The Supreme Court’s recent decision has restored the orthodox approach to interpreting liquidated damages clauses and has brought some certainty following the Court of Appeal’s judgment in 2019. It has also emphasised the importance of protecting accrued rights. In an earlier update, we explored the consequences of the Court of Appeal’s decision, which can be accessed here.
On 16 July 2021, the Supreme Court gave its judgment on Triple Point Technology, Inc (“Triple Point”) v PTT Public Company Ltd (“PTT”) on appeal from the Court of Appeal.1 The central issue for the Supreme Court was the approach to interpreting liquidated damages clauses. The liquidated damages clause in question provided that liquidated damages were to be paid by the contractor “from the due date for delivery up to the date [the employer] accepts such work.” The issue was whether liquidated damages were payable under this clause in respect of work which had not been completed before the contract was terminated.2
The project was split into various phases. Completion of Phase 1 was significantly delayed and ultimately work did not commence in respect of Phase 2 at all. Whilst PTT paid Triple Point an initial US$ 1,038,000 invoice relating to Phase 1 work, the parties disagreed over whether subsequent invoices from Triple Point were also payable. Following Triple Point’s subsequent refusal to continue work, PTT gave notice that it was terminating the contract.
The Court of Appeal’s judgment provided that where a liquidated damages clause focussed specifically on the delay between the contractual completion date and the date when completion is actually achieved, liquidated damages will not apply if those works are never, in fact, achieved. Therefore, PTT was entitled only to liquidated damages in respect of works that had been completed, by reference to the agreed stages contained in the contract, upon termination.
In its judgment, the Court of Appeal assessed the relevant case law in detail and noted that in cases where the contractor fails to complete the works and a second contractor steps in, three different approaches have emerged to interpreting clauses providing liquidated damages for delay:
- The clause does not apply: as per the Glanzstoff case,3 the Chanthall case,4 and the Gibbs case.5
- The clause only applies up to termination of the first contract: as per the Greenore case,6 the Shaw case,7 the LW Infrastructure case,8 and the Bluewater case.9
- The clause continues to apply until the second contractor achieves completion: as per the Hall case,10 the Crestdream case,11 and the GPP case.12
The second approach set out above had often been considered the orthodox approach. However, the Court of Appeal held that whether the first or second approach applied,13 it would depend upon the wording of the relevant clause, noting that there is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss and that it should not be assumed that the liquidated damages clause had any operation beyond the precise event for which it expressly provided.
The Supreme Court held that the Court of Appeal’s approach departed from the generally understood position and was not consistent with commercial reality and the accepted function of liquidated damages.14
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.”15
The Supreme Court restated the general law, that the accrual of liquidated damages comes to an end upon termination of the contract, after which the parties must seek damages for breach of contract under the general law – a liquidated damages clause does not need to provide for such an outcome expressly.16
The Supreme Court further clarified that it is much more probable that parties would have intended the provision for liquidated damages to cease upon completion and acceptance of the works to stand in addition to, and not in substitution for, the right to liquidated damages down to termination. Reading the clause in that way reduced the risk that the contractor was not liable for liquidated damages for delay, which would result in the extinction of accrued rights to liquidated damages. The Supreme Court criticised the Court of Appeal’s judgment in this respect and noted that parties are unlikely to intend that the right to liquidated damages once accrued was simply extinguished. In particular, the Supreme Court criticised the Court of Appeal’s analysis of the Glanzstoff case and noted that the case turned on its specific facts but was not of legal significance.
In conclusion, the Supreme Court held that in regards to whether liquidated damages were payable under the contract in circumstances where Triple Point never completed the work and PTT never accepted the work, the Court of Appeal fell into error in being guided by the decision of the House of Lords in Glanzstoff.
By majority, the appeal was allowed in part, and PTT was found to be entitled to recover damages assessed by the judge at first instance at just over US$14.5m, without limitation of liability.
Therefore, the position further to the Supreme Court’s judgment is that unless the liquidated damages clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract.
The Supreme Court acknowledged that the Court of Appeal’s interpretation of this particular contract 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.
The Supreme Court’s decision brings some legal certainty following the Court of Appeal’s judgment, in particular for employers who were left exposed in circumstances where termination was in sight and liquidated damages had accrued, yet potentially such accrued rights may have extinguished if the works remained incomplete. The Court of Appeal’s decision had also created concern given most standard form clauses such those in the FIDIC and IChemE forms were incompatible with its interpretation of liquidated damages.
Of course, the application of this principle will turn on the precise wording of the contract. 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.