Guidance from the Supreme Court on liquidated damages

The Supreme Court provided some welcome clarification on the law relating to liquidated damages in the recent judgment of Triple Point Technology Inc (Respondent) v PTT Public Company Ltd (Appellant) (2021). In doing so, the Supreme Court concluded that the Court of Appeal’s “radical re-interpretation” of the law on liquidated damages clauses was “inconsistent with commercial reality and the accepted function of liquidated damages”.

The appeal concerned a software contract where the parties had agreed liquidated damages for delay. Article 5.3 of the contract provided for liquidated damages “up to the date PTT accepts such work”. The main issue to be decided by the Supreme Court was whether PTT was entitled to liquidated damages for delay in circumstances where work had not been completed or accepted before the contract was terminated.

In the Court of Appeal, Sir Rupert Jackson stated that “much will turn on the precise wording of the liquidated damages clause in question”. He went on to hold that this particular clause had “no application in a situation where the contractor never hands over completed work to the employer”.

The Court of Appeal decision was controversial. It was widely regarded in construction law circles as departing from the generally understood position on liquidated damages clauses.

“Well-trodden” territory

Giving the leading judgment, Lady Arden disagreed with Sir Rupert Jackson’s view that where a construction contract is abandoned or terminated “the employer is in new territory for which the liquidated damages clause may not have made provision”. Lady Arden concluded this was “well-trodden” territory and that it was “unnecessary for the liquidated damages provisions to provide for it”. Lady Arden also disagreed with the apparent significance that the Court of Appeal had placed on British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd (1913) (HL).

Lady Arden said that where parties do provide for liquidated damages to terminate on completion and acceptance of the work, it was “more probable” that the parties intended liquidated damages nevertheless to apply up to the date of termination. This interpretation met “commercial common sense”. If necessary, one could interpret the words in article 5.3 allowing liquidated damages “up to the date PTT accepts such work” as meaning “up to the date (if any) PTT accepts such work”. This interpretation also prevented the odd situation where an employer’s accrued rights to liquidated damages might become retrospectively extinguished upon a later termination (a situation which the Court of Appeal’s decision appeared to contemplate).

Lord Leggatt gave a separate judgment, agreeing. He noted that no standard form could be found that provided for the payment of liquidated damages only where a contractor actually completes the work. That reinforced his view “that such a clause is not one which parties to a commercial contract would think it sensible to choose”.

Therefore, the Supreme Court held that article 5.3 of the contract provided for liquidated damages to be payable to PTT where Triple Point did not discharge its obligations within the time specified. Where there was no acceptance of the work, it did not follow that there would be no liquidated damages.

Purpose of liquidated damages clauses

The Supreme Court has now given helpful guidance on liquidated damages clauses:

• Liquidated damages clauses are agreed by parties to provide a predictable and certain remedy for an event (normally a delay to completion).
• These are a standard feature of construction and engineering contracts and usually provide for damages to be paid for each day or week of delay in the contractor completing the works once the contractual completion date has passed.
• The provisions benefit the employer as it does not have to quantify its loss “which may be difficult and time-consuming” and may lead to costly disputes. These provisions also provide the employer with certainty in relation to the amount it will recover in compensation for delay.
• Liquidated damages clauses also benefit the contractor by limiting the contractor’s exposure to potentially open-ended claims for delay.
• Termination of a contract will only have a prospective effect on the parties’ rights and obligations. If an entitlement to liquidated damages has accrued at the time of termination, “there is no reason - in law or in justice - why termination of the contract should deprive the employer of its right to recover such damages, unless the contract clearly provides for this”.
• Unless the contract provides clear wording to the contrary, the accrual of liquidated damages comes to an end on termination of the contract.
• After the contract is terminated “the parties must seek damages for breach of contract under the general law”. The employer is at liberty to prove any claim that it might have for unliquidated damages, subject to the usual rules as to reasonable foreseeability and mitigation.
• There is no need to specifically provide for the effect of termination in the contract, parties can take this “consequence as read”.

Comment

Contractual clauses dealing with delay remain an important risk management tool for the parties. The Supreme Court’s decision provides important guidance on the interpretation and application of these provisions. The decision restores the orthodox position that liquidated damages clauses apply up to termination of a contract, but not thereafter. Clear wording must be used if parties want to agree a different approach.