In a judgement that has been widely welcomed, the UK Supreme Court ("UKSC") has ruled that where a party had accrued a right to claim liquidated damages for delay, that right survives the subsequent termination of the contract in circumstances where the work remained incomplete at the time of termination.

In reaching its conclusion in Triple Point Technology, Inc v PTT Public Company Ltd, the UKSC reaffirmed the 'orthodox approach' to interpretation of liquidated damages provisions.

Background

PTT Public Company Ltd ("PTT") had entered into a contract with Triple Point Technology Inc ("Triple Point") for the supply of software services. The contract had two phases. Phase 1 was delivered, albeit 149 days late, however Phase 2 was late and incomplete. PTT refused to make further payments as the milestones had not been reached. Triple Point refused to undertake further work without payment leading PTT to terminate the contract for wrongful suspension. At the time the contract was terminated Phase 2 remained incomplete.

Triple Point raised proceedings in the Technology and Construction Court ("TCC") seeking payment of outstanding invoices and PTT counterclaimed for both ordinary and liquidated damages.

The key question for the courts was whether PTT was entitled to claim liquidated damages for late delivery of Phase 2 in circumstances where at the point of termination that work was incomplete.

The clause of the contract regulating the right to apply liquidated damages was:

If [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, [Triple Point] 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

At first instance the TCC dismissed Triple Point's claim and awarded PTT nearly US$3.5m in liquidated damages. Triple Point appealed. In what was a controversial judgement, the Court of Appeal set aside the award of liquidated damages on the basis that the words "up to the date PTT accepts such work” meant that PTT was not entitled to claim liquidated damages in circumstances where, due to the termination, it had not accepted works as having been completed by Triple Point.

This was a significant deviation from the accepted wisdom that liquidated damages continued to accrue up to termination, with the remedy after termination being general damages.

The UKSC decision

The UKSC reinstated the conventional and accepted approach that in the event of termination, liquidated damages would ordinarily be claimable in respect of any delays up to the point of termination, irrespective of whether work had been complete. After termination general damages would apply.

The court observed that this was consistent with the commercial purpose of liquidated damages, which is to provide certainty and predictability in ascertaining delay related damages, and those general principles should be well understood by contracting parties. To deviate from that would be inconsistent with parties' understanding and would require clear and unambiguous provisions in the contract. In this case the wording of the clause in question did not achieve that.

The court also noted that to deviate from the established position could have the unintended consequence of incentivising a contractor to breach its contract in circumstances where it was in delay so as to avoid the applications of liquidated damages.

This decision provides welcome clarity for both employers and contractors of the general approach.