A Court of Appeal decision earlier this week has provided authoritative guidance as to the effect of termination on liquidated damages provisions in relation to delay. The decision resolves conflicting authorities on this issue stretching back more than a century. The Court of Appeal’s reasoning suggests that many liquidated damages provisions providing compensation for delay may fall away entirely on termination of the contract, leaving the employer to prove a claim for general damages for delays both before and after termination.
Termination and liquidated damages clauses
Whether a clause entitling an employer to claim liquidated damages for delay will survive termination has been decided inconsistently in previous cases. A House of Lords decision in 1912 (British Glanzstoff Manufacturing v General Accident, Fire and Life Assurance Co) decided that such a clause applied only where the original contractor completed the works and was not applicable upon termination. However, this decision appears to have been overlooked in the modern cases.
More recent cases have held that liquidated damages accrue up until the date of termination, but not thereafter. The employer is then left to bring a general claim for unliquidated damages for post-termination delays. Other recent cases have held that liquidated damages continue post-termination until the works are completed by the employer or a new contractor. The justification for this is said to be that any other approach would reward the contractor for its own default. This was the line taken most recently by the Commercial Court in GPP Big Field v Solar EPC Solutions (click here for our Law-Now on that decision).
Triple Point Technology Inc v PTT Public Company Ltd
PTT entered into a contract for the procurement of software and related services from Triple Point. The contract documents provided for payment by milestones, but also included specific dates for payment. Work under the contract was delayed and Triple Point sought payment according to the dates referred to in the contract documents. PTT refused payment on the basis that the relevant milestones had not been achieved. Triple Point suspended work for non-payment and PTT purported to terminate the contract for Triple Point’s default.
Among other issues in dispute, a question arose as to whether PTT could claim liquidated damages for delay. The clause in question required Triple Point 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”. The TCC held that PTT was entitled to liquidated damages up until the date of termination in respect of incomplete milestones.
The Court of Appeal
The Court of Appeal upheld Triple Point’s appeal on this point and found that no liquidated damages accrued for incomplete milestones in circumstances of termination. Lord Justice Jackson set out the three inconsistent lines of authority identified above, noting that British Glanzstoff had not been cited in the modern cases despite it being “a decision of our highest court, which has never been disapproved”.
Although the outcome in each case depends on the precise wording of the clause in question, the Court of Appeal expressed doubts about the cases which permit liquidated damages for delay to persist beyond termination. This echoes criticism made by commentators in relation to these cases.
The Court also identified difficulties with the view, favoured by most textbooks, that liquidated damages apply up to the date of termination, but not beyond. Whilst this might be said to preserve accrued rights, it may be artificial to divide the employer’s right to damages for delay into a period of liquidated damages prior to termination and a period of general damages after termination: “It may be more logical and more consonant with the parties' bargain to assess the employer's total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract.”
The clause before the Court specifically referred to liquidated damages accruing “up to the date PTT accepts such work”. This was found to be similar to that considered in British Glanzstoff in that the completion of the work was expressly contemplated. Accordingly, the proper interpretation was that the entitlement to liquidated damages in respect of incomplete milestones fell away entirely upon termination and was replaced by a right to claim general damages for delay, subject to proof by PTT.
Conclusions and implications
This is an important Court of Appeal decision providing significant clarity in a controversial area of the law. Whilst each case will depend on the drafting of the clause in question, it appears that clauses which refer expressly to liquidated damages accruing until the completion of the works are more likely to fall away entirely upon termination in accordance with the British Glanzstoff decision. A large number of construction contracts are drafted in this way, including the JCT and FIDIC forms.
Employers considering the termination of a construction contract where the contractual date for completion has been overrun should carefully consider the implications of this decision. Termination in such circumstances may mean that any entitlement to liquidated damages for delay no longer applies, requiring the employer to prove actual delay losses. These may be more or less than the level set for liquidated damages – or difficulties of proof may in some circumstances render them irrecoverable. Arguments may also arise as to whether the liquidated damages provision, albeit inapplicable, remains relevant to the assessment of any claim for general damages.
Triple Point Technology, Inc v PTT Public Company Ltd  EWCA Civ 230.
GPP Big Field LLP & Anor v Solar EPC Solutions SL  EWHC 2866 (Comm).