Background

Liquidated damages are a common feature within construction contracts. They constitute an agreed figure for the loss that the Employer will suffer, usually per week, if the contractor completes after the contractual completion date. The Employer is then entitled to this figure if there is delay. Such clauses are useful for both parties – it prevents the Employer from having to prove the actual loss caused by delay which can often be difficult, and the Contractor has the benefit of knowing the fixed amount that is payable for delay.

Prior to this case, the general wisdom was that liquidated damages could be charged up to the point of termination but thereafter that contractual right fell away. From that point onwards, the Employer could still recover the loss suffered but it reverted to general damages. However, this view had not been fully tested in Court and there were some contradicting case law.

Triple Point Technology Inc -v- PTT Public Company Limited

Triple Point Technology Inc (‘Triple Point’) was a Delaware-based software company that worked in commodities trading. In 2012, it contracted with PTT Public Company Ltd (‘PTT’) to provide a software system. The contract contained milestones for payment but the project ran into delay and never reached completion. Triple Point wanted its invoices in respect of incomplete works to be paid, relying on dates for payment and order forms; PTT refused payment relying on the failure to meet milestones. Triple Point eventually suspended works for non-payment and PTT subsequently terminated for Triple Point’s purported default. PTT then employed a third party to complete the contract work. Triple Point started proceedings for payment of its invoices, and PTT counterclaimed for damages, including liquidated damages for delay. Those liquidated damages went beyond the point of termination and up to the point when the third party finished the works.

The matter was first considered by the High Court. The Court found that Triple Point was not entitled to payment of its invoices because payment was governed by the milestones which had not been reached. However, PTT was entitled to nearly US$3.5 million in liquidated damages via its counterclaim. Triple Point subsequently appealed to the Court of Appeal.

Court of Appeal

The Court of Appeal had a number of points to consider, including determining the period when liquidated damages could be charged in circumstances where an Employer had terminated the contract and a second contractor steps in. The Court said that there were effectively 3 different approaches that might be possible in those circumstances:-

(a) The liquidated damages clause does not apply at all;

(b) The liquidated damages clause applies up to the point of termination and then falls away thereafter;

(c) The liquidated damages clause continues until the second contractor has achieved completion.

Although (b) was the approach normally used, and was the view taken in various textbooks, the Court ruled that whether the liquidated damages clause ceased to apply completely, continued to apply up to termination, or continued to apply beyond termination depended on the wording of the specific clause itself.

The relevant clause (Article 5.3) said:

“If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by PTT, CONTRACTOR shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work …”

On the facts of this case then, it was decided that the relevant liquidated damages clause referred to delay where Triple Point completed the work. However, as Triple Point had been prevented from finishing the works due to termination, it was determined that liquidated damages could not apply as there would never be a date when PTT accepted the incomplete work from Triple Point.

The Court of Appeal therefore stated that PTT was not entitled to recover any liquidated damages in respect of any works it completed itself. Liquidated damages therefore dropped from $3.5 million to $154,662. PTT remained entitled to recover damages for non-completion, though those damages were at large rather than fixed at the agreed liquidated damages amount.

Supreme Court

The Court of Appeal’s decision was both impactful and confusing. On the face of it, the Court of Appeal had said that the perceived view of when liquidated damages could be charged was wrong. However, the Court also made great hay of the wording of that contractual clause. As a result, it wasn’t clear if this case had altered the position regarding liquidated damages or simply interpreted one specific contractual provision. Would a different outcome have been reached had the wording been drafted differently?

Further, it arguably created a situation where a contractor is rewarded for his breach of contract, with liquidated damages falling away upon termination and the employer being unable to rely on the pre-agreed rates and instead being put to the burden of proving actual loss.

The Supreme Court considered the matter. It had to determine whether delay damages were recoverable only if the contractor completed the works or if such a right survived termination.

In the end, the Supreme Court reversed the Court of Appeal’s decision and said that liquidated damages are recoverable for delay prior to termination whether or not the works are completed by the contractor. Thereafter, general damages apply.

Lady Arden stated that the Court of Appeal’s decision was:

“inconsistent with commercial reality and the accepted function of liquidated damages. Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract. After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. That is well-understood… Parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read”.

Points to Note

The Supreme Court’s decision is certainly a welcome one – it removes the seed of doubt sown by the Court of Appeal, and restores the conventional approach that liquidated damages are recoverable up to the point of termination. A party in default will have the benefit of knowing that whilst the works remain within their power liquidated damages apply but do not apply to the period thereafter, when completion is out of their control. However, defaulting contractors should not be of the belief, as the Court of Appeal originally suggested, that termination may benefit them by forcing the employer to assess and evidence general damages which would require them to prove their loss and deal with arguments on foreseeability and mitigation.

If, of course, parties do want liquidated damages to fall away where practical completion is never achieved by the contractor they may do so, but they will need precise wording for that to take effect.

As an aside, given that losses post termination revert to general damages, employers should take steps to ensure that they are in a strong position to make such a claim by keeping good records and taking appropriate steps to mitigate. Employers may also want to consider having a performance bond to provide security for those losses suffered after termination.

Need advice on any of the issues raised in this article?

Please get in touch with the author, Will Buckenham, today on 01482 324252 or via email: wdb@gosschalks.co.uk. Alternatively, contact any member of our specialist Construction law team for advice.