We previously wrote about the Court of Appeal decision in the case of Triple Point v PTT and its potential impact on liquidated damages. The decision was appealed to the Supreme Court.
The Supreme Court handed down their judgment in July and have provided clarity on liquidated damages clauses and their interpretation. Although the facts of the case have nothing to do with construction, the Court of Appeal decision had created uncertainty.
The Case
Triple Point supplied and installed a software system to PTT. The contract was based around Triple Point hitting 18-month milestones for the completion of the ongoing stages of the work. If these milestones were not met, then liquidated damages were payable.
Triple Point was hit with severe delays and completed the first and second milestones 149 days late. No further deadlines were completed. PTT terminated the contract and none of the remaining works were completed.
Triple Point brought a claim against PTT for non-payment under the contract. PTT counterclaimed for compensation for failure to perform including liquidated damages for delay under the appropriate clause which read:
“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 zero one percent) of undelivered work per day of delay from the due date from delivery up to the date PTT accepts such work…”
It fell to the Court to determine did the Liquidated damages clause operate where the works had been delayed but the contract had been terminated before completion?
The TCC
The Technology and Construction Court (TCC) decided that the Liquidated damages clause applied to all aspects of the delay and awarded liquidated damages.
The Court of Appeal (CA)
The CA stressed that the precise wording of the clause would determine the result. It highlighted 3 possible interpretations in circumstances where the contract had been terminated prior to completion – all of which could be supported by existing case law:
- The clause did not apply at all;
- The orthodox view that the clause applied to a period of delay up to termination;
- The clause applied even after termination of the contract and until a second contractor achieves completion (at which point the works would be accepted by PTT).
The CA noted that the orthodox view in this case was “not free from difficulty”. The CA went on to adopt option 1 above. In order for the clause to apply, PTT must have gone on to accept the delayed work. As the majority of the 18-month milestones had not been met, PTT had not accepted them. As milestones 1 and 2 had been completed, PTT were entitled to liquidated damages for the delays to them. Regarding the incomplete works, PTT were entitled to ordinary damages for breach of contract.
The Supreme Court (SC)
The SC again stressed that the wording of the clause is the key to its interpretation. It overturned the CA’s decision. It held that PTT were entitled to Liquidated damages for the delay to the works for the period up until termination. This being in line with the orthodox view set out as option 2 by the CA above.
Lady Arden, in her lead judgment, noted that the CA’s interpretation of the clause was “inconsistent with commercial reality and the accepted function of liquidated damages”. She went on to comment that liquidated damages are agreed by the parties to a contract to provide a remedy for a particular event (here delay to completion of the works) and that it is well known that the accrual of liquidated damages come to an end on termination of a contract. Thereafter, any further remedies must be sought under the general law i.e., ordinary damages for breach of contract. She found that this interpretation was better when considering the clause in question which had sought to make acceptance of the works an end to the accrual of liquidated damages and not a pre-condition to their right to be claimed.
Lady Arden emphasized that the benefit of this interpretation is that it ensured that the rights that parties had prior to termination were not lost on termination. Lord Leggatt in his supporting judgment also emphasized the perversity of the CA’s interpretation as meaning that the Contractor would not be incentivized to complete the works, as it was only at that point that liability to pay liquidated damages would be triggered.
Conclusion
While care must always be given to the wording in each liquidated damages clause, the SC’s decision has marked a return to business as usual. Many contract drafters had looked to amend their terms following the CA’s decision. This included the update to the NEC4 suite of contracts. There were question marks over whether liquidated damages clauses had to now contain provisions dealing with termination. Others wondered whether works had to be completed before termination. The SC’s judgment puts an end to this uncertainty and re-establishes construction industry practices.
If you have any questions on the interpretation of liquidated damages clauses, or you find yourself in a dispute involving them, please do not hesitate to contact the writer, Graham Mead on 01473 298234 or by email on gmead@prettys.co.uk. Graham is a partner in the CMDR team.
