What happens to a right to liquidated damages for delay when a contract is terminated? Up until now, there has been a series of conflicting judgments on the point. The Court of Appeal has now provided some welcome clarity in this area.
Triple Point supplied software systems to PTT (a Thai commodities trader). The project provided for payment against milestones but was delayed. After some performance (and some payment), the parties fell out and PTT terminated the contract, concluding the project with a third party.
Triple Point sued for its invoices and PTT counterclaimed for damages including liquidated damages for delay. The Court found as follows:
- In a case (as here) where a contractor fails to complete and a second contractor takes over, there are three potential options: a) the liquidated damages clause does not apply at all; b) it only applies up until the point of termination; or c) it applies until the second contractor completes the contract.
- Here, the Court concluded that the right approach was to award liquidated damages up until the point of termination. It expressed the view, obiter, that option c (the clause applying until completion by the second contractor) was unlikely ever to apply in the absence of express contractual wording to this effect.
- The Court also ruled on the interpretation of a limitation clause finding: a) that an exclusion in relation to 'negligence' did not include a breach of a contractual duty of skill and care; and b) that the limitation clause applied to total liability, including the liability for liquidated damages.
Stephenson Harwood comment
The interpretation of liquidated damages clauses has long been a source of dispute in itself. While this decision was heavily dependent on its facts, it shows an increasing trend for the Courts to respect commercially negotiated limitation clauses and / or attempts to fix liability in the event of default. Accordingly, where possible, liquidated damages clauses should be drafted so as to ensure maximum clarity as to their applicability in the event of termination.
Separately, careful consideration should be given before terminating a contract as to whether a right to liquidated damages might be lost1 (albeit general damages may be available).