Practical Law

Imagine this: a contractor undertakes to perform certain works by a specified date, and agrees to pay liquidated damages (LDs) if it does not complete by that date (subject to any entitlement to an extension of time). The contractor, through its own fault, is late and does not complete by the specified date. In fact, the contractor is very late and, in the end, the employer terminates the contract before the works are completed (as it is entitled to do under the contract).

For those of us involved in the construction industry, this scenario does not require too much imagination.

In my previous blog post, I said that whether LDs could be recovered after termination of the contract would appear on my hypothetical construction law exam paper. I was concerned about how and whether the unlucky student sitting this exam question would get to the right answer.

It turns out that there was a more fundamental problem – I asked the wrong question. The recent Court of Appeal decision in Triple Point Technology Technology Inc v PTT Public Co Ltd shows that I should have asked whether LDs are recoverable at all in the event of termination. 

Before considering the most recent case, let’s take a look at the previous case law.

The starting point

The line of relevant cases starts with the House of Lords case of British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp Ltd (1912). In this case, the court held that an LDs clause only applied where there was a delay in completion by the contractor itself. Where the work was completed by others, the employer was not entitled to recover any LDs and must prove the damage suffered.

LDs are not recoverable after termination

Jumping forward nearly a century, in Greenore Port v Technical & General, the contractor went insolvent before the works were complete. Jackson J (as he then was) in the TCC decided that the claimant was entitled to recover LDs for delay up to the date of termination and general damages thereafter.

In Shaw and another v MFP Foundations and Pilings Ltd, the contract in question stated that LDs would be £nil, meaning that no damages were recoverable for delay. Edwards-Stuart J in the TCC found that the LDs provisions in the contract applied up to the date of termination. After that, he held that the requirement to pay LDs at the contractual rate (or nothing, if so provided) falls away after termination.

The position in Greenore and Shaw is the accepted position in the two leading construction law case books. Keating says:

“If the contract is brought to an end by determination or otherwise, then prima facie all future obligations cease and no claim can be made for liquidated damages accruing after determination. But there may be some special clause which has the effect of keeping the provision for payment of liquidated damages alive although the work has been taken out of the hands of the contractor.” 

Hudson is in agreement with Keating:

“Further liquidated damages are only recoverable for a period when the Contractor is in a position to complete the work. Therefore, after termination, only general damages will be recoverable.”

LDs are recoverable after termination

In contrast to the above cases, there have been two first instance cases which decided that LDs are recoverable after termination.

GPP Big Field LLP v Solar EPC Solutions SL concerned EPC contracts relating to solar power generation plants in the UK. GPP claimed damages (both liquidated and unliquidated) for late and/or non-completion of the works. The case was heard in the commercial court by Mr Richard Salter QC, sitting as a deputy High Court judge, and one of the questions he was asked to consider was whether the contractor was liable for LDs after the date of termination of one of the EPC contracts.

The judge held that LDs would continue until the actual date of commissioning of the plant, despite that the contract had been terminated prior to this point.

Similarly, in Hall and another v Van Der Heiden, Coulson J (as he then was) held:

“Accordingly, as a matter of principle, I reject the submission that the defendant’s liability to pay liquidated damages came to an end when the employment was terminated”.

The principle referred to was that, if LDs ceased to be payable upon termination, the contractor would be rewarded for its own default (it being the contractor’s default that led to termination).

I therefore concluded in my previous blog post that a Court of Appeal decision on the issue would be very helpful. And now we have one!

Triple Point v PTT

Triple Point v PTT concerns a contract in which Triple Point agreed to provide a software system and related services to PTT.

Work proceeded slowly because Triple Point failed to properly resource the project. The work was broken down into stages, and Triple Point achieved completion of some of the stages significantly behind schedule. The parties fell out over what sums were due to Triple Point and eventually PTT terminated the contract pursuant to its terms. At the point of termination a significant portion of the work was still outstanding.

One of the issues for the judge was whether PTT could claim LDs for elements of the work that had not been completed at the time of termination. PTT claimed LDs from the specified completion dates in the contract, up to the date of termination (not beyond).

Triple Point argued that these LDs were not recoverable at all, because the work was never completed and accepted by PTT. Triple Point argued that the LDs clause only applied when the work was delayed but subsequently completed and accepted by PTT.

In the Court of Appeal, Sir Rupert Jackson relied heavily on the reasoning in Glanzstoff, holding that:

“…Whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend on the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”

He held that the clause in question, which focused specifically on delay between the contractual completion date and actual completion, had no application in a situation where a contractor never completes the work.

Although Sir Rupert Jackson emphasised that every case will turn upon the wording of the clause on question, he cast doubt on the decisions in Hall and GPP. He even said that he may have decided Greenore differently had Glanzstoff been cited to him.

In my view, this decision will come as a surprise to many who have considered this issue in the past. It had previously been accepted that LDs would be recoverable at least up to the point of termination.

The decision in Triple Point v PTT turned very much on the wording of the LDs provision in question but, in my experience, the wording used was not particularly unusual. Parties to construction contracts should think carefully about whether they want their LDs provisions to apply in the event of termination and draft accordingly. Thought should also be given as to how the termination provisions interact with the LDs provisions. It will be interesting to see whether parties start inserting amendments to the standard forms to address this decision.