A recent Court of Appeal decision (in Triple Point v PTT) has clarified the previously uncertain legal position as to whether liquidated damages can survive termination. Over the years the courts have taken differing approaches when deciding whether liquidated damages can be claimed when a contract is terminated. This recent Court of Appeal case, although based on a software agreement, provides guidance of direct relevance within a construction environment also. This article explores the previous legal position and how it has been clarified.
The three diverse stances taken in previous when approaching disputes over liquidated damages may be summarised as follows:
- If a contract is terminated before completion, liquidated damages will not be available and damages will need to be claimed for delay and loss as usual.
- Liquidated damages can be claimed up until the date that the contract is terminated, but none can be claimed after.
- Liquidated damages can be claimed up until the date of the termination of the contract and will be payable until a replacement contractor has completed the relevant work.
There has been much commentary in relation to the fairness or otherwise of these approaches. The third approach has been considered as if liquidated damages are no longer payable when a contract is terminated, this is potentially a reward to the contractor as they no longer have to pay out. The contractor is also liable until a new contractor is found, this is beyond the control of the original contractor and so may be considered unfair. The second approach, applied by the courts over the recent years and viewed by may as the conventional approach to liquidated damages, has also been adopted with caution and depends on the wording of the liquidated damages clause. The courts have said that the wording of the clause needs to be specific to ensure liquidated damages are payable until the date of termination.
Triple Point v PTT concluded that liquidated damages are not applicable at all if the contractor never finishes the work, which is the first approach set out above. The rationale for this decision was that general damages for loss and delay are still available and so the contractor will not be free of any liability. Therefore, if a contract has not been fulfilled, liquidated damages should not be payable due to the criticisms highlighted above. However, the Court of Appeal did make clear that the reason for the decision in this case was because of the specific wording of the clause.
Comment
This case provides welcome clarification on the law surrounding liquidated damages and termination. Firstly it highlights the ever important task of ensuring that all clauses are drafted clearly. If any parties want liquidated damages to be available after termination of the contract, then this needs to be specified in the contract. Furthermore, this case also highlights the extra consideration that needs to be given when deciding whether to terminate a contract. If a contract is terminated early, liquidated damages may not be available.