Practical Law

This blog may be rather late in the day. Perhaps that’s appropriate, as it touches on the consequences of delay. Also, I’m happy to admit that the Court of Appeal’s decision in Triple Point Technology Inc v PTT Public Company Ltd has already rightly received much comment from others. So one could argue for a blogging equivalent of the five-second rule: if one’s thoughts aren’t quickly launched into the blogosphere, perhaps they should be left to moulder where they lie.

That said, Triple Point directly impacts on commercial and drafting practice in a way most cases simply don’t. (Naturally, I remain a keen student of all TCC cases dealing with adjudication enforcement.) Allowing some longer time for reflection on its ramifications may well justify a four-month rule here – the more so given that practitioners have now had an opportunity to discuss Triple Point with clients. Anyway, that’s my excuse for being late to the ex parte (if you will).

Back to the future

Sir Rupert Jackson’s judgment is characteristically logical and attractively structured. It causes one to look at liquidated damages (LDs) provisions in a different light, in answering the perennial question of the extent to which a contractor remains liable for such damages following termination of its employment. Sir Rupert did this – an added plus for me – by dusting down a relatively elderly Scottish appeal to the House of Lords, British Glanzstoff Manufacturing Co. Ltd. v General Accident, Fire and Life Assurance Co. Ltd.

The gist of Triple Point is that if a contract is worded so that liability for delay LDs effectively depends on the contractor being allowed to complete the works, the liability entirely falls away if termination occurs prior to completion. That’s the case even if the contractor is in culpable delay at the point of termination. In such contracts, LDs and termination are mutually exclusive remedies.

It’s no surprise that the judicial focus in resolving difficult points in construction cases will rest primarily on the actual contractual terms, not more recherché excursions into discussions of principle. Even so, Sir Rupert rather poured cold water on the two alternative answers to the question that had gained traction in recent cases:

• LDs are recoverable only up to the date the contractor’s employment is terminated, or
• LDs remain payable by the contractor post-termination, pending eventual completion of the works by a replacement contractor.

Both remain possible answers, of course. But whether either is correct will depend on the wording of the particular contract. Certainly, Triple Point indicates that the courts won’t lightly endorse the latter alternative: there’s an obvious repugnance in a contractor being liable for delay LDs on a potentially open-ended basis, with no opportunity to mitigate its exposure by completing the works (however late) other than by relying on any liability cap. And Sir Rupert identified some practical difficulties in applying the first alternative (a point to which I’ll return).

What does seem clear is that many contracts – not least those based on JCT terms – will be susceptible to the analysis in Triple Point. The wording in, say, clauses 2.31 and 2.32 of the Standard Form of Building Contact, 2016 edition, is in essence so similar to the relevant provision in Glanzstoff, that it’s hard to resist that conclusion.

Client reaction?

But is the clean cut of judicial logic something that works for clients and contractors? Based on my discussions, I doubt it. Consider the following points that arise if Triple Point fully applies.

• Refund of delay LDs: The employer loses its contractual right to claim any LDs that had previously accrued due, as well as to retain any that had actually been deducted from or paid by the contractor. LDs held by the employer become repayable to the contractor, subject to any set-off the employer can make out for delay-related loss or any other matter. Doubtless, an employer that has terminated a contractor’s employment for any reason associated with delay would be aggrieved to learn that its right to retain delay LDs has ceased – particularly if the contractor is on the edge of insolvency, possibly rendering the right to claim general damages more illusory than real.
• General damages: As the delay LDs have flown off, the employer is left to prove its actual loss. This may be no easy matter. But it’s an exercise that it would have to undertake: a rough cut of it will inform any initial, defensive set-off; a more rigorous assessment will be needed if the employer is to mount a claim for general damages for delay.
• Uncertainty for employers: Clearly, Triple Point could give rise to significant uncertainty for an employer. The issue is exacerbated when other stakeholders are considered. If a contractor is in culpable delay and is terminated, it may be that the employer remains liable to a tenant or forward funder for delay LDs that are no longer definitely passed down to the contractor in full. Even if the contractor is ultimately liable for general delay damages equivalent to the up-line LDs, it may be some time before the employer can prove its loss and recover from the contractor.

This compares unfavourably with LDs, which are a debt due if the contractor’s liability is triggered. So it would not be a great surprise if stakeholders, including banks providing development finance, started to ask developers to proof building contracts against Triple Point. There is some precedent internationally: the FIDIC forms already include wording that preserves the right to claim LDs in a termination situation. Naturally, this is aimed at maintaining certainty of revenue in a project finance context.

• Uncertainty for contractors: LDs protect contractors too, as they crystallise the amount of liability for delay for a given period. But that protection is lost if the LDs regime is jettisoned on termination. I doubt many contractors would be prepared to bet that any proven general damages would be less than the LDs that would otherwise have applied for a period of delay. After all, it’s a rule of thumb that negotiated LDs often represent a significant discount on the employer’s potential loss. And given the binary logic of Triple Point, it’s not easy to see how a contractor could argue that a previously prevailing rate of LDs acts as an upper limit on any general damages for which it may be liable. Similarly, a well-advised contractor may now wish to consider how any liability cap on LDs will fare after termination: won’t it simply bite on thin air?

So my sense of things – borne out over the last few months – is that we’re likely to see both employers and contractors seeking to ensure LDs regimes survive and continue to apply to any period of delay up to the date of termination. This isn’t without some practical difficulty: as Triple Point says, it may be “artificial and inconsistent” for the employer’s delay-related losses to be assessed on the basis of LDs up to the point of termination, but on the basis of general damages thereafter. This has real force: for example, in making a “mixed” damages assessment following termination, just what proportion of the employer’s overall actual losses would be deemed covered by the LDs applicable up to the date of termination?

But while there may not an easy answer to this question, one imagines that the attraction of having a level of certainty up to the date of termination will outweigh any potential difficulty. The problem can be left to be addressed as and when it arises.

Another puzzle?

Triple Point addressed delay LDs. But what about LDs for failing to achieve a target internal area of X square metres or a specified level of performance? These terms are often written on the basis that the relevant assessment determining liability to pay damages takes place on or around practical completion. What if practical completion never occurs under the contract, due to termination? Will these damages also fall away, leaving only a claim for general damages?

Inevitably, much will depend on the particular wording of each contract. But it’s likely that performance LDs will fall away in the context of (say) a power or process plant contract: such damages would only be engaged if the performance tests have been carried out and failed to achieve the guaranteed levels.

However, could the position be different for LDs relating to a failure to achieve a target measured area? Suppose that, at the point of termination prior to practical completion, the contractor had completed all the essential work determining whether a target area could ever be achieved. In that case – at least in principle – there may be little reason to hold that the LDs altogether cease to apply. One could say that the parties have agreed a commuted sum for the losses in question and should stick to their bargain, unless the contract dictates a different result.

But that analysis, if it’s correct, doesn’t seem to hold good if termination occurs much earlier. So I do wonder if Triple Point will also prompt clients, contractors and others to reflect on just what contracts should say on post-termination liability for non-delay matters covered by LDs. It’s a point I’ve already started to discuss in negotiations.