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Construction Contracts: Liquidated Damages Recoverable for Period Prior to Termination

In Triple Point Technology v PTT, the Supreme Court of the United Kingdom has restored the orthodox position on how termination prior to completion of work affects the operation of a liquidated damages provision.

Liquidated damages clauses for delay in the completion of work are a common feature of commercial contracts. In 2019, however, significant doubt was cast on one aspect of their operation by the ruling of the Court of Appeal of England & Wales in Triple Point Technology v PTT [2019] EWCA Civ 230 (see here): if the contract is substantially delayed, but terminated before completion of the work, to what extent (if at all) is the contractor liable to pay liquidated damages?

The decision of the Supreme Court of the United Kingdom in Triple Point Technology v PTT [2021] UKSC 29, restored the orthodox understanding of how liquidated damages clauses operate in the event of termination, and underlines the robust approach that English law takes to enforcing clauses agreed between the parties that pre-determine recoverable levels of loss.

 

Background

PTT, a company involved in commodities trading, engaged Triple Point to develop a new commodity trading and risk management system. The contract provided that payment would be made by milestones, and that Triple Point would be liable for liquidated damages in respect of work delivered late. In the event, only the first of these milestones was completed, 149 days late. Despite this, Triple Point demanded further payments in respect of work not yet completed, and suspended its work when those demands were not met. PTT ultimately terminated the contract as a result.

Triple Point brought a claim before the High Court seeking the further payments it had demanded. PTT counterclaimed (amongst other losses) liquidated damages for delay, both to the work completed prior to termination and to the work that was never completed. On appeal, amongst other relief, Triple Point sought a ruling that the liquidated damages provision only applied to work which was delayed but nonetheless completed by Triple Point, and not in respect of the work which had not been accepted by PTT before the date of termination. 

In its decision, the Court of Appeal suggested that the situation after termination was "new territory for which the liquidated damages clause may not have made provision", and expressed concern that granting liquidated damages for delay up to termination, and general damages for delay after termination "may sometimes be artificial and inconsistent with the parties' agreement". Ultimately, the Court of Appeal decided that the wording of the liquidated damages clause only applied to work completed by Triple Point and handed over to PTT prior to termination, and could not be applied to works that Triple Point had never completed. Only general damages (i.e. financial loss that PTT could prove it actually suffered) would be recoverable for delay to those other parts of the works, even if delay had occurred before the termination of the contract (see further here).

PTT appealed to the Supreme Court of the United Kingdom on several grounds, including that the Court of Appeal had misapplied the law on this point.

 

The Supreme Court

The Supreme Court decided that while the Court of Appeal had conducted a thorough review of authorities dealing with the construction of a liquidated damages clause, it had failed to adequately consider what the parties were likely to have intended by the words they used. The Supreme Court's unanimous conclusion was that the interpretation adopted by the Court of Appeal was "inconsistent with commercial reality", and thus unlikely to have been what the parties intended. 

In their view, just because the Parties' expressed intention was for liquidated damages to accrue until the work was accepted by PTT, this did not mean that Triple Point would only be liable to pay liquidated damages if its work was accepted. Rather, the parties should be taken to know that, as a matter of English law, liquidated damages stop accruing on termination of the contract, but any entitlement that has already accrued prior to termination will be retained. On that basis, there was no need for specific wording from the Parties to produce that result.

 

Comment

First and foremost, the Supreme Court's judgment resolves the ambiguity created by the Court of Appeal in this area of the law, and makes clear that under English law, in the absence of clear wording to the contrary, no accrued entitlement to liquidated damages will be lost on termination of a contract. While the judgment does not expressly determine whether liquidated damages can continue to accrue after termination (a controversial issue which has arisen in other cases), Lord Leggatt clearly considered it unlikely that any contractor would agree to such an arrangement without clear wording to this effect.

More broadly, this decision reaffirms that the English courts will seek to uphold an agreement between parties to pre-determine damages in their contract. The Supreme Court's judgment emphasises in a number of places the positive, commercial utility of liquidated damages, providing certainty to both parties as to what risk each will take. That certainty would be reduced if the parties' measure of damages was conditional on whether or not the contractor ultimately completes their work. 

Taken together with the Supreme Court's judgment in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 - which narrowed the circumstances in which a liquidated damages clause might be construed as a penalty - it is clear that English law continues to emphasise the importance and desirability of upholding liquidated damages clauses. This can be contrasted with courts in civil code jurisdictions, which under the prevailing civil codes have a much greater latitude to adjust the parties' agreed measure of damages to reflect actual loss.

Lastly, on the important issue of certainty of the amount of damages payable for delay, we note that there are moves afoot with FIDIC contracts to create certainty as to the amount a Contractor may recover if it is compensably delayed by an Employer. In 2020, FIDIC proposed a new form of Green Book (Short Form of Contract) which contemplates "Prolongation Costs" being fixed in the contract, rather than left to proof by the Contractor. Whether the market will embrace this idea remains to be seen, but as the Supreme Court made clear in Triple Point, there is certainly an appeal to agreeing in advance upon recoverable amounts that are otherwise difficult to quantify.

 

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