14/06/2019
Whether to opt for liquidated damages or rely on general damages, and what level of liquidated damages would be appropriate or even enforceable, are all questions that are debated when parties negotiate construction contracts. However do parties give much thought about what happens to liquidated damages if the contractor’s employment is terminated?
When parties are at the start of a project and full of optimism, we suspect not much thought is given to this question. However the Court of Appeal’s recent decision in Triple Point Technology Inc (“Triple Point”) v PTT Public Co Ltd (“PTT”) [2019] EWCA Civ 230 highlights the need to consider this situation and concludes that how parties draft the contract will be key in determining whether liquidated damages for delays will be awarded where a contract terminates and works have not been completed by the original contractor.
Introduction
Triple Point and PTT entered into a contract for Triple Point to provide PTT with software for use in commodity trading. The project was to be completed in stages and Triple Point would be paid in instalments on the completion of such stages. There were delays in reaching the first stages but PTT agreed to pay for the work completed. Triple Point then asked for the payment of further invoices in respect of work which had not yet completed. PTT refused to pay this, Triple Point suspended their works in response, and ultimately PTT terminated the contract.
When Triple Point took the matter to the High Court to recover the sums they believed were due, PTT counterclaimed for damages. The Judge awarded PTT $4,497,278.40. The majority of this was awarded for liquidated damages for delay on elements of the uncompleted work calculated from the specified completion date until the date the contract terminated.
Court of Appeal
Triple Point appealed the decision. Triple Point argued that the liquidated damages were irrecoverable because they were only payable where there was a delay to the works, but they were eventually completed by them to the satisfaction of PTT. As the works were never completed by Triple Point, no liquidated damages were payable. The relevant clause, Article 5.3, read that in the instance of delay not attributable to PTT, Triple Point would 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…”.
The court identified that three approaches had been adopted previously when deciding to what extent liquidated damages were payable for delay where the first contractor failed to complete the works and a second contractor stepped in to complete them.
Approach 1: The clause does not apply at all
The courts have previously taken the view that liquidated damages would only apply where the first contractor was late in completing the works but actually completed them, and did not cover a situation where the contract terminated and a second contractor stepped in to finish the works. In this case the clause read delays would be payable if the contractor failed to complete the works for such time “during which the works shall remain unfinished”.
Approach 2: Liquidated damages can be awarded up to the termination of the first contract
There have been numerous cases where the courts found, as with the High Court in this case, that the claimant was entitled to liquidated damages from the period of delay until termination. After termination, the employer would only be entitled to claim for general damages.
Approach 3: Liquidated damages are recoverable until works are completed by a second contractor
The court did not find this approach to be attractive as the original contractor would be liable to pay liquidated damages for a period when the second contractor was in control of completing the works and responsible for any additional delays.
Judgment
Sir Jackson applied Approach 1, finding that article 5.3 did not apply and therefore PTT were not entitled to liquidated damages. This did not prevent them from applying for general damages.
However this does not mean that liquidated damages are irrecoverable when a contract terminates and the original contractor fails to complete the works. The court stressed that drafting will be key and stated that “the question whether the liquidated damages clause (a) ceases to apply (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss”.
Considerations
Liquidated damages clauses benefit employers by providing certainty in the sum recoverable for delays and removing the need to prove the actual loss suffered or that reasonable steps were taken to reduce this loss. They also act as a cap on the contractor’s liability for delay. The certainty liquidated damages provide make them attractive to both parties. These benefits fall away if only general damages are available.
Going forward, getting the wording of your contract right is essential to ensure liquidated damages are recoverable on termination. Contracts should make it expressly clear that liquidated damages are recoverable up to termination (without affecting the employer’s rights to seek general damages after termination).
The court suggested that liquidated damages up to termination, general damages after, is really what parties would want or ‘bargain for’. Parties should ensure that the contract is crystal clear that this is exactly what the parties want to avoid leaving anything to the court to interpret.
Clauses which seek to recover liquidated damages for any period after termination are inherently risky, even if suitable drafting can be agreed with a contractor, given the criticism they face in this decision and elsewhere.
Authors
Rory Budworth, Trainee Solicitor, Bevan Brittan
David Arnold, Associate, Bevan Brittan
