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Are liquidated damages payable post-termination?

28.06.2019 Energy & infrastructure

Gillie Belsham

Gillie Belsham Global Head of Aviation, Partner

Leila Peggs

Leila Peggs Managing Associate

In Triple Point Technology, Inc. v PTT Public Company Limited [2019] EWCA Civ 230, the Court of Appeal has clarified a line of conflicting authorities on the question of whether liquidated damages can be claimed following the termination of a contract. The Court of Appeal held that the relevant provision did not, on its wording, apply where the contract was terminated and the original contractor failed to complete the works. It is a salient reminder of the need to construe liquidated damages clauses using ordinary principles of interpretation, rather than proceeding on the assumption that liquidated damages will be payable post-termination.

Background

Triple Point, a software designer and supplier, entered into a contract to supply a commodities trading software system to PTT, Thailand’s national oil company. The project was split into two phases and provided for payment against a series of milestones.

The contract contained a liquidated damages clause which provided that if Phase 1 of the work was not delivered by the specified date, then 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 ... ”.

Stages 1 and 2 of Phase 1 were completed, albeit 149 days late. PTT paid the amount invoiced for these stages. When Triple Point demanded payment for further work, PTT refused to pay on the basis that Triple Point had not achieved the relevant milestones. Triple Point halted work and left the site. PTT claimed Triple Point had wrongfully suspended work and terminated the contract. Triple Point then commenced proceedings claiming the invoiced sums and PTT counterclaimed damages, including delay liquidated damages, consequent on Triple Point’s repudiatory breach of the contract.

Triple Point’s claim was dismissed at first instance and PTT was awarded damages of nearly US$4.5 million. Triple Point appealed.

Issues on appeal

Triple Point argued that the liquidated damages provision was an unenforceable penalty as it imposed a detriment on Triple Point that was “out of all proportion to any legitimate interest of the innocent party” (per Lord Neuberger in Cavendish Square Holdings BV v Makdessi [2015] UKSC 67). The Court of Appeal disagreed – the losses that PTT might suffer as a result of late delivery could well be much greater and the formula in the contract, despite using the word “penalty”, was a genuine pre-estimate of the likely losses.

However, the main issue on appeal centred on Triple Point’s argument that the liquidated damages clause was not engaged because it only applied when work was delayed, but subsequently completed, and accepted, and it did not therefore apply to work which was never accepted.

Decision

The Court of Appeal recognised that this argument raised “questions of general principle concerning the operation of liquidated damages clauses in termination or abandonment cases” and reviewed the conflicting authorities on the issue, concluding that in cases where the contractor fails to complete the works and a second contractor steps in, there are three possible approaches to a delay liquidated damages clause:

  1. The clause does not apply;
  2. The clause only applies up to termination of the original contract; and
  3. The clause applies until the second contractor completes the works.

The Court of Appeal was not convinced by the approach in (3) (despite this being the approach adopted in some recent cases, including GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm), decided only a few months before this case) as it would allow the owner and the replacement contractor control over the period in which the liquidated damages run.

In deciding between approaches (1) and (2), the Court of Appeal recognised that much will depend on the wording of the liquidated damages clause. The approach in (1) derives from the House of Lords decision in British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd 1913 SC (HL) 1. This case has never been disapproved, though it was not cited in more recent cases, which have favoured approach (2), and which is generally recognised as the orthodox approach.

Looking at the wording of the liquidated damages clause however, the Court of Appeal found that, much like that in the Glanzstoff case, it was focused on delay between the contractual completion date and the date Triple Point actually achieved completion. The clause, therefore, was not applicable to a situation where the contractor does not ever hand over the completed work.

As a result, the Court of Appeal held that PTT was able to recover liquidated damages only for the delay in the work that was actually completed; in respect of the work that was not completed by Triple Point, PTT’s remedy was to seek general damages. This required PTT to prove its losses and demonstrate that it had fulfilled its duty to mitigate losses.

Even for those completed works for which PTT could claim under the liquidated damages clause, it also had to contend with the contractual liability cap. The trial judge found that liquidated damages fell outside the cap, however the Court of Appeal found that they fell within the cap further reducing the amount PTT was able to claim from Triple Point under the liquidated damages clause.

Comment

This decision highlights the care that needs to be taken in drafting to ensure that a liquidated damages provision operates in the way the parties intend. To minimise risk, the liquidated damages provision should expressly state whether it continues to apply post-termination.

For existing contracts, care should be taken to consider the impact of this decision in a potential termination scenario where the relevant contractual completion date has passed. It should not be assumed that the liquidated damages clause will apply, which may mean an owner is required to prove its loss as general damages. Depending on the type and extent of damage incurred, an owner could end up being in either a better or worse overall position as compared with a claim under the liquidated damages clause.

Care should also be taken when drafting, and construing, contractual liability caps to ensure they reflect the intention of the parties to exclude, or include, liquidated damages as appropriate.

Article authors:

Gillie Belsham Leila Peggs