Can an employer claim liquidated damages for delay if the contractor does not complete its work and the employer never accepts it? This was one of the questions the Supreme Court had to grapple with in the case of Triple Point Technology Inc v PTT Public Company Ltd in which an IT project ran into considerable difficulties. In our previous article we reviewed the Court of Appeal's decision in the case. Now the Supreme Court has allowed an appeal in relation to the liquidated damages issue. The decision potentially has practical implications for both IT and construction contracts with Lady Arden describing the Court of Appeal's previous summary of the issue as a "radical re-interpretation" of the law relating to liquidated damages and "inconsistent with commercial reality".
Triple Point contracted to customise its proprietary software for commodity trading and risk management for PTT. Payment was to be made under the contract by reference to "milestones". Work on Phase 1 was delayed. Triple Point only completed stages 1 and 2 of Phase 1 which were 149 days late. Triple Point demanded payment in respect of other invoices which it had submitted. PTT refused to pay on the basis that the invoices were not due under the contract. Triple Point therefore refused to perform further without payment and PTT subsequently gave notice to terminate.
Triple Point issued proceedings for its unpaid fees. PTT counterclaimed for various damages for breach of contract on termination including liquidated damages up to the date of termination. Triple Point denied liability and sought to rely on various clauses in the contract limiting and excluding liability. (There were also arguments in relation to the meaning of the word "negligence" in an exclusion clause and the impact this had on whether the liquidated damages should be included in a limitation cap. However, these turned on the specific wording of the clause and so have not been addressed here).
The services under the contract were to be performed in accordance with a Project Plan. The contract provided that if the work was not delivered within the time specified and the delay had not been introduced by PTT then Triple Point was obliged to pay liquidated damages
"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..."
Due to the wording of the clause Triple Point claimed that liquidated damages were only payable for the 149 days of delay in completing stages 1 and 2 of Phase 1 (claiming that was the only work completed and accepted) and so it was only liable to pay liquidated damages of US$154,662. PTT argued that liquidated damages were also payable for the delay in delivering all uncompleted work up to the date of termination (a total period of 3,220 days) resulting in a claim for liquidated damages of US$3,459,278.40.
The decision at first instance
At first instance the judge found that the delay to the project had been caused by Triple Point's breaches of various contractual obligations. PTT was therefore held to be prima facie entitled to damages. These included liquidated damages for delay which was to be calculated from the specified completion dates for both Phase 1 and Phase 2 up to the date of termination of the contract, with unliquidated damages recoverable from that point.
The Court of Appeal
Triple Point appealed and PTT cross appealed. Jackson LJ reviewed the previous authorities and concluded there were three alternative, conflicting ways in which the court had previously addressed the question of liquidated damages when works had not been completed. He concluded that whether liquidated damages would cease to apply or would continue up to termination (or beyond) depended on the wording of the clause. In this case the clause referred to delay between the contractual completion date and acceptance of the work. The Court of Appeal therefore found that PTT was only entitled to liquidated damages for the Phase 1 works that had been completed and accepted and had to claim unliquidated damages for the delay to the works not completed.
The Supreme Court
One of the issues for the Supreme Court was whether PTT was entitled to liquidated damages for delay for work which had not been completed before the contract was terminated. In the Supreme Court Lady Arden concluded that the Court of Appeal's approach on this issue was "inconsistent with commercial reality". She commented that liquidated damages are supposed to be a predictable and certain remedy and parties must be taken to know that their entitlement will end on termination of the contract. After that point the parties must seek damages for breach of contract under the general law. She described the Court of Appeal's decision as a "radical re-interpretation of the case law on liquidated damages clauses".
Lady Arden said that the true construction of the liquidated damages clause was that the damages were payable in the event that Triple Point did not complete the works on time, irrespective of whether PTT accepted any of the works which were completed. To conclude that there would be no liquidated damages if there was no acceptance of the completed works would render the clause of little value in a commercial context. She described the Court of Appeal's interpretation of the clause as "throwing the baby out with the bathwater."
Lord Leggatt added additional reasoning for allowing the appeal stating:
"...it is ordinarily to be expected that, unless the clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract."
Following the shift in direction by the Court of Appeal, the Supreme Court's decision now provides welcome clarity for liquidated damages claims where a contract is terminated before the work is completed. Subject to the particular contract wording, if a right to liquidated damages has already arisen that right will usually be preserved on termination. The liquidated damages will usually only be calculated up to the termination date. Beyond that point it would be open to the employer to claim unliquidated damages for delay assessed in accordance with usual principles, subject to any limitations or exclusions in the contract.
Liquidated damages clauses can be a useful tool to assist both parties in calculating damages for delay. The decision reinforces the commercial purpose of liquidated damages clauses and helps negate the risk that these clauses might fall away (leaving only an unliquidated damages claim) on late-running projects where the contract is terminated before the work is completed. However, the hurdles that PTT had to jump through to obtain a decision in its favour highlight the need to ensure careful drafting, particularly if the parties want the liquidated damages position on termination to be different from that outlined by the Supreme Court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.