Liquidated damages (LDs) are predetermined damages set when a contract is entered into, based on a calculation of the estimated loss likely to be incurred if the contractor fails to meet specific dates. LDs clauses are commonplace in commercial contracts. In construction contracts, they generally apply where the contractor fails to complete works by specified dates due to reasons for which the contractor is culpable. They are generally calculated according to the period between the specified dates and actual completion. But what happens if the contractor does not reach completion?
In the recent case of Triple Point Technology v PTT Public Company Ltd (PTT) the Supreme Court required to determine whether, and if so to what extent, LDs apply in the circumstances where a contractor fails to complete works and a second contractor is brought in.
The dispute
PTT, a commodities trader, placed an order with Triple Point, a software system supplier, for a new software system dealing with trading, risk management and vessel chartering. The project contract provided for payment against certain milestones in the works, and it applied LDs in the event of particular delays. Payments were issued in respect of the first two stages of works; however, the project was subject to delays that resulted in Triple Point failing to reach the next stage of work. Triple Point sought payment from PTT of software licence fees, which PTT refused as the next stage in the works was not completed and no payment milestone had been triggered. Triple Point suspended work pending payment and left the site. PTT argued that Triple Point had wrongfully suspended work and PTT served notice requiring Triple Point to remedy its breaches of contract. When Triple Point did not comply with the notice, PTT formally terminated the contract and engaged another contractor to complete the works.
Triple Point sued in respect of its invoices and for work it had carried out prior to termination. PTT counter-claimed for damages including LDs.
The court required to determine whether Triple Point was entitled to cease works pending payment, who was responsible for the delay, whether PTT was entitled to terminate the contract, to what extent LDs were payable, and whether the contractual cap operated to limit these.
The Technology and Construction Court’s (TCC) Decision
At first instance, the TCC held that Triple Point was not entitled to suspend works and that it was in breach of contract. PTT was awarded $3,459,278.40 in LDs for delay up to the date of termination, as well as other incurred costs. The court found the contractual cap on liability did not cover LDs.
Various questions arose from the decision, with potentially major ramifications for the construction industry, in particular:
- Do LDs clauses apply at all where a contractor fails to complete and a second contractor is brought in?
- If so, do LDs clauses only apply up until the point of termination? Or do they apply until the second contractor achieves completion?
- Does a contractual cap limiting liability apply to LDs in the circumstances of termination?
The TCC’s decision was appealed to the Court of Appeal.
The Court of Appeal Decision
The Court of Appeal held that LDs were not due for the period beyond termination of the contract and that PTT was entitled to liquidated damages in respect of completed and accepted works only. When considering whether the contractual limitation of liability applied to these LDs, the court held that the relevant clause created an overall cap on the extent of Triple Point’s total liability, inclusive of its liability for LDs.
The established position that LDs are payable for incomplete works up to the date a contract is terminated and that only general damages are recoverable thereafter was thus cast in doubt. The significance of the points raised led to a further appeal to the UK Supreme court.
The UK Supreme Court Decision
By unanimous decision, the Supreme Court rejected the Court of Appeal’s decision, holding that the effect of LDs provisions should normally finish when a contract is terminated but should apply to incomplete works to that date. It agreed that the contractual cap, in this case, covered LDs.
Points to take away
Plainly, LDs, liability caps and termination clauses are significant and require careful drafting. The application and effect of these clauses will always depend on the precise words used.
However, the UK Supreme Court’s decision confirms that accrued rights and liabilities survive termination of contract and that, subject to clear and express words to the contrary, LDs entitlement normally accrues up to the date of any termination of the contract, but thereafter general damages apply. In addition, the accrual of LDs in these circumstances can be limited by a contractual cap on liability, depending on the precise words of the relevant provision.
For more information, please contact Iain Drummond, Partner in our Property and infrastructure disputes team or Tara Davison, Solicitor in our Property and infrastructure disputes team.