterling components of the adjusted operating cost element as a whole. The contractual mechanism was intended to reflect actual operating costs, including changes in the sterling-dollar exchange rate, rather than only the difference between current costs and the original baseline.
5. The requirement that invoices separately itemise the capital and operating cost elements, their components and indexed changes did not require a separate day-rate adjustment sum. The operating cost element and its component adjustments remained subject to audit. Clauses addressing changes in law or location concerned new or additional costs, while ongoing operating costs were dealt with through the day-rate adjustment mechanism.

• Court of Appeal (Civil Division): dismissed Stena’s appeal and agreed with the reasoning and conclusions of Burton J.
• High Court of Justice, Queen’s Bench Division: Burton J determined the preliminary contractual construction issues in Hess’s favour. The decision is cited as [2011] EWHC 1340 and reported at [2011] 2 All ER (Comm.) 1011.