Essential law: Liquidated damages, part four

Whether liquidated damages clauses are still applicable following termination of a construction contract is a question that is currently in a state of flux. There is a decision on this point currently awaited from the Supreme Court in the case of Triple Point Technology, Inc vs PTT Public Company Ltd.

Ahead of the Supreme Court’s decision, this article will look at the current position on the survival of liquidated damages clauses following termination.

The Triple Point decision in the Court of Appeal

Article 5.3 of the contract stated: “If [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 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.” [emphasis added]

The contract provided for delivery of work in stages and phases. At the date of termination, stages one and two of phase one had been completed (late), but all other work was unfinished. At first instance the judge awarded PTT liquidated damages in respect of all delays under the contract up to the date on which either the work was completed, or the contract was terminated. Triple Point argued on appeal that article 5.3 was not engaged in respect of any work that was not accepted.

The Court of Appeal identified three possible solutions to the question of what should happen to liquidated damages clauses following termination:

• They do not apply.
• They apply only to the point of termination.
• They apply until the works are actually completed (by another contractor).

Each of these approaches has some support in the case law. The court doubted the cases that supported the third option and acknowledged that the question would turn on the wording of the relevant contract.

The court held that the focus in article 5.3 on the period of delay from contractual completion date to the actual date of completion meant that the clause did not apply where the contractor never handed over completed work.

The court therefore allowed PTT to recover liquidated damages for the delay in completing stages one and two of phase one, but not for any other delays as no other sections of work had been completed by Triple Point. The court found that PTT would not be left without a remedy for these other sections, as it would be entitled to general damages arising out of the termination, which could include delay losses.

When do liquidated damages clauses survive termination?

This decision surprised many in the construction industry, as the received wisdom was that the second option was correct.

Wording similar to that in the Triple Point case, linking liquidated damages to the date of actual completion, is found in many standard forms of contract.

Ultimately, the decision in Triple Point makes clear that the wording of the liquidated damages clause will determine what should happen to it post termination. It is therefore a question of what criterion determines the obligation to pay liquidated damages, and what impact termination has on that criterion.

For example, if there was a clause linking the obligation to pay liquidated damages to the completion of the works (as in Triple Point), termination of the contract would render such completion impossible and so the liquidated damages clause should no longer have any effect. If, on the other hand, the liquidated damages clause simply required a weekly payment for so long as the works remained unfinished, there would be a much stronger argument that the effect of the clause was not impacted by a termination of the contract.

Lessons for liquidated damages clauses

When drafting liquidated damages clauses, there are some key principles that can be followed:

• Accrued rights survive termination of a contract. If a liquidated damages clause is drafted so that the employer becomes entitled to some form of payment before the contract is terminated, it should keep that right on termination.
• Liquidated damages can remain payable after termination if the mechanism for their calculation is not linked to the completion of the work.
• If liquidated damages clauses fall away on termination, general damages should still be payable. However, parties should be aware of how any exclusive remedies clause could cut across the right to claim such general damages.
• It is preferable for the parties to expressly address what should happen to the liquidated damages clause following termination of the contract.

This last point is the most important. Many disputes come about because the contract does not make clear what has been agreed. After Triple Point, if the parties want liquidated damages to remain payable after termination, this can be stated in the contract and avoid the argument entirely.

Chris Hadnutt is an associate in the construction, engineering and projects team at Charles Russell Speechlys