Post-Termination and Liquidated Damages

A decision of the Supreme Court has clarified whether liquidated damages are payable in the event of termination of a contract.

Background

This case concerned a dispute between Triple Point Technology Inc (‘Triple Point’) and PTT Public Company Ltd (‘PTT’).

PTT is a company whose activities include trading oil and gas. It appointed Triple Point, a software developer and designer, to provide software and related services. Phase 1 of the work was divided into 9 stages, for which Triple Point was to be paid $6.92M.

The contract was not a success. Completion of the first two stages of work were significantly delayed. A payment dispute arose. PTT refused to make payment and Triple Point suspended work. PTT terminated the contract.

Triple Point started court proceedings, claiming sums allegedly due to it in respect of software licence fees. PTT counterclaimed for liquidated damages for delay prior to termination and its costs arising out of the termination.

Relevant terms of the contract

Clause 5.3 of the contract provided that:

“If [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, [Triple Point] shall be liable to pay the penalty 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.” (Emphasis added)

On the face of it, clause 5.3 provided for liquidated damages to be payable by Triple Point at a daily rate if its work was delayed.

Previous decisions

PTT was successful in the High Court in England, which awarded almost $4.5M on PTT’s counterclaim. That figure included almost $3.5M in liquidated damages.

Triple Point appealed, with the main issue for the Court of Appeal to deal with being how to apply clause 5.3 in circumstances where Triple Point had not achieved completion of 7 of the 9 stages of the phase 1 works.

The wording “up to the date PTT accepts such work” referred to the acceptance of completed work. In the Court of Appeal’s view, that meant that clause 5.3 did not apply in the situation where Triple Point had not handed over completed work. The upshot of that was that PTT was only entitled to recover liquidated damages of $154,662 in respect of Triple Point's delay in completing stages 1 and 2 of the phase 1 works. PTT was not entitled to recover liquidated damages for any of the other delays.

The Supreme Court

The Supreme Court was tasked with considering whether PTT only had a right to liquidated damages if Triple Point completed the work, and the 5 Supreme Court Judges unanimously disagreed with the Court of Appeal.

It was noted that the Court of Appeal had departed from the “generally understood” position that, subject to the precise wording of the clause, liquidated damages would accrue until the contract was terminated. At that point a contractor (PTT in this case) becomes liable to pay general damages for breach of contract.

The aim of a liquidated damages clause is to avoid the need for an employer to quantify its loss, which it may be difficult and expensive to do.

In the Supreme Court’s view, parties should be taken to know that liquidated damages cease to accrue on termination. It was not something that needed to be expressly written in to the contract.

Under the contract between PTT and Triple Point, liquidated damages were payable where Triple Point never completed the work.

Carson McDowell View

The NEC4 Engineering and Construction Contract provides for delay damages (Option X7). The JCT Design and Build Contract (2016) provides for liquidated damages. Whatever you call them, clauses that allow an employer to deduct or retain a set amount of money in the event of delays in completion of works are common in construction and engineering contracts.

Even though the contract between PTT and Triple Point related to software, the judgment of the Supreme Court provides certainty to parties to construction and engineering contracts that a right to liquidated damages accrued before termination does not come to an end on termination. Clear words will be required if parties intend that their contract to deviate from this “normal” position.

The Supreme Court was seemingly influenced by the standard forms of contract used in the construction and engineering industry. The 2017 FIDIC Yellow Book was even cited as an example of a contract that followed the “orthodox approach.”

Parties should still take care to ensure that any bespoke contracts, or amendments to standard forms, do not have unintended consequences.

If you have any queries, the Construction Law team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.