REUTERS | Thomas Peter

The Terminator’s dilemma

The jurisprudence on the effect of termination on the recoverability of liquidated damages for delay has many things in common with the Terminator film franchise. First, both began ages ago and seem likely to run on and on forever. Second, the instalments in each are of variable quality and sometimes appear to have been produced in ignorance of what came before. Third, each concerns a “Terminator”: an antagonistic figure resolved to bring things to an abrupt end, whether that be via (i) terminating a contract or (ii) the remorseless annihilation of all human life. 

Triple Point v PTT

Much like Terminator Salvation (2009), the fourth instalment in the franchise, the decision of the Court of Appeal in Triple Point Technology Inc v PTT Public Company Ltd has not received good reviews in all quarters. The case concerned claims arising out of delay by Triple Point in providing a software system to PTT. After the late completion by Triple Point of the first two contractual milestones, PTT stopped paying Triple Point, terminated the contract and procured an alternative system from another provider.

Triple Point claimed that further payments were due from PTT, and PTT made a counterclaim for, among other things, liquidated damages for delay. Triple Point argued that the liquidated damages provision in the contract only applied where its work was delayed but subsequently completed and accepted. It did not apply where the work was never completed.

Sir Rupert Jackson accepted this submission by reference to a decision of the House of Lords dating from the early twentieth century, namely British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co Ltd. The relevant clause in that case read:

“24. If the contractor fail to complete the works by the date named in clause 23…and the architect shall certify in writing that the works could reasonably have been completed by the said date…the contractor shall pay or allow to the employer the sum of £250 sterling per week for the first four weeks, and £500 per week for all subsequent weeks as liquidated and ascertained damages for every week beyond the date…during which the works shall remain unfinished…”

On the meaning of these words, Lord Haldane LC said:

“I read it as meaning that if the contractors have actually completed the works, but have been late in completing the works, then, and in that case only, the clause applies. Under the circumstances in which this appeal comes before the contractors have not completed the works…”

Both Lord Haldane LC and Lord Shaw said the liquidated damages provision represented a “separate code” to the employer’s right to remove a contractor in delay from the project. Both appear to have regarded these rights as mutually exclusive.

In Triple Point, the relevant clause read:

“5.3. If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by PTT, CONTRACTOR shall be liable to pay the penalty at the rate of 0.1%…of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…”

Sir Rupert Jackson said:

“This clause, like clause 24 in Glanzstoff, seems to be focused specifically on delay between the contractual completion date and the date when Triple Point actually achieves completion. The phrase in article 5.3 ‘up to the date PTT accepts such work’ means ‘up to the date when PTT accepts completed work from Triple Point’. In my view Article 5.3 in this case, like clause 24 in Glanzstoff, has no application in a situation where the contractor never hands over completed work to the employer.”

As to the broader legal principles which apply to liquidated damages for delay where there has been a termination, Sir Rupert identified three categories of case, namely:

Indicating that he did not “think that the Glanzstoff principle can be confined to cases where the first contract was terminated before the contractual completion date”, Sir Rupert then said this:

“I see much force in the House of Lords’ reasoning in Glanzstoff. In some cases, the wording of the liquidated damages clause may be so close to the wording in Glanzstoff that the House of Lords’ decision is binding.

The textbooks generally treat category (ii) as the orthodox analysis, but that approach is not free from difficulty. If a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision. Although accrued rights must be protected, it may sometimes be artificial and inconsistent with the parties’ agreement to categorise the employer’s losses as £x per week up to a specified date and then general damages thereafter. It may be more logical and more consonant with the parties’ bargain to assess the employer’s total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract. In my view, the question 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 upon 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.”

Time to say “Hasta la vista, baby” to accrued rights?

This passage has been controversial. As Coulson LJ wrote in a paper presented to the Society of Construction Law at a conference hosted in London on 19 September 2019:

“[Triple Point] might be said to be authority for the proposition that, if a contractor’s performance is poor, but still reaches an acceptable standard in the end, liquidated damages will apply, but if it is totally disastrous, so that the work is never accepted and the employer has to go elsewhere, it will not. On the face of it, that might seem a strange result. There is a respectable case for saying that liquidated damages accrued at least until the contract was terminated. On the other hand, for the reasons explained by Sir Rupert, there is both logical force, and high authority, in support of his approach.”

Writing in the Edinburgh Law Review, Davie and Dowers take this argument a step further:

“It seems possible, even likely, that the approach in Triple Point will create situations in which a contractor in delay will consider its interests best served by neglecting to complete the works and taking its chances defending a claim for general damages.”

This latter quotation in particular is a damning assessment of Triple Point, surely comparable with the “Tomatometer” rating of “Rotten” given to 2019’s Terminator: Dark Fate on the Rotten Tomatoes website. Is the assessment fair?

I would suggest that the outcome in Triple Point was correct on the facts but that the Court of Appeal’s broader observations as to the legal position ought to be treated with a degree of caution. I say this because:

  • In Triple Point, the language of the clause plainly supported the construction adopted by the Court of Appeal: the only meaning which could rationally be attributed to the words “such work” in the phrase “up to the date PTT accepts such work” in Article 5.3 was work which had been delivered (and was therefore capable of acceptance). The Court of Appeal’s conclusions that Article 5.3 (i) could not operate unless and until Triple Point’s work was delivered; and (ii) did not operate in circumstances where PTT had, instead of waiting for Triple Point to deliver, obtained an alternative system from another provider, were therefore justified.
  • However, the proposition that the reasoning in Glanzstoff has “much force” and ought to be applied more widely is open to doubt. A key factor in the judgments in Glanzstoff was that the power to oust the contractor from the works under clause 26 was “really a separate code” from the right to levy liquidated damages under clause 24. This may have been right as a matter of construction of the contract in Glanzstoff, but in modern contracts it will not usually be the case that an employer’s contractual rights to terminate and to levy liquidated damages respectively are, on a proper interpretation of the agreement, to be regarded as mutually exclusive. (Nor was it the position in Triple Point itself: certainly, the Court of Appeal did not say so in its judgment.)
  • While the Court of Appeal was, of course, right to say that all will ultimately depend upon the wording of the clause in question, it is difficult to imagine a situation in which it would be “more logical and more consonant with the parties’ bargain” to deprive an employer of an accrued right to liquidated damages and replace it with a (generally less valuable) right to general damages in circumstances where a contractor has abandoned or repudiated the contract. The very notion that the employer could lose such an accrued right by justifiably and lawfully terminating the contract would be (and in my experience, usually is) greeted with surprise by those in the industry.
  • More broadly, the effect of Triple Point is to put employers in the invidious position of having to choose between (i) keeping a recalcitrant contractor on site in order to retain the right to levy liquidated damages in due course, which might be unattractive for all sorts of project-specific and commercial reasons; and (ii) terminating the contract and thereby accepting both the risk of losing the right to liquidated damages and the potential burden of having to present and prove a claim for general damages for delay. Not only is this unlikely to reflect parties’ intentions, but it can also be said to be objectionable in principle insofar as it has the potential to reward contractors for breaking their contracts: see the observations of Coulson LJ, and Davie and Dowers, above.

PBS Energo AS v Bester Generacion UK Ltd

Triple Point was decided in March 2019. There has not yet been sufficient consideration of the decision by the lower courts to say with confidence what its legacy will be. However, the judgment was addressed recently by Cockerill J in PBS Energo AS v Bester Generacion UK Ltd, a case about the termination of a contract to construct a biomass plant.

One of the issues was whether Bester’s claims for liquidated damages were ruled out by clause 15.7, an actual net loss clause, in circumstances where the plant was never built. It was argued, by PBS, that clause 15.7 represented a “complete code” by which Bester was fully compensated for its losses occasioned by the non-completion of the project, and should be regarded as operating to the exclusion of the liquidated damages provision.

Cockerill J rejected this argument, stating:

Triple Point was a case which was driven by the clause in question – so the Liquidated damages clause was not apt to cover a situation where there was no completion. However, the judgment makes clear that what is perhaps the orthodoxy is that the clause applies until the termination of the first contract – and also that in deciding which of three outcomes (no application, application up until termination, and application beyond termination) is correct in any given case will turn on the wording of the clause in each case.”

She went on to point out that clause 21.9 of the contract specifically provided that “save as otherwise provided in this Contract (a) termination of this Contract shall be without prejudice to any accrued rights and obligations as at the date of termination”. This, she held, made it:

“… plain that termination operates without prejudice to accrued rights or obligations.”

In view of the emphasis placed by the court on the primacy of the wording of the clause in each case, one cannot read too much into this judgment. However, it is of some interest that Cockerill J reaffirmed that the usual position is that liquidated damages will apply until termination of the contract since, as set out above, in Triple Point the Court of Appeal cast doubt upon that analysis (“the orthodox analysis…is not free from difficulty”). Insofar as the judgment tells us anything new, it is that the lower courts may be slow to adopt Sir Rupert’s invitation to depart from orthodoxy.

“I’ll be back”?

However, with Triple Point presently under appeal to the Supreme Court, and rumours of yet another Terminator film doing the rounds online, neither Triple Point, employers nor humanity at large can sleep easy in their beds just yet.

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: