The Court of Appeal considered whether a clause conferring daily liquidated damages for delay applied to the particular factual circumstances and, if so, what event brought the liquidated damages to an end.
This was a dispute over the purchase of an IT system. Phase 1 of the project was completed 149 days late and further milestones were not completed at all. Ultimately the supplier was held to be in repudiatory breach for abandoning the contract, allowing the customer to terminate.
The contract included liquidated damages for delay which were expressed as accruing:
"…at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date [the customer] accepts such work…".
How this provision applied to the facts in question was sufficiently arguable for the dispute to be heard by the Court of Appeal.
Of particular interest in the judgment is the Court of Appeal’s consideration of how liquidated damages apply in termination or abandonment cases. The orthodox analysis is that delay liquidated damages will accrue until contract termination. However the Court of Appeal identified another possible approach also supported by case law: that liquidated damages continue to accrue post contract termination, running (in this case) until the second contractor achieved the acceptance required by the clause.
Liquidated damages are purely contractual mechanisms; “there is no doctrine of liquidated damages”, rather their operation turns upon the drafting of the particular liquidated damages clause and how that clause interrelates with the rest of the contract.
The court held that in this particular case the wording of the clause meant that the customer was entitled to liquidated damages for the first delay (to stage 1 acceptance).
The court avoided having to decide upon the correct end date for the liquidated damages attributed to the phase 2 delay because it found that the delay fell outside of the scope of the liquidated damages clause altogether. The drafting had anticipated liquidated damages accruing daily until acceptance - and yet none of the phase 2 work had ever been accepted by the customer because it remained incomplete. The scenario fell out of scope of the clause.
The court also considered whether the amounts accruing under the phase 1 liquidated damages were subject to the general contract cap or operated outside of it. Again, the court considered the precise drafting of the clause and the drafting of the wider contract, finding that the liquidated damages were subject to the cap.
Unfortunately for the customer, because the cap had already been wholly used up by the award of general damages, this analysis meant that it was unable to recover liquidated damages attributable to the phase 1 delay.
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