Legal: When it's over, it's over

A recent Court of Appeal decision provides much-needed clarity on the operation of liquidated damages clauses in respect of delay after the termination of a construction contract. The case, Triple Point Technology Inc vs PTT Public Co Ltd [2019] EWCA Civ 230, concerned a contract for procurement of software and related services between PTT as employer and Triple Point as supplier. The contract documents provided for payment by milestones, but also included specific dates for payment. Work under the contract was delayed and Triple Point sought payment according to the dates referred to in the contract documents. PTT refused payment on the basis that the relevant milestones had not been achieved. Triple Point suspended work for non-payment and PTT purported to terminate the contract for Triple Point’s default. 

Among other issues in dispute, a question arose as to whether PTT could claim liquidated damages for delay. The clause in question required Triple Point 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”. 

Other recent cases have held that liquidated damages continue post-termination until works complete

Yes, no or something in between? 

At first instance, the Technology and Construction Court held that PTT was entitled to liquidated damages up until the date of termination in respect of incomplete milestones, but not beyond. However, the Court of Appeal upheld Triple Point’s appeal on this point and decided the liquidated damages clause fell away entirely upon termination. 

The Court of Appeal noted that such questions had been treated inconsistently in the past: 

• A House of Lords decision in 1912 (British Glanzstoff Manufacturing vs General Accident, Fire and Life Assurance Co) decided that a liquidated damages clause applied only where the original contractor completed the works and was not applicable upon termination. This decision appears to have been overlooked in the modern cases, but as the Court of Appeal noted it is “a decision of our highest court, which has never been disapproved”.
• More recent cases have held that liquidated damages accrue up until the date of termination, but not thereafter. The employer is then left to bring a general claim for unliquidated damages for post-termination delays. 
• Other recent cases have held that liquidated damages continue post-termination until the works are completed by the employer or a new contractor. The justification for this is said to be that any other approach would reward the contractor for its own default. 

While the correct approach will depend on the wording of the clause in question, the Court of Appeal expressed doubts about those cases that permit liquidated damages to persist beyond termination. 

The court also identified difficulties with the view, favoured by most textbooks, that liquidated damages apply up to the date of termination but not beyond. While this might be said to preserve accrued rights, the court expressed concerns about the artificiality of dividing the employer’s right to damages for delay into a period of liquidated damages prior to termination and a period of general damages after termination.

The clause before the court specifically referred to liquidated damages accruing “up to the date PTT accepts such work”. This was found to be similar to that considered in British Glanzstoff in that the completion of the work was expressly contemplated. Accordingly, the proper interpretation was that the entitlement to liquidated damages in respect of incomplete milestones fell away entirely upon termination and was replaced by a right to claim general damages for delay, subject to proof by PTT. 

Where to from here? 

Although it remains possible to draft liquidated damages clauses to give effect to any of the three approaches identified in this case, the Court of Appeal’s decision is likely to point the way in most cases. Clauses that refer expressly to liquidated damages accruing until completion are more likely to fall away entirely upon termination in accordance with the British Glanzstoff decision. A large number of construction contracts are drafted in this way, including the JCT and FIDIC forms. 

Parties considering the termination of a construction contract where the contractual date for completion has been overrun should carefully consider the implications. Termination in such circumstances may mean that any entitlement to liquidated damages for delay no longer applies, requiring the employer to prove actual delay losses. These may be more or less than the level set for liquidated damages – or difficulties of proof may in some circumstances render them irrecoverable. Arguments may also arise as to whether the liquidated damages provision, albeit inapplicable, remains relevant to the assessment of any claim for general damages.

Matthew Taylor and Aidan Steensma are solicitors specialising in infrastructure, construction and energy disputes at CMS Cameron McKenna Nabarro Olswang