Liquidated Damages after Termination?
24th April, 2019
Triple Point v PTT  EWCA Civ 230
The Court of Appeal has provided much needed guidance on whether a liquidated damages provision is engaged in circumstances where the work has not been completed as at the date of termination. The decision highlights that, in circumstances where termination of the contract has occurred prior to completion, liquidated damages may not be recoverable. As such, and in order to ensure certainty, parties entering into a construction contract are strongly advised to expressly state whether or not their liquidated damages provision is to apply if works remain incomplete as at the date of termination.
While the judgment raised multiple issues, this article focuses solely on the decision pertaining to the entitlement to liquidated damages following termination.
Triple Point was engaged by PTT to develop a new software system for commodity trading and risk management. The works were divided into two phases, with payment subject to the completion of certain milestones. Triple Point achieved completion of stages 1 and 2 of Phase 1 on 19 March 2014, 149 days late.
Triple Point submitted an invoice in respect of the completed work which PTT duly paid. However, PTT refused to make any further payments in respect of invoices relating to incomplete work. Triple Point refused to continue working without receiving further payment and therefore suspended work and abandoned the project. PTT terminated the contract by reason of Triple Point’s suspension of the works. Triple Point commenced proceedings to recover the outstanding sums claimed in its unpaid invoices. PTT denied any further payments were due and claimed damages for delay.
The Liquidated Damages Provision
Article 5.3 of the contract provided:
“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 High Court Decision
At first instance, Triple Point’s claim was dismissed and PTT was, pursuant to Article 5.3 of the contract, entitled to recover liquidated damages for delay in respect of the complete and incomplete works.
Triple Point appealed on the basis that liquidated damages for delay were not recoverable under Article 5.3 as that clause only applied when work was delayed, but subsequently completed and accepted. The Court of Appeal described this as a “formidable argument which raises questions of general principle” and proceeded to identify that in cases where the contractor fails to complete and a second contractor steps in, three conflicting approaches have emerged to clauses providing liquidated damages for delay:
(a) The clause does not apply.
(b) The clause only applies up to termination of the first contract.
(c) The clause continues to apply until the second contractor achieves completion.
The Court held that the correct approach will turn upon the precise wording of the clause itself, though it was doubtful about the approach in category (c) as this would mean the employer and the second contractor could control the period for which liquidated damages would run.
The Court concluded that Article 5.3 “focused specifically on delay between the contractual completion date and the date when Triple Point actually achieves completion” and, therefore, was not engaged in circumstances where the contractor does not hand over completed work to the employer.
Accordingly, PTT was entitled to recover liquidated damages in respect of Triple Point’s delay of 149 days in completing stages 1 and 2 of Phase 1, but was not is not entitled to recover liquidated damages for any of the other delays as they concerned incomplete sections of the work. The Court emphasised that PTT would be able to recover general damages in respect of the incomplete sections of the work, though this would require it to prove its actual loss.
The Court of Appeal’s decision was dependant upon the wording of Article 5.3 and its specific reference to PTT’s acceptance of work. It is to be expected that liquidated damages provisions which make reference to the completion of the works will not apply in circumstances where termination has occurred prior to completion.
Whether you are negotiating a standard form building contract or a bespoke set of terms, our specialist construction team at Aaron & Partners Solicitors can help you ensure your liquidated damages provision adequately addresses the circumstances in which it is to be engaged.
Construction and Engineering Law
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