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02 Aug 2021

Back to the start: Supreme Court restores orthodox approach on liquidated damages

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Introduction

The Supreme Court has handed down its long-awaited judgment in Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29. The decision addresses the interpretation of a liquidated damages clause where a contract is terminated prior to completion of a project that is in delay caused by the contractor.

Whilst the contract in this case related to the provision of a software system, the judgment is highly relevant to the construction industry where contracts containing liquidated damages provisions are commonplace. 

What was the liquidated damages issue about?

PTT is an oil and gas company that engaged Triple Point to provide a software system that would assist PTT in its commodity trading and risk management.

The key term of the contract in relation to the liquidated damages issue was Article 5.3 which provided that, where Triple Point "... fails to deliver work within the time specified and the delay has not been introduced by PTT...", Triple Point shall be liable to pay liquidated damages "... 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".

Following delays to the project and acceptance by PTT of only a small proportion of the works, PTT terminated the contract prior to completion and sought liquidated damages from Triple Point. Triple Point argued that Article 5.3 applied to only the small volume of work that had been accepted by PTT and therefore PTT was not entitled to the liquidated damages it sought in relation to delays to completion of the works that had not been accepted.

The different interpretations

In a construction context, the same position arises where there is a project in delay (and the delay is caused by the contractor) and the contract provides that the employer is entitled to liquidated damages from the contractual completion date up to the actual date of practical completion. 

If the employer terminates the contract after the completion date has passed but prior to practical completion, what becomes of its entitlement to liquidated damages?  This was the crux of the issue and three approaches were considered by the Supreme Court as follows:

"(i) the clause in question did not apply to any period of delay in completion of the work;

(ii) the clause applied to any period of delay up to the date of termination of the contract; or

(iii) the clause continued to apply even after the termination of the contract until the work was completed by another contractor."

Whilst approaches (i) and (iii) have applied in a few previous cases, (ii) is generally regarded as the orthodox analysis.

The approach adopted affects whether the employer's claims are restricted to liquidated damages before and after termination (category (iii)), general damages before and after termination (category (i)), or liquidated damages up to termination followed by general damages after termination (category (ii)).

The TCC and Court of Appeal decisions

At first instance in the TCC (judgment here) the court determined that PTT was entitled to liquidated damages up to the date of termination, irrespective of which elements of the work had been "accepted". The effect of the TCC's decision was that liquidated damages could be claimed up to termination where practical completion had not been achieved; thereafter, the employer would be limited to a claim for general damages.

The Court of Appeal (judgment here) overturned the TCC's decision. The court held that liquidated damages only applied where the work had been "accepted". The effect of the Court of Appeal's decision is that a claim for liquidated damages is lost if the contract is terminated before practical completion, and the employer is left instead with a claim for general damages both before and after termination.

The Supreme Court's ruling

The Supreme Court (judgment here) reversed the Court of Appeal's decision, granting PTT the liquidated damages it was awarded at first instance.

Lady Arden ruled that the relevant wording at Article 5.3 ("up to the date PTT accepts such work") ought not to be interpreted as imposing the pre-requisite of acceptance of work on a claim by PTT for liquidated damages but instead to be interpreted as meaning that "up to the date (if any) PTT accepts such work". Therefore, the termination of the contract before acceptance of all of the work did not nullify PTT's entitlement to liquidated damages up to that point.

Applying this to a construction project, it means that the occurrence of practical completion is not a pre-requisite to a claim for liquidated damages. If the contract is terminated before PC, the termination marks the end point of the period for which liquidated damages can be claimed but does not cause a claim to liquidated damages to be lost. In relation to the period following termination, the employer can bring a claim for general damages.

The position was succinctly summarised by Lord Leggatt as follows:  "... it is ordinarily to be expected that, unless the clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract."

This interpretation avoids the loss on termination of accrued rights of the employer to liquidated damages. It also avoids the position that liquidated damages would be payable up to termination in relation to works that have been completed but were late yet not payable in relation to works that are late and incomplete. In some circumstances, the latter scenario would provide the contractor with an incentive to bring about the termination of the contract in order to avoid liquidated damages that would otherwise be payable if it achieved completion.

What this means for you

Whether the Supreme Court's decision is good or bad news for a specific party will depend on the terms of their contract and in particular the specified rate of liquidated damages.

The confirmation that liquidated damages can be claimed up to the point of termination may be well received by employers who, had they not been able to claim liquidated damages, may have faced difficulties in establishing a similar level of general damages under normal principles. However, where the rate of liquidated damages means that an employer's claim is now smaller than the losses it has actually suffered as a result of contractor delay, the impact of the decision will be that the rate of liquidated damages will operate as a ceiling on what would otherwise have been a greater claim for general damages.

For contractors, the same points apply in reverse. If the rate of liquidated damages is lower than the losses caused to the employer by contractor delay, the decision will provide comfort to the contractor that the rate of liquidated damages effectively caps their liability at a manageable level. With that said, where a high rate of liquidated damages applies, some contactors may now face a claim that is far higher than would otherwise have been recoverable by the employer in a claim for general damages.

However, the judgment does provide certainty to the market in confirming the orthodox position that, where a contract is terminated prior to completion, liquidated damages apply up to the point of termination.

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