The recent decision in the Court of Appeal case of Triple Point Technology, Inc. v PTT Public Company Ltd  EWCA Civ 230 challenges certain assumptions typically made in relation to liquidated damages clauses, and is of considerable relevance to the construction industry. The decision related to the interpretation of a liquidated damages clause for delay where the supplier never achieved completion and the contract was terminated. The Court of Appeal held that, given the wording of the clause, it was engaged only where the work was completed by the contractor but not where it was left incomplete, and that in the latter scenario the employer was entitled only to general damages.
We have previously written about this decision here on our Litigation Notes blog. In this e-bulletin, we reflect in further detail on the potential implications of the decision for construction and engineering contracts.
The Facts in Triple Point
In 2013, PTT Public Company Ltd ("PTT", a company engaged in commodities trading) entered into a contract (the "Contract") with Triple Point Technology ("Triple Point", a software development company) to replace PTT's existing Commodities Trading, Risk Management and Vehicle Chartering System ("CTRM System") and to develop the system to accommodate new types of trade. The work was split into Phases 1 and 2 respectively and each Phase was further split into 9 stages or milestones. Triple Point was required to complete the work under each milestone by pre-set dates and would be paid an agreed portion of the Contract Price as it completed the successive stages.
The project proceeded slowly owing to Triple Point's failure to properly plan, resource and manage the project. Triple Point achieved completion of stages 1 and 2 of Phase 1 with a delay of 149 days, but did not achieve completion of any further stages in Phase 1 or any stages at all in Phase 2. While the delay and failure to complete were not disputed, Triple Point refused to carry out further work without being paid. It subsequently suspended work and abandoned the site, following which PTT terminated the Contract.
Triple Point commenced proceedings before the High Court claiming outstanding sums shown on its invoices. PTT raised a defence to these claims and counterclaimed liquidated damages ("LDs") for delay. The High Court dismissed Triple Point's claims and awarded approximately US$4.4 million to PTT on the counterclaim. Triple Point appealed this decision before the Court of Appeal.
Three Interpretations of an LDs Clause
Before the Court of Appeal, one of Triple Point's key grounds of appeal was that the delay LDs clause in the Contract was not engaged and that LDs for delay were therefore irrecoverable. The text of the LDs clause (Article 5.3) (the "LDs Clause") was as follows:
"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, 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." (emphasis supplied)
Triple Point contended that the LDs Clause only applied where work was delayed and subsequently completed and accepted, but not when it was never accepted by PTT.
The Court of Appeal took the view that this was a "formidable argument" and proceeded to analyse existing authorities. The majority of the authorities dealt with scenarios where the original contractor failed to complete the works and a second contractor had to step in. The authorities each appeared to take one of the following three approaches:
- That the LDs clause did not apply at all (Category 1);
- That the clause applied but only to provide an agreed measure of damages up to the termination of the contract (Category 2); and
- That the clause provided an agreed measure of damages until the time the second contractor (i.e. replacement contractor) achieved completion (Category 3).
The Court of Appeal made the following observations in relation to each of the three approaches:
- Regarding Category 1, there was "much force" in the reasoning of the line of authorities and specifically the case of Glanzstoff1;
- While textbooks considered Category 2 to be the "orthodox analysis", it might be "artificial and inconsistent with the parties’ agreement" to categorise the employer’s losses at the pre-agreed LDs rate up to a specified date (i.e. till termination) and then apply general damages thereafter; and
- In relation to Category 3, the Court of Appeal raised doubts as to the correctness of the line of cases on the basis that they allowed the employer and the second contractor to dictate the period of LDs.
The Court of Appeal emphasised that the correct approach would depend on the precise wording of the LDs clause in question. In relation to the LDs Clause in the Contract, the Court considered that this was similar to the clause reviewed in Glanzstoff and held that it had no application in a case where the work was never completed (see text in bold in the LDs Clause above).
Therefore, PTT was entitled to recover LDs only in respect of stages 1 and 2 of Phase 1, but not in relation to any other stages of either Phase 1 or 2. In relation to the incomplete phases, PTT was entitled to the recovery of general damages.
Impact on Construction Contracts
In its judgment, while the Court of Appeal prefaced its views on the three approaches by stating that the correct approach depended on the actual wording of the LDs clause, it demonstrated a preference for the Category 1 approach.
It is not uncommon for parties to include in construction contracts provisions similar to the LDs Clause in Triple Point, often on the assumption that delay LDs continue to apply till termination where the contractor fails to complete the works. The impact of Triple Point is therefore potentially wide ranging.
In this section we consider the potential difficulties with the Category 1 approach where the contract is terminated, the approach taken in standard form construction contracts to LDs and the key considerations in drafting construction contracts including LDs clauses.
Category 1 approach: impact on parties
The Court of Appeal's preference for the Category 1 approach (subject to the caveat about actual wording) potentially gives rise to the following issues:
- In long term public infrastructure projects, it is well recognised that the employer cannot easily prove its actual loss and general damages are unlikely to be an adequate remedy. The survival of a LDs clause notwithstanding termination is therefore an important issue for these projects.
- The difficulty in proving losses may be used by contractors to their tactical advantage. Contractors may weigh up their potential exposure to damages under the LDs clause (especially where there are significant losses for severe delays) against the employer's difficulty in proving general damages and might be encouraged, on balance, to slow down its progress in anticipation of the employer terminating the contract before completion.
- Conversely, the application of a Category 1 approach may be problematic for contractors who have priced the contract based on an agreed level of financial exposure. General damages may not be adequately capped and there may be uncertainty over whether any cap on LDs applies to general damages.
- If the contract in question excludes loss of profit and indirect/consequential loss, certain delay related losses (which would otherwise have been captured by the LDs clause) may be excluded, leading to inadequate recovery by the employer for the contractor's delay.
- In a scenario where the employer deducts sums towards LDs for delayed completion as the project progresses, it is unclear whether it will be entitled to retain these sums on termination if the Category 1 approach applies.
Standard form contracts and liquidated damages
A review of the standard form construction contracts shows that there is no uniform approach to the interplay between liquidated damages and termination provisions:
- Clause 15.4(c) of the FIDIC Silver Book2 (dealing with payment on termination for the contractor's default) states that on termination, the employer is entitled to LDs for the incomplete works between the time for completion and the termination date. FIDIC therefore anticipates the effect of termination on LDs and, accordingly, adopts drafting consistent with the Category 2 approach.
- The JCT Design and Build Contract 2016 is less clear. Clause 2.29 dealing with LDs allows an employer to issue a notice stating that "for the period between the Completion Date and the date of practical completion of the works or [a] Section", it requires the contractor to pay LDs or that it will withhold or deduct such damages from sums due to the contractor. As set out above, whilst an employer may make deductions for missing completion deadlines as the project progresses, it is unclear whether it will be entitled to retain these if the contract is terminated prior to practical completion. This appears to be a risk given that the termination provisions in the JCT do not expressly provide for the effect of termination on the LDs provisions.
- The NEC4 Engineering and Construction Contract (2017) provides for an optional LDs clause as "Option X7", which states that the contractor is liable to pay damages for each day from the completion date to the earlier of completion and/or the date on which the employer takes over the work. Like the JCT, the termination provisions are silent in relation to the operation of the LDs clause in the event of termination prior to completion.
Drafting construction contracts containing liquidated damages clauses
In light of Triple Point, the following considerations should be borne in mind when drafting construction contracts containing LDs clauses:
- Contracting parties must not assume that there is a universal approach in standard forms to LDs provisions on termination. If a construction contract is to be based on/incorporate a standard form, the LDs provisions and their interaction with other key provisions relating to termination and limitations/exclusions of liability need to be carefully reviewed and amended as necessary.
- From the employer's perspective, beware of inserting clauses that stipulate LDs as the sole remedy for delay. Although the position is not entirely clear, such clauses may leave open the possibility that the employer's entitlement to general damages is limited or excluded, particularly if the losses claimed pertain in any way to delay.
- If Categories 2 and 3 represent the preferred approach over Category 1, the LDs provision must be drafted very clearly to reflect this position.
It is evident that the Court of Appeal decision in Triple Point will have a significant bearing on the way that existing LDs clauses are interpreted and the drafting of construction contracts going forward.