In this case, the Court of Appeal reviewed the law on liquidated damages for delay and held that the contractor was not liable for delay for works it had not completed.

Background

Triple Point Technology (TPT) was a Delaware based company that designed and implemented software for commodities trading. In 2012, TPT contracted with a PTT, a commodities trading company, to provide the latter with a software system.

Under the contract, the project was to be completed in two phases. In phase 1, the existing system would be replaced while in phase two the software would be further developed to accommodate new types of trade. A series of milestones were set up under the contract with payment according to those milestones.

The contract contained two clauses which were of key importance in the case. First, there was a liquidated damages clause at Article 5.3 which stated:

If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by PTT, CONTRACTOR shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.”

Article 12.3 in the contract also provided a cap to liability:

…The total liability of CONTRACTOR to PTT under the Contract shall be limited to the Contract Price received by CONTRACTOR with respect to the services or deliverables involved under this Contract. Except for the specific remedies expressly identified as such in this Contract, PTT’s exclusive remedy for any claim arising out of this Contract will be for CONTRACTOR, upon receipt of written notice, to use best endeavour to cure the breach at its expense, or failing that, to return the fees paid to CONTRACTOR for the Services or Deliverables related to the breach. This limitation of liability shall not apply to CONTRACTOR’s liability resulting from fraud, negligence, gross negligence or wilful misconduct of CONTRACTOR or any of its officers, employees or agents.”

Dispute arose between the parties when TPT failed to complete its services according to the contractual timetable. It completed Stages 1 and 2 of Phase 1 on 19 March 2014 but was 149 days late in doing so. Although PTT duly paid sums in relation to the completion of those stages, it refused to make further payments on the basis that the other milestones had not been met.

TPT maintained that further payments were due on its invoices was not willing to continue working without further payment. As a result, PTT alleged that TPT wrongfully suspended its work and eventually terminated the contract on 15 February 2015. TPT sued in respect of its invoices, and PTT counter-claimed damages, including liquidated damages for delay under Article 5.3

High Court decision

At first instance, Jefford J dismissed TPT’s claim and awarded $4.5 million to PTT on the counter-claim.

She found that TPT was not entitled to further payment from PTT as payment was governed by milestones set out in the contract and those milestones had not been reached.

As for the counter-claim, she held that PTT was entitled to recover for the costs of procuring an alternative system and wasted costs. This was subject to a contract price cap under Article 12.3 of around $1 million.

In addition to that sum, however, she also held that PTT was entitled to liquidated damages under Article 5.3 in the sum of nearly $3.5 million and that this was not subject to the cap.

TPT appealed to the Court of Appeal. It argued, inter alia, that:

  1. Liquidated damages for delay under Article 5.3 was not recoverable.
  2. That liquidated damages should have been subject to the cap under Article 12.3

Court Appeal

The Court of Appeal allowed TPT’s appeal that liquidated damages under Article 5.3 were not recoverable for incomplete works. It also allowed the appeal on ground (2) that the cap should have applied to liquidated damages. It was held that the total liability of TPT could not exceed the contract price.

I. Liquidated damages for delay

TPT’s strongest argument on this ground was that liquidated damages under Article 5.3 did not apply because the work was never completed by TPT. It argued that Article 5.3 only applied where the work was delayed but eventually completed by the contractor.

After a review of the case law, Sir Rupert Jackson giving the judgment of the Court of Appeal, determined that three approaches had been taken in relation to liquidated damages for delay in instances where a contractor fails to complete and a second contractor steps in:

  1. The liquidated damages clause does not apply
  2. The clause only applies up until the termination of the contract
  3. The clause continues to apply until the second contractor achieves completion

Although approach (2) represented the orthodox approach, set out by the textbooks in Keating and Hudson, Sir Rupert Jackson noted at [110] that, “..the question of whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”

On the facts of the present case, Article 5.3 was focused specifically on the delay between the contractual completion date and the date when TPP actually achieved completion. This was evident from the phrase, “up to the date PTT accepts such work,” in Article 5.3 which was interpreted by the Court to Appeal to mean, “up to the date PTT accepts completed work from TPP.” As the contractor did not hand off work to the employer and there was no completion, Article 5.3 could not have applied to any uncompleted work.

It followed that PTT was entitled to recover liquidated damages in respect of TPP’s delay of 149 days in completion of stages 1 and 2 of Phase 1. However, PTT was not entitled to recover for any other delays as TPP did not complete any other sections of the work. Jefford J was therefore wrong to award $3.5 million in liquidated damages, as the correct sum was $154,662.

Although PTT could not recover for those other sums under liquidated damages, it was not deprived of a remedy. As Sir Rupert Jackson goes on to state, “the fact that PPT cannot recover liquidated damages in respect of any other sections of the work does not mean it is left without a remedy for non-completion. Such damages are at large rather than fixed in advance. PTT is entitled to recover damages….assessed on ordinary principles.”

II. Application of the cap

Sir Rupert Jackson went on to state that the liquidated damages for delay were subject to the cap under Article 12.3. This was because Article 12.3 clearly expressed that the total liability of any breaches of contract could not exceed the total amount paid to the contractor for services under the contract.

While Article 12.3 appeared to provide an exception for specific remedies. This applied to the separate caps in respect of each individual breach and was not construed by the Court of Appeal to be an exception to the total liability rule stated earlier in Article 12.3. This was because Article 12.3 appeared to provide a standard remedy for PTT by obliging TPT to make repairs in for breach, or failing that to repay for the services or deliverables subject to breach. The exception for specific remedies was therefore an exception to that standardised remedy, and not to the general liability cap.

It was immaterial that Article 5.3 provided for a specific remedy by way of liquidated damages. It was still subject to the total cap on liability for breach of contract. Since the cap was wholly used up by the award of general damages, PTT was not entitled to recover liquidated damages of $154,662 for delay.

Comment

Triple Point Technology provides useful and needed clarification on the law with respect to liquidated damages clauses for delay. Previously, in GPP Big Field v Solar EPC [2018] EWHC 2866 (Comm), it had been held that the employer’s entitlement to liquidated damages did not cease upon termination. GPP followed authority in Hall v Van der Heiden (No 2) [2010] EWHC 586. In that case, Coulson J justified his decision that the contractor would be liable for liquidated damages for delay post-termination on the basis that the contractor appeared to benefit from a termination of contract in instances where it had failed to complete works. In essence, Coulson J was worried that the costs of delay would be shifted to the employer.

However, there are potential difficulties with the result in GPP and Hall. First it does not sit well with orthodox principles of contract law. When a contract comes to an end as a result of termination the prospective obligations under that contract cease. Those obligations include the obligation to complete the work within a contractually stipulated time frame. Therefore while a contractor would be liable for delays prior to the date of termination since those breaches had already accrued prior to termination, the same would not be true for any delays post-termination.

The orthodox contractual position is supported by the decision in Shaw & Anor v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC) – [40]-[41]:

So far as liquidated damages are concerned, in respect of any period of culpable delay up to the date when the contract is terminated the employer is entitled to recover liquidated damages at the contractual rate… However, after the date of termination the parties are no longer required to perform their primary obligations under the contract and so the contractor’s obligation to complete by the completion date no longer remains and the provision for liquidated damages therefore becomes irrelevant.”

Second, any concern that risks would be shifted onto the employer or that the employer would be left with no remedy are over stated. This is because the employer would still be entitled to ordinary damages for consequential loss that arise as a result of delay. This was precisely the point that Sir Rupert Jackson made at paragraph [113] in Triple Point Technology.

Finally, the position in GPP and Hall raise the problem that the extent of the contractor’s liability for delay would be determined by the employer and the replacement contractor. The contractor has no control, post-termination, over how quickly the employer acts to find a replacement to complete the works, or indeed how quickly the replacement contractor works.

As stated in British Glanzstoff Manufacturing v General Accident [1912] 1 SLT 282, 285, “The contractor is gone. He has got no more power, so to speak, to stop the running of the time…this particular clause, which provides for a penalty per week for delay in completion, seems to me, upon the face of it, necessarily to apply—and to apply only—to a case where the works are finished by the original contractor.

While the Court of Appeal in Triple Point Technology did not authoritatively determine which approach was most suitable, as it depended on the construction of the liquidated damages clause, it did at least cast doubt on the 3rd approach that a liquidated damages clause for delay could extend beyond the date of termination. This suggests that the result in GPP and Hall are exceptional and will most likely not be followed in the future.

Triple Point Technology does however highlight the importance of construing each liquidated damages clause. The fact that Article 5.3 specified that the calculation of delay damages was up until the date that PTT accepts such work impliedly made completion a requirement of the assessment process. It was for this reason that the Court of Appeal applied the approach in British Glanzstoff rather than the orthodox position set out in Shaw.

The result would likely have been different if the liquidated damages clause stipulated a simpler formula. For instance, if the calculation was that TPP was to be liable for each day delayed, assessed according to the contractually stipulated date of completion, then the Court of Appeal may have held that the liquidated damages clause applied until the date of termination.