26.11.2021

Clarity on Liquidated Damages following Termination

The United Kingdom Supreme Court in Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 has clarified the operation of liquidated damages clauses in the event of termination.  The decision confirms that liquidated damages will apply up until termination regardless of whether the delayed work has been completed unless the express wording of the contract says otherwise.  Despite being a technology case, Triple Point is equally applicable to construction contracts.

The judgment can be accessed here. 

Background 

In 2013 the appellant/principal, PTT Public Company Ltd (a Fortune 500 energy company) (PTT) entered into a contract with the respondent/contractor, Triple Point Technology Inc (Triple Point) for the design, installation, licensing, and maintenance of a software system to enable PTT to carry out commodities trading (the Contract).  The Contract works were to be delivered in two phases (comparable, it seems, to separable portions).

Article 5.3 of the Contract contained a liquidated damages clause, which stated that: “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% (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 parties accepted this was not a penalty, despite the wording.)

The works were substantially delayed, and, as a result, PTT withheld payment.  Triple Point suspended all works for the non-payment and commenced proceedings to recover the outstanding sums.  In turn, PTT terminated the Contract on the ground of wrongful suspension, and counter-claimed for inter alia liquidated damages under Article 5.3 of the Contract, running up to the date of termination.  Upon termination, phase one had been completed 149 days late, while phase two, which was also in delay, remained incomplete.

The primary issue for the Court was whether PTT was entitled to liquidated damages for delays to work which Triple Point had not completed (ie phase two), and which was therefore never “accepted” by PTT.  Two secondary issues concerning bespoke limitation clauses are not discussed in this article as they are specific to the Triple Point case, except to note that they illustrate the importance of clear drafting as the limitation clauses here were ineffective. 

Earlier decisions

At the first instance, the Technology and Construction Court (Jefford J) found that PTT was entitled to liquidated damages of US$3,459,278.40 which had accrued for all delays occurring up to the date of termination. 

Somewhat surprisingly, the Court of Appeal (with Sir Rupert Jackson, a leading construction jurist, delivering the judgment) set aside the award of liquidated damages and held that PTT was only entitled to liquidated damages for the works which had actually been completed and accepted by PTT before the contract was terminated (ie only for delay to phase one).  Given that phase two had not been completed or accepted, the Court of Appeal considered that PTT was not entitled to recover liquidated damages for delays to that second phase. 

Supreme Court decision: return to status quo 

The Supreme Court unanimously reversed the decision of the Court of Appeal and returned back to the orthodox position.  Unless there are express words to the contrary, liquidated damages will accrue up until the contract is terminated regardless of whether or not the works have been completed, and these accrued rights will survive termination.  Following termination, delay liquidated damages would cease to accrue but the delayed party could seek general damages for any delay losses that arise after that date. 

In reaching this decision, the Supreme Court considered that it met commercial common sense and prevented the elimination of accrued rights.  Importantly, the parties should have certainty that liquidated damages clauses will apply up to the point of termination.  The Court of Appeal’s finding was “inconsistent with commercial reality and the accepted function of liquidated damages”.

On the specific facts, the Supreme Court found that Article 5.3 provided for liquidated damages if Triple Point failed to discharge its obligations within the specified time irrespective of whether the works which were completed late were accepted by PTT.  In effect, the Court was prepared to read the relevant words as if it said “up to the date (if any) PTT accepts such work” (implied words underlined).  This meant PTT was entitled to liquidated damages as assessed by the TCC at the first instance. 

Our comment 

The decision avoids uncertainty on the operation of liquidated damages clauses following termination.  Contracting parties can have confidence that, regardless of the status of completion of the works, liquidated damages will apply up to the date of termination.  Clear and express language must be used if parties want a different outcome. 

The decision also confirms that, although each liquidated damages clause will be assessed on a case-by-case basis, it does not need to specifically provide for the consequences of termination – which would have been the effect of the Court of Appeal’s decisions.  

It is noted that NZS3910:2013 does prescribe the consequences of termination.  Under clause 14.2.5, if the Principal terminates for a Contractor default, the Contractor remains liable for liquidated damages “from the Due Date for Completion which would have applied if the Contract had not been terminated to the actual date of Practical Completion of the Contract Works”.  In other words, it overrides the default orthodox position affirmed in Triple Point by entitling the Principal to claim liquidated damages for the full period up to Practical Completion even if termination occurred prior to that.

Absent express wording like that in NZS3910:2013, any other losses arising from delay after the period of termination will have to be proven by way of general damages.  If that is the position, contracting parties should take this into account, among other factors, when deciding whether to terminate. 

If you have any questions about this judgment, please get in touch with our Construction or Disputes Team at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

 

 

 

 

 

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