The Court of Appeal decision in Triple Point Technology v PTT  EWCA Civ 230 has been the subject of much legal debate. However, nearly a year later the judgment continues to create uncertainty and cause some real concern for clients regarding what happens with liquidated damages following termination.
The key part of the judgment deals with the situation in which the employment of a first contractor is terminated after the contractual completion date but before that contractor has completed the works. The works are then completed by a second contractor. In his judgment, Sir Rupert Jackson LJ acknowledged that there could be three possible solutions to this:
- that the liquidated damages clause does not apply at all to any period of culpable delay by the first contractor;
- that the clause only applies to culpable delays by the first contractor up until the point of termination;
- that it applies until the second contractor achieves completion of the works.
Doubts were expressed regarding the third option and I, personally, would agree with that as a general principle: Subject to the precise words of the contract in question, it would seem harsh to make the first contractor liable for liquidated damages when it is no longer in control of completion of the works.
Prior to Triple Point, subject to a review of the contract, my usual advice to clients would be that the second scenario was most likely to apply and is the ‘right’ result: The contractor was liable for liquidated damages for culpable delay up to the point of termination albeit the contractor might be able to claim an extension of time to reduce or extinguish any period of delay up to termination. After termination the first contractor might be liable for unliquidated damages for delays to completion if the contract provides that the first contractor is liable (in terms) for the extra over costs to the employer of completing the works (as is typical where there is termination for the contractor’s default).
In Triple Point, the Court decided that, under the particular terms of the bespoke contract under consideration, the first scenario applied: The employer had no right to claim liquidated damages for any sections of work that had not been completed by the first contractor but could claim its actual losses from any delays in completion as unliquidated damages. Whilst this might have been the right result for the particular situation before the Court, it has created significant issues for the industry.
A number of commentators have reviewed the industry standard forms of contract against the judgment in Triple Point in order to assess whether the same result might arise under those contracts. It has been suggested that under the JCT, FIDIC and LOGIC standard forms the situation post termination might be the same as in Triple Point.
One of the advantages of liquidated damages is that both parties agree in advance the liability of the contractor and the recovery of the employer in the event of culpable delay. There might also be agreed limits on the total amount of liquidated damages that can be deducted by the employer separate from any overall limits on the contractor’s liability. The removal of the liquidated damages mechanism creates two problems:
- First, the employer has to claim unliquidated damages for any culpable delays by the contractor and so has to prove its actual losses suffered and claim unliquidated damages; and
- Second, the contractor may be at risk for a much greater sum with regard to pre-termination delays than was provided for under the contract by way of liquidated damages.
For both parties, the allocation of risk agreed under the contract (potentially at great time and effort and possibly with the benefit of legal advice) would be done away with. In the case of the contractor, its potential liability to the employer could be far greater than originally anticipated if there is a specific limit on liquidated damages but no limit or a higher limit on unliquidated damages.
It is possible that its liability for actual losses might be mitigated by other provisions that survive termination, such as exclusion or limitation clauses that restrict the types of losses that may be claimed by the employer as unliquidated damages. Those provisions might then cause issues for the employer in terms of recovering unliquidated damages in respect of pre-termination delays. For example, there may be an express exclusion on claiming loss of profit, loss of production or other consequential losses as unliquidated damages although those losses had been taken into account when agreeing the rate(s) of liquidated damages.
It is also worth noting that there is nothing in the judgment in Triple Point that suggests that conclusion only applies to instances of termination for default: It could therefore apply to situations where a contract is terminated by an employer for convenience. Indeed, the possibility of claiming its actual uncapped losses for delay as opposed to pre-agreed and capped liquidated damages might be a factor that encourages an employer to terminate for convenience.
The principle from Triple Point also leads to some confusion where the employer’s right to terminate arises from the accrued liquidated damages the employer is entitled to deduct having reached a particular threshold e.g. 10% of the contract price. The employer might be entitled to terminate on the basis that liquidated damages have reached or exceeded £X but then be precluded from claiming any liquidated damages following termination.
Following the judgment, the unwanted consequences of Triple Point can be avoided by appropriate drafting to ensure that the outcome is the one agreed by the parties. However, that will not assist the parties who entered into contracts before the Triple Point judgment was issued or those parties who, rightly or wrongly, sign up to an unamended standard form contract without seeking detailed legal advice.