UK: Termination And The Inapplicable Liquidated Damages Clause

Until the recent Court of Appeal judgment in Triple Point Technology Inc v PTT Public Company Ltd, the generally held view was that in delay cases where the contract works are not completed by the original contractor, liquidated damages will be recoverable until the point of termination (at least). This is no longer the case - in the Triple Point judgment, the Court of Appeal found that in this scenario (based of course on the wording of that particular contract), the liquidated damages provision was inapplicable.

Background

  • Triple Point is a US company specialising in the design and provision of software for use in commodities trading. PTT is a company that undertakes commodities trading. In early 2013, PTT appointed Triple Point to develop, install and implement complex software. The contract provided for milestone payments and completion in stages (the Contract).
  • The work did not go well, with under-resourcing by Triple Point, as well as a failure in the software provided which did not have the functionality specified in the Contract. Disputes arose over payments Triple Point alleged were due - PTT's position was that key milestones triggering payments had not been achieved.
  • The work actually completed by Triple Point was 149 days late. Triple Point submitted an invoice for $1,038,000 for the work done which was paid by PTT.
  • In May 2014, Triple Point suspended work and left the site, contending that other payments due under the Contract had not been made. PTT maintained that Triple Point had wrongfully suspended work and, in February 2015, terminated (or purported to terminate) the Contract.

Technology and Construction Court (TCC) proceedings

Triple Point commenced proceedings in the TCC seeking outstanding payments allegedly due under the Contract. PTT counterclaimed for damages both for delay, and damages due on termination of the Contract.

In short, the TCC dismissed Triple Point's claim in its entirety and awarded PTT approximately £4.5m on its counterclaim. The Court found that Triple Point was not entitled to suspend work and in doing so, was in repudiatory breach of contract. The termination by PTT was valid under the Contract or at common law.

Two clauses of the Contract were pertinent to the claim for damages:

  • Article 5 which provided for delay damages at 0.1% of undelivered work per day of delay; and
  • Article 12.3 which provided for damages to PTT subject to a cap.

The damages awarded to PTT were in three parts:

  1. the costs of procuring an alternative software system;
  2. wasted costs;
  3. liquidated damages for delay (LDs) of approximately $3.5m.

Parts one and two (together, general damages under the Contract) were held to be subject to a contractual cap set out in Article 12.3 of the Contract, limiting the total recoverable amount for one and two combined to $1,038,000 ie the amount of the fees that had been paid to Triple Point.

Court of Appeal (the CA)

Triple Point appealed. The key areas of the CA consideration (with the leading judgment given by Sir Rupert Jackson LJ) are reviewed below.

What was recoverable by way of LDs?

The CA reviewed previous case law relating to the recoverability of LDs where the contractor fails to complete the contractual works, which are then completed by a third party. Sir Rupert Jackson LJ described three distinct approaches to this scenario that have emerged from the judgments:

  1. the LDs clause does not apply;
  2. the LDs clause only applies up to termination of the first contract; or
  3. the LDs clause continues to apply until the second contractor achieves completion.

In summary (while acknowledging that case law has not been consistently cited/applied, possibly contributing to these differing approaches), Sir Rupert Jackson LJ concluded that "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 on the wording of the clause itself".

Focusing here on the LDs wording in Article 5.3 of the Contract:

"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 ... 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....." [emphasis added].

Based on this part of the clause in particular, Sir Rupert Jackson LJ's conclusion was that the LDs provision had no application where completed work was not handed over to the Employer. The CA therefore disagreed with the TCC as to the extent of LDs recoverable by PTT and held that Article 5.3 was only applicable in relation to sections of the works that had been completed (but completed late). PTT could not recover LDs in respect of any sections that had not been completed. This was not to say that in those circumstances, PTT would be without a remedy - it would still have a remedy in general damages- subject to the relevant provisions of the Contract (including Article 12).

PTT was able to recover LDs under Article 5.3 for the delay of 149 days to the parts of the works that were completed - this amounted in principle to $154,662.

Did the cap on liability extend to the LDs?

Did a cap limit Triple Point's total liability in damages (liquidated or otherwise)?

PTT's contention was that the Article 12.3 cap should not have been applied to any of the damages. Triple Point argued that the cap applied to all the damages claimed, including LDs.

The TCC had held that the Article 12.3 cap did not apply to the LDs for delay.

The CA did not agree on this point and held that Article 12.3 imposed an overall cap on the contractor's total liability. This meant that the LDs for the 149 days of delay to the works that had been completed by Triple Point were not recoverable as the cap had already been reached.

Commentary

Prior to the decision, the generally held view was that in this scenario, LDs would be payable up to termination. While acknowledging that all will depend on the particular contract wording, the CA was clear in its decision in Triple Point that the LDs clause had no application in relation to works not completed by the original contractor, stating "[t]here is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss".

This judgment may have been unexpected but it adds clarity in this area. A review of standard provisions should now be considered if you want to ensure that the LDs clauses do not become inapplicable following termination.

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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