Liquidated damages after termination

Liquidated damages clauses are nothing new to those working within the construction industry, and I suspect we all think we have a fairly good understanding of how they operate; if a contractor is slow to complete the contractual works then, unless it is entitled to an extension of time, the applicable liquidated damages clause will kick in so as to compensate the employer for the contractor’s delays… right?

But what happens if the contract is terminated?

Until recently, the accepted wisdom within the industry was that liquidated damages would cease to be payable from the date of termination (unless there was a special clause extending the liquidated damages provision even though the work had been taken out of the contractor’s hands). The employer’s right after the date of termination would be to recover general damages (the difference being that liquidated damages simply provide for a specific sum to be paid, regardless of the actual losses, whereas general damages are calculated by reference to the actual losses incurred).

The recent decision of the Court of Appeal in the case of Triple Point Technology Inc v PTT Public Company Limitedhas provided us with a new perspective.

Triple Point was engaged to supply a software system to PTT. Payment of the contract price was to be made according to agreed payment milestones and a liquidated damages clause was incorporated such that Triple Point would be penalised for failing to complete the works by an agreed date.

Triple Point was slow to progress the works, yet demanded payments notwithstanding that payment milestones had not been achieved. Unsurprisingly, PTT refused to pay, citing the contractual payment milestones. Triple Point suspended works and PTT eventually terminated the contract.

Proceedings were issued. Triple Point claimed payment of unpaid invoices; PTT counterclaimed liquidated damages for delay and damages on termination.

At first instance, Jefford J awarded to PTT, amongst other sums, $3.45 million by way of liquidated damages. Triple Point appealed against that decision on the basis that Phase 1 of the works had not been completed, let alone accepted by PTT.

In giving judgment on the appeal, Sir Rupert Jackson reviewed the case law and identified 3 different approaches that had been taken to liquidated damages in cases where the contractor’s works were incomplete and third parties had been brought in to complete them:

1. The LD’s clause does not apply. That was the decision of the House of Lords in British Glanzstoff Maufacturing v General Accident Fire and Life Assurance, wherein it was held that the LD’s clause only applies if and when the contractor has actually completed the works. Sir Rupert saw “much force” in this argument, and recognised that it was a decision of the highest authority.
2.  The LD’s clause applies but only until the date of termination. This was the previously accepted wisdom referred to above and is consistent with the decisions in the more recent cases of Greenore Port v Technical &General Guarantee Co and Shaw v MFP Foundations and Pilings Limited. Sir Rupert saw “difficulty” with this category because if the contract is terminated, the parties might be in territory which was not specifically provided for by the liquidated damages clause.
3. The LD‘s clause applies until the works are in fact completed, by whoever the employer engages to complete them.  Although there was authority in the case of Hall v Van Der Heiden (No.2), the Court had doubt about this category because it gave the employer, and the new contractor, control over the period for which liquidated damages would apply.

Sir Rupert rightly concluded that the correct approach in any given case will depend on the precise wording of the liquidated damages clause. There was no invariable rule that liquidated damages must be used to compensate an employer for part of its losses. Turning to the facts of Triple Point, Sir Rupert held that the clause in question focussed specifically on delay between the contractual completion date and actual completion; it had no application to a situation where the contractor never actually handed over completed work to the employer.

It is important to note that this did not rule out PTT’s right to recover damages. PTT was entitled to liquidated damages in respect of delays up to the date on which it accepted completed works from Triple Point. Delays beyond that were to be compensated by way of general damages (albeit that they were subject to a cap under the contract).

This case serves as a reminder that liquidated damages clauses need to be carefully drafted, and considered in conjunction with any contractual termination provisions. Liquidated damages clauses can provide a simple mechanism for dealing with potential losses caused by delay. If the clause fails, or only covers part of a period during which losses are incurred, such that the employer’s entitlement is to general damages in the alternative, that places a far greater burden on the employer to demonstrate causation of actual losses, and to provide evidence of quantum.  

Further, the case also highlights the need to ensure that any claims for damages following termination are pleaded in broad enough terms to ensure maximum recovery, regardless of what judicial interpretation is ultimately given to any liquidated damages clause.