Does termination of a contract before the works are complete impact an employer’s ability to recover liquidated damages? This question was recently considered by the English Court of Appeal. The answer? It depends on the terms of the contract. However, it seems that many liquidated damages provisions, including those in currently used standard form construction contracts, may not apply at all on termination of the contract, leaving employers to prove a claim for general damages for delays suffered both before and after termination. This means that the parties should carefully consider LD provisions before entering into or terminating a contract.

Background

While liquidated damages provisions (LD provisions) and termination rights are fairly standard and familiar components of construction contracts, very few contracts expressly address how these provisions might operate together (although this appears to be changing with the 2017 edition of FIDIC – see further below).   

However, there are occasions where a construction project is in difficulty, the employer becomes entitled to terminate the contract, and the contractor is already in delay before termination occurs. In those circumstances, what happens to the LD provisions on termination? Do they survive termination and, if so, to what extent do they remain applicable?

This is by no means a new issue but it is an issue that has been decided inconsistently over the last 100 years, as the English courts have taken three distinct approaches to these questions. 

First Approach

In British Glanzstoff v. General Accident,1 the House of Lords held that LD provisions did not apply following termination of the contract and the compensation due to the employer should be assessed as general damages.

In this case, the contract was terminated and the original contractor never completed the works. The LD provisions referred to a specified sum being payable for every week beyond completion (or extended completion) during which works remained unfinished. The court stated that “if the contractors have actually completed the works, but have been late in completing the works, then, and in that case only, the [LD] clause applies” (emphasis added).

This approach was followed in a small number of subsequent cases.2

Second Approach

However, over the last 25 years Glanzstoff appears to have been largely forgotten and the English courts have often preferred a split approach, where LD provisions applied up to the date of termination, and general damages applied thereafter.3

This was on the basis that accrued rights (including to liquidated damages) must be protected on termination and the parties’ agreement in relation to the level of damages payable for delay should continue in effect until the date the contract is terminated.

Third Approach

However, in some instances, the English courts have held that LD provisions applied up to the date of actual completion of the works (even though completion was by another contractor).4 Although this approach has been questioned by many, the High Court held as recently as November 2018 that LDs in an EPC contract for five solar plants would continue to apply after the termination of the contract and up to the date of actual commissioning of the plants.5

There has been little consensus as to the circumstances in which each of the above three approaches should be taken, and conflicting decisions, often in relation to similarly worded clauses, have resulted in confusion and uncertainty. For example, different approaches were taken in relation to the same LD provisions in the JCT Minor Works building contract on three separate occasions – the clause was not applicable at all in Gibbs;6 but was applicable up to the date of termination in Shaw;7 and was applicable even after the date of termination and up to the actual completion in Hall.8

Clarification in Triple Point? 

The recent Court of Appeal case of Triple Point Technology, Inc v. PTT Public Company Ltd9 concerned the delayed development and implementation of commodities trading software, and the eventual termination of the contract – circumstances which might also arise on a construction project. 

In Triple Point, the court set out a clear and detailed analysis of the relevant case law stretching back to Glanzstoff and provided welcome guidance in relation to the approach to be taken.

  1. The court expressed doubts about the Third Approach because it would allow the employer and the second contractor to control the period for which liquidated damages would run.
  2. While the court recognised that the Second Approach may seek to preserve the rights agreed and accrued under the contract, it considered that this approach was not without difficulty, as it may be artificial and inconsistent to split the assessment of any compensation due to the employer between liquidated and general damages at the date of termination.
  3. The court saw much force in the reasoning in Glanzstoff and emphasised that the First Approach would have to be followed where the contract wording is close to that in Glanzstoff.

Ultimately, the Court of Appeal concluded that the applicable approach will depend on the exact wording of the LD provision itself. Triple Point’s contract provided for liquidated damages “from the due date for delivery up to the date PTT accepts such work”. The court held that this meant that the LD provision would only apply when PTT accepted the completed works from Triple Point, meaning it would apply to Phase 1 of the works (which had been completed), but not the remainder of the works (which had not been completed) and where damages were to be assessed as general damages.

New implications?

Triple Point makes clear that the wording of the contract will be key. In circumstances where the wording of the LD provisions refers to damages for delay until the completion of or acceptance of the works (or a section of it), the First Approach is most likely to apply.

This is important because the wording of the LD provisions in Glanzstoff and Triple Point is analogous to the wording contained in various other standard form construction contracts, such as the FIDIC 4th Edition (1987) Red Book (Clause 47.1) and the JCT 2016 Design and Build Contract (Clause 2.29).

By way of contrast, the 2017 edition of FIDIC (Clause 15.4) expressly provides that, in the event of a termination, liquidated damages will continue to apply from the time for completion of the works up to the date of termination.

Triple Point serves as a strong reminder that:

  1. employers and contractors should carefully consider the LD provisions, and in particular what happens in the event of a termination, before entering into the contract. The courts will look to give effect to what the parties intended and the clearer the contract is, the more likely it is the parties will get what they expect; and
  2. employers should also carefully consider the likely application and impact of the LD provisions before taking a decision to terminate a contract.