Liquidated damages following termination: A return to orthodoxy

Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29

The recent decision of the UK Supreme Court in Triple Point has resolved uncertainty regarding the application of delay liquidated damages in the event of termination.  The Supreme Court overturned the earlier decision of the Court of Appeal, which had muddied the waters.

The decision provides welcome guidance on the interpretation of liquidated damages clauses and accrued rights prior to termination.  Such clauses are a standard feature in construction contracts and serve the critical purpose of defining (for both the principal and contractor) the extent of the contractor’s liability for delay.

The principles of this case will apply to situations where a contractor is terminated prior to project completion.  Triple Point confirms that liquidated damages accrue up until the date of termination (and general damages apply following termination).

This marks a return to the orthodox position that, absent express wording to the contrary, a principal retains its right to accrued liquidated damages if the contract is terminated before the work is completed.

Background

PTT entered into a contract with Triple Point for the design, installation, licensing and maintenance of a software system.  Works were to be delivered by Triple Point in two phases, with payment to be made on achievement of contract milestones.

The contract contained the following delay liquidated damages clause:

“If Contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, 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…”

Works proceeded slowly and Triple Point delivered the first phase of work 149 days late.  PTT paid Triple Point’s sectional completion invoice but refused to pay invoices relating to the second phase.  Triple Point suspended works for non-payment.  PTT asserted repudiatory breach and terminated the contract.

Triple Point commenced proceedings to recover outstanding sums on unpaid invoices.  PTT counterclaimed for its losses arising from termination and delay liquidated damages that had accrued prior to termination.  A number of issues arose in the proceedings.  This note summarises the Courts’ decisions related to the liquidated damages issue.

Earlier decisions

The High Court dismissed Triple Point’s claim, holding that PTT was entitled to liquidated damages, which were not subject to the overall damages cap.  The decision was appealed.

The Court of Appeal set aside the award of liquidated damages.  In making its decision, it identified three possible outcomes where a contractor is delayed, and the contract is terminated prior to completion:

  1. The liquidated damages clause ceases to apply.
  2. The clause applies up to the date of termination, and general damages apply thereafter (i.e. the orthodox position).
  3. The liquidated damages clause survives termination and liquidated damages continue to accrue until works are eventually completed (by another contractor).

To the surprise of many, the Court of Appeal held that PTT was only entitled to liquidated damages for work which had been completed prior to termination of the contract.[1]  It took the approach that PTT was not entitled to liquidated damages for the second phase because those works had not been completed.

The Court of Appeal’s decision created uncertainty in the industry.  It potentially had the effect of preventing a principal recovering accrued liquidated damages for incomplete sections of work following termination.  Given the extent to which construction projects are broken into milestone sections, we considered this to be an alarming departure from the status quo.

Supreme Court decision signals a welcome return to the status quo

The Supreme Court overturned the Court of Appeal’s decision, commenting that the decision was a “radical re-interpretation of the case law” that was “inconsistent with commercial reality and the accepted function of liquidated damages”.[2]

The Supreme Court made the following key points in its decision:

  • Where delay has occurred that triggers liquidated prior to termination, “there is no reason – in law or in justice – why termination of the contract should deprive the employer of its right to recover such damages, unless the contract clearly provides for this”.[3]
  • After termination of the contract, delay liquidated damages no longer accrue. The appropriate remedy for any further losses suffered are general contractual damages.[4]
  • Parties do not need to specifically provide for the effect of termination on the liquidated damages clause of a contract.[5]

Footnotes:

[1] [2019] EWCA Civ 230.

[2] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29, at [35].

[3] At [79].

[4] At [53].

[5] At [35].

This article was co-authored by Ben Stewart, a Law Clerk in our Construction team.

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