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Do liquidated damages apply following termination of a construction contract? Well, it depends… [May 2019]

Construction contracts often include a liquidated damages (“LD”) clause in which the parties agree the financial consequences of the contractor’s delay. Typically, those clauses require the contractor to pay a pre-determined amount (often calculated on a daily or weekly basis) to the employer in the event the contractor fails to achieve completion as required by the contract by the contractual completion date. In doing so, the employer does not have to demonstrate its actual loss (or indeed any loss) resulting from the delay and, instead, deducts LD calculated at the pre-determined rate. The benefit to the contractor of an LD provision is that he is able to quantify his liability in the event of delay.

However, the application of LD clauses where the contract is terminated has been less than clear. Is the employer entitled to LD up to the point of termination or, perhaps, up to the point the works are completed (by a replacement contractor)? Further, if the works are never completed, are LD payable at all?
These questions were addressed in the recent case of Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230. The Court of Appeal held that a LD clause only applied where the contractor had completed the contract works. As a result, where the contractor failed to complete the works, the employer’s remedy lay in pursuing unliquidated damages rather than LD. However, Sir Rupert Jackson commented that the exact application would depend on the wording of the clause itself.
Facts
Triple Point Technology Inc. (“Triple Point”) was engaged by PTT Public Company Ltd (“PTT”) to supply a software system. The contract (the “Contract”) divided the works into stages and provided that payment would be made in milestones. In the event that the work was delivered late, the Contract provided for LD to be payable “at the rate of 0.1%...of the undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work”.
Triple Point achieved completion in relation to the initial stages, albeit these works were 149 days late. Triple Point invoiced for these works and PTT duly paid. Subsequently, despite never completing any more work, Triple Point demanded further payment in line with the contractual payment milestones. PTT refused to pay and Triple Point suspended its work resulting in PTT terminating the Contract.
TCC Judgment
Triple Point commenced proceedings to recover the outstanding sums claimed in its invoices. In the first instance, Jefford J dismissed Triple Point’s claim. In relation to PTT’s counterclaim, Jefford J held that PTT was entitled to recover LD for the work up to the point it was completed (amounting to $154,662.00) and for the remainder of the work which was not completed up to the date of termination (amounting to $3,304,616.40).
Court of Appeal Judgment
Triple Point appealed and contended that the LD clause applied only to work that was delayed, completed and accepted by PTT; it did not apply in respect of work which PTT never accepted such as the work which was not completed. The Court of Appeal agreed; the LD clause applied only to the works completed prior to termination.
Sir Rupert Jackson identified three approaches arising from previous authorities:
  1. the LD clause applies only to the period of delay to the works completed prior to termination;
  2. the LD clause applies only to the period of delay to all the works until termination; or
  3. the LD clause applies to all the works until completion is achieved (for instance, where a second contractor completes the works).
The first approach was set out in British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd [1913] SC (HL) 1. The House of Lords held that the LD clause in question did not apply at all where the contractor had not completed the works and a replacement contractor had carried the remainder of the works to completion. For some unknown reason, British Glanzstoff was not cited in modern cases which lead to the development of the second approach in Shaw v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC), in which the TCC held that the employer was entitled to recover LD until the date of termination.
As to the third approach, in Hall v Van Der Heiden (No 2) [2010] EWHC 586 (TCC) the contractor had not reached practical completion and the employer subsequently engaged another contractor to complete the works. Couslon J awarded LD at the contractual rate for the entire period until practical completion was achieved by the second contractor.
Sir Rupert Jackson expressed doubts as to whether the third approach was correct as the employer and second contractor would be in control of the period up to practical completion and, therefore, the amount of LD payable by the first contractor. Nevertheless, Hall was followed recently in GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866.
Sir Rupert Jackson noted that the second approach, where LD applied up to termination after which the employer could claim for general damages, was the orthodox approach. However, in his view:
the question of whether the liquidated damages clause (a) ceases to apply or (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.”
In Triple Point, the LD clause focused specifically on the delay between the contractual completion date and the date when Triple Point achieved completion. Sir Rupert Jackson took “up to the date PTT accepts such work” to mean “up to the date when PTT accepts completed work from Triple Point”. As such, the LD clause in Triple Point was analogous to that in British Glanzstoff and the first approach was taken.
Therefore, PTT was entitled to recover LD in respect of the delay to the completed work (149 days amounting to $154,662). However, since Triple Point did not complete any other sections of work, PTT could not recover LD in respect of the other delays (amounting to $3,304,616.40). Instead, PTT’s remedy was a claim for damages at large assessed on ordinary principles.
Unfortunately for PTT, the Contract contained a cap on liability in respect of general damages which had already been wholly used up as a result of PTT’s other counterclaims. Further and in any event, Sir Rupert Jackson found that the cap extended to the LD and, as such, PTT was unable to recover even the $154,662 in relation to the completed work.
Conclusion
The current position as to the application of LD is as uncertain as before. In the two modern approaches, the courts had looked to maintain the parties’ agreement to have LD in some capacity, be that up to termination or up to completion. However, following Triple Point, it appears that where LD are tied to completion, LD would not apply to incomplete works if the contractor’s employment was terminated prior to completion.
In those circumstances, the employer’s remedy is a claim for general damages, as to which it would have to demonstrate its actual loss and damage resulting from the delay in what could potentially be an onerous exercise. Further, it may not be in the employer’s best interests to terminate the employment of the contractor before completion, particularly in circumstances where the actual loss and damage suffered is likely to be less than the amount recoverable through LD.

Case: Triple Point Technology Inc v PTT Public Company Ltd 

Reference: [2019] EWCA Civ 230

This article and/or any information contained herein is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking, or refraining from, any action as a result of the contents of this article.

20/05

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