Termination before works are finished: application of liquidated damages? Triple Point Technology v PTT Public Company

Scott Stiegler
Yasmin Bailey
Vinson & Elkins, London

In a decision welcomed by many practitioners in the United Kingdom and abroad, the UK Supreme Court recently settled the law on the application of liquidated damages (LDs) in circumstances where a contract is terminated before the works are complete. The approach taken by the Court of Appeal in Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, which contemplated that a contractor could avoid the payment of accrued liquated damages for an incomplete milestone in the event of termination, left many in the industry unsettled. In overturning the decision of the Court of Appeal, the Supreme Court returned to an orthodox approach whereby the right to liquidated damages accrues until the termination of the contract, and thereafter general damages may be sought.

Factual background

PTT and Triple Point entered into a contract further to which Triple Point was to provide software and related services to PTT. The works under the contract were divided into a number of phases, with each phase being further divided into a number of stages. Payment under the contract was provided for by milestones, although the contract also included specific payment dates.

The works progressed slowly and eventually fell into delay. Triple Point sought payment further to the specific dates set out in the contract, which PTT refused to pay on the basis that Triple Point had failed to achieve the relevant milestones to which the payment related. Triple Point subsequently suspended the contract for non-payment and in turn PTT terminated the contract.

Prior to termination, Triple Point had completed stages 1 and 2 of phase 1 of the works, but the other works remained incomplete.

The liquidated damages clause in question relevantly provided as follows:

‘If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by PTT, CONTACTOR 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’.

Previous case law

The case law in this area was developed following the specific liquidated damages provisions in question in each of the cases. This resulted in a variety of possible outcomes. In a scenario where a contractor was subject to previously accrued liquidated damages, but was then terminated with those remaining works being completed by another contractor, three different approaches began to emerge:^[1]

1. The orthodox view had generally been that accrued liquidated damages were recoverable up to the date of termination, irrespective of whether the milestone had been finally achieved or not.^[2]

2. In British Glanzstoff Manufacturing Co Ltd v General Accident Ltd,^[3] it was decided that a liquidated damages clause applied only where the contractor had actually completed the works, but had been late in doing so – it did not apply where completion of the works had not been achieved.^[4]

3. In another case, a position developed that liquidated damages may be recoverable beyond the date of termination and up to the date the works were completed by another contractor.^[5]

Each of these positions presented a different outcome for both contractor and employer.

First instance decision^[6]

In the proceedings at first instance, Triple Point claimed for payment of its invoices, denied that the termination was lawful and claimed payment for the value of services performed prior to termination.

PTT disputed that any payment was due and counterclaimed liquidated damages for delay and unliquidated loss and damage resulting from the termination.^[7] Various defences were raised by Triple Point in relation to the liquidated damages clause; however, Jefford J stated that neither of the arguments were well made.^[8]

Jefford J found that Triple Point was responsible for the delay that had occurred to the project by May 2014 when it ceased to perform. Consequently, as Triple Point was not entitled to cease performance, it was found to be responsible for the further delay up to the date of termination.^[9]

It was subsequently held that liquidated damages applied up to the date of termination (in respect of both phases of the works) and that general damages were recoverable thereafter. This was, for all intents and purposes, the orthodox approach. For stages 1 and 2 of phase 1, liquidated damages were calculated at £154,662. For the remainder of the various stages in the two phases, liquidated damages was calculated at £3,304,616.40.^[10]

Decision of the Court of Appeal^[11]

While the Court of Appeal (Lewison LJ, Floyd LJ and Sir Rupert Jackson) dismissed many of Triple Points grounds of appeal, it did allow its appeal with respect to liquidated damages, and this was the main focus of the decision.

In the Appeal, Triple Point argued that the liquidated damages provision was not engaged, in that the provision only applied when work was delayed, but subsequently completed and then accepted – that is, it does not apply in respect of work that the employer never accepted.^[12] This was described by Sir Rupert Jackson as a ‘formidable argument which raises questions of general principle concerning the operation of liquidated damages clauses in termination or abandonment cases’.^[13]

The Court of Appeal held that applying this approach to interpreting a liquidated damages clause would depend on the wording of the relevant clause and noted that there is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.^[14]

The Court of Appeal also noted that while the approach that liquidated damages are recoverable up to the date of termination, irrespective of whether the milestone had been finally achieved, was considered the orthodox approach, this was not an approach free from difficulty, noting that it may ‘sometimes be artificial and inconsistent with the parties’ agreement’ and that in circumstances where ‘a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision’.^[15]

Applying this reasoning, the Court of Appeal held that where a liquidated damages clause focused specifically on the delay between the contractual completion date and the date when completion was actually achieved, upon the construction of the words in the clause, liquidated damages would not apply if the completion of those works was never, in fact, achieved.^[16] In this regard, the Court of Appeal particularly relied on the wording in British Glanzstoff Manufacturing Co Ltd v General Accident Ltd.

In light of the specific wording of the liquidated damages clause in question, PTT was only entitled to recover liquidated damages in respect of stages 1 and 2 of phase 1 of the works, being £154,662, which Triple Point had completed prior to termination of the contract.

Decision of the Supreme Court^[17]

On 16 July 2021, the Supreme Court (Lord Hodge, Lady Arden, Lord Sales, Lord Leggatt and Lord Burrows) unanimously overturned the Court of Appeal’s decision on whether liquidated damages were payable with respect to the incomplete works. The Supreme Court noted that the Court of Appeal’s reliance on Glanzstoff ‘loomed large in the reasoning of the Court of Appeal’,^[18] even though it was ‘little-known’,^[19] and like the Court of Appeal, much attention was focused on the case.

Lady Arden observed that the Court of Appeal saw much force in the reasoning of the House of Lords in Glanzstoff and took the view that the wording of the liquidated damages clause in issue in this case could be so close to the wording in Glanzstoff that the House of Lords decision was binding.^[20] Lady Arden, however, found that this observation was difficult to follow, and noted that the clauses in question in Glanzstoff were ‘not said to be some market-accepted wording or clauses from some standard form recognised in the industry where the interpretations of the courts in reported cases may in practice be treated as binding in later cases involving the same wording’.^[21] Lady Arden stated that with those exceptions, ‘in general the decision of one case as to the meaning and effect of a clause cannot be binding as to the meaning and effect of even a similar clause in another case’.^[22]

The Supreme Court identified that a difficulty with the Court of Appeal’s conclusion on the interpretation of the liquidated damages provision was that it was ‘inconsistent with commercial reality and the accepted function of liquidated damages’.^[23] Ultimately, the parties agreed a liquidated damages clause so as to provide ‘a remedy that is predictable and certain for a particular event’ and so ‘the employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do.’^[24]

Lord Leggatt also identified that a liquidated damages regime which would not be effective unless a contractor completed the works brought with it a perverse outcome. Such a provision would ‘give a contractor who badly overruns the time specified for completion an incentive not to complete the work in order to avoid paying liquidated damages for the delay which its breach of contract has caused. It makes no sense to create such an incentive.’^[25]

With respect to Sir Rupert Jackson’s comment that if a construction contract is abandoned or terminated, the employer is in ‘new territory for which the liquidated damages clause may not have made provision’, Lady Arden stated that it was, in fact, ‘well-trodden’ territory.^[26] Ultimately, Lady Arden went on to conclude that she did not consider that Glanzstoff should have led the Court of Appeal to their ‘radical re-interpretation of the case law on liquidated damages clauses’.^[27]

The Supreme Court restated the general law, which is that the accrual of liquidated damages comes to an end upon termination of the contract (after which a party must seek damages for breach of contract under the general law) but those rights accrued as at the date of termination survive. The Supreme Court also held that a liquidated damages clause does not need to provide for such an outcome expressly.^[28]

What was perhaps most interesting was the fact that the issue of whether or not liquidated damages were payable where Triple Point never completed the works and PTT never accepted them was only raised orally in the Court of Appeal. Lady Arden noted that there were no skeleton arguments for this point in the Court of Appeal and the Supreme Court could not tell precisely how the argument was put. Lady Arden also noted that initially Triple Point did not propose to argue the point by reference to an analysis of the authorities that were ultimately cited by the Court of Appeal in its judgment.^[29]

Conclusion

A liquidated damages regime brings with it a level of certainty for both parties. However, the Court of Appeal’s decision left the position unclear as to whether a contractor may potentially face a different level of exposure than under a liquidated damages regime for delays incurred prior to termination or, conversely, may force an employer to go to greater lengths and expense to demonstrate its claim for delay-related damages over and above what would be required if the liquated damages regime was effective. There is also, of course, the concerning practical outcome identified by the Supreme Court whereby a contractor may be incentivised not to complete the works in order to avoid liquidated damages for delay being accrued because of its own breach of contract.

The Supreme Court approached the issue with common commercial sense. Lord Leggatt surmised most relevantly that there were ‘cogent commercial reasons why parties who include a liquidated damages clause in their contract would be unlikely to intend the employer’s right to receive such damages for delay by the contractor to be conditional upon the contractor actually completing the work’.^[30]

Of course, the application of the principles from this case will always turn on the precise language of the contract in question. However, parties to a contract containing an appropriately drafted liquidated damages clause can take some comfort that in circumstances where the contract is terminated, in the absence of express wording to the contrary, an orthodox interpretation of that liquidated damages clause ought to prevail.