Liquidated Damages and Termination

On 16 July 2021, the Supreme Court handed down its long-awaited judgment in the case of Triple Point Technology vs PTT Public Company Limited[1].  This important decision for the construction industry has confirmed the accepted position that while liquidated damages (LDs) cease to accrue on termination any accrued rights to LDs survive termination.

As a reminder, LDs are a pre-determined level of damages to which one party is entitled in the event of certain specified breaches occurring. In the context of construction contracts, LDs clauses are frequently used to incentivise the contractor to complete on time, providing for a fixed rate to be paid to the employer for each day or week that works are late.

Background

In 2013, Triple Point (the Contractor) and PTT entered into a contract (the Contract) under which Triple Point was to provide software and software implementation services to PTT. The works were divided into two Phases, and Triple Point was to be paid in instalments on completion of nine separate milestones.

The Contract included an LDs clause which provided:

“If Contractor [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, the Contractor shall be liable to pay the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…” (emphasis added)

Works proceeded slowly and Phase 1 was completed 21 weeks late. PTT accepted these works and paid Triple Point for Phase 1, but refused to pay invoices in relation to Phase 2 as the relevant milestones had not been reached. Subsequently, in May 2014, Triple Point suspended work on the basis of non-payment and left the site. PTT said this was wrongful termination (a repudiatory breach) and so terminated the Contract in March 2015.

Proceedings and Decisions

First Instance[2]

Triple Point commenced proceedings in the Technology and Construction Court claiming payment on unpaid invoices. PTT counterclaimed for LDs for delays up to the point of termination as well as for its other losses arising from the termination.

Triple Point’s claim was dismissed. PTT was awarded its costs of termination as well as LDs for delays incurred prior to termination, on the basis that the LDs provision applied to both Phases 1 and 2 up to the point of termination.

Court of Appeal[3]

Triple Point appealed and PTT cross appealed. The Court of Appeal, relying on a House of Lords judgment[4], decided that the phrase “up to the date PTT accepts such work” meant that the clause did not apply in circumstances where Triple Point did not complete – and so PTT could not accept – the works. As such, the court found that while PTT was entitled to LDs in respect of the completed Phase 1 works, it was not entitled to LDs for the Phase 2 works which had not been completed or accepted.

The Supreme Court

PTT then appealed to the Supreme Court. The main issue it needed to consider was whether LDs were payable in respect of works which were not completed or accepted prior to termination. Lady Arden, who delivered the lead judgment, found that the Court of Appeal’s approach was “inconsistent with commercial reality and the accepted function of liquidated damages” which is to provide a “predictable and certain” remedy. If the right to accrued LDs is simply lost in the event of termination, this overturns the accepted position that accrued rights and liabilities survive termination.

In respect of the language of the clause, it was held that the parties had included the words “up to the date of acceptance” out of caution, to remove any question that LDs were payable after acceptance, but that this was not a pre-condition of Triple Point’s liability. Accordingly, the Supreme Court ruled that PTT was entitled to LDs for any delay that had accrued up to the date of termination, whether or not that work had been completed.

Comment

LDs are a standard feature of construction contracts, conferring predictability and certainty to both employer and contractor. As noted by Lord Leggatt, the approach taken by the Court of Appeal could have created a perverse incentive for a contractor in delay to not complete works in order to avoid liability for LDs. As such, the Supreme Court’s decision is a welcome restatement of the general law that LDs cease to accrue on termination, that thereafter general damages apply, and that the accrued rights and liabilities of parties – including in respect of LDs – survive termination.

As well as providing clarity on this issue, this case serves as a further reminder that contractual clauses should always be drafted in plain language that makes the intention and application of the clauses clear, because if a clause is contested then interpretation is key.

[1] [2021] UKSC 29

[2] [2018] EWHC 45 (TCC)

[3] [2019] EWCA Civ 230

[4] British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd, 1913 SC (HL) 1

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk

Posted in Commercial contracts, Construction.