UK: Liquidated Damages And Unfinished Works

Last Updated: 23 September 2019
Article by Shaun Tame

Key points: 

  • The Court of Appeal handed down its judgment in Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230 on 5 March 2019 
  • Sir Rupert Jackson delivered the leading, unanimous judgment 
  • This decision provides guidance as to the effect of termination of a contract on liquidated damages provisions
  • In particular, guidance was given on whether liquidated damages continue to apply in respect of incomplete works after termination until the works in question have been completed
  • Following Triple Point, parties will consider whether it is appropriate to cater expressly for what happens in respect of liquidated damages in the event of terminatio

Triple Point Technology Inc (Triple Point) is a company based in Delaware, which designs, develops and implements software for use in commodities trading. PTT Public Co Ltd (PTT) is a company which, amongst other activities, undertakes commodities trading. PTT is based in Thailand.

PTT entered into a contract with Triple Point for the procurement of software and related services. Phase 1 would replace the existing system and Phase 2 would involve the development of the system and accommodate new types of trade.

The contract provided for payment on milestones and for payment on specific calendar dates. Work under the contract was delayed and Triple Point sought payment on the basis of the dates referred to in the contract. PTT refused payment on the basis that the relevant milestones had not been achieved. Triple Point suspended work for non-payment and PTT purported to terminate the contract for Triple Points default.

A question arose as to whether PTT could claim liquidated damages for delay. The clause in question required Triple Point to pay:

'... the penalty at the rate of 0.1% (zero point one per cent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work.'

While it will depend in each case on the specific drafting of the liquidated damages provision, in this case, the court held that PTT was entitled to liquidated damages up to the date of termination in respect of work handed over late but before termination. The liquidated damages provision had no application in respect of work which was not handed over by termination: instead, general damages applied in respect of those.

The court's view

Sir Rupert stated:

'[112] Let me now turn to Article 5.3 [the Liquidated damages clause] in the present case. 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.

[113] The consequence of this analysis is that PTT is entitled to recover liquidated damages of $154,662 in respect of Triple Point's delay of 149 days in completing stages 1 and 2 of Phase 1. PTT is not entitled to recover liquidated damages for any of the other delays. That is because Triple Point did not complete any other sections of the work. The fact that PTT cannot recover liquidated damages in respect of any other sections of the work does not mean that it is left without a remedy for non-completion. Such damages are at large, rather than fixed in advance. PTT is entitled to recover damages for breach of Articles 5 and 12 of the CTRM contract, assessed on ordinary principles.'

The authorities

In the event of termination, how do liquidated damages provisions operate in respect of unfinished works? Sir Rupert explained that, in answering this question, the authorities are split into three categories:

  • Liquidated damages do not apply and general damages are recoverable instead: British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143; Chanthall Investments Ltd v F G Minter Ltd 1976 SC 73; Gibbs v Tomlinson (1992) 35 ConLR 86.
  • Liquidated damages apply up to termination but not thereafter. Instead, after termination, general damages are recoverable: Greenore Port Ltd v Technical & General Guarantee Co Ltd [2006] EWHC 3119 (TCC); Shaw v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC); LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2011] SGHC 163; Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC).
  • Liquidated damages apply until the works are completed under a separate contract by a replacement contractor: Hall v Van der Heiden [2010] EWHC 586 (TCC); Crestdream Ltd v Potter Interior Design Ltd (2013) HCCT 32/2013; GPP Big Field llp v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).

Sir Rupert stated that the textbooks treat the second category as the orthodox. He expressed his doubts about the cases in the third category. He did not analyse all of the cited cases. The problem with the third category, as expressed by Sir Rupert, in general terms, is that if it is correct then the employer and the replacement contractor control the period for which liquidated damages run. Essentially, however, the operation of liquidated damages clauses depends on their drafting.

Sir Rupert saw much force in the decision in Glanzstoff. In that case, a building contractor became insolvent before it completed the works. The employer, British Glanzstoff, retained another contractor and claimed against the first contractor's bondsman for recovery of liquidated damages for the pre-termination period of delay and the post-termination period of delay.

That contract contained a liquidated damages clause (cl 24) and another clause (cl 26) providing that, if the contractor ceased working, the employer could engage another contractor to complete the works. The employer could then recover the additional costs incurred from the original contractor.

The Scottish Court at first instance and the Court of Session found against British Glanzstoff who appealed to the House of Lords. On that appeal, Sir Rupert noted:

'[85] Glanzstoff appealed to the House of Lords. There was a stellar line-up of counsel. The Lord Advocate of Scotland, leading Alfred Hudson KC (author of Hudson's Building Contracts) appeared for the appellant. Richard Atkin KC (the future Lord Atkin) appeared for the respondent ...'

He continued:

'[87] Lord Haldane LC gave the leading judgment. He characterised clause 26 as "an enclave in the contract by itself providing for a special remedy". He held that clause did not apply in the instant case for two reasons: ... first of all, that is altogether inapt to the provisions made by clause 26, which contain a complete code of themselves; and secondly, because upon its construction 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 us the contractors have not completed the works; on the contrary, they have been ousted from the works by the employers under their powers given them by clause 26. I am therefore of the same opinion as the learned Judges in the Court of Session, who were unanimous in holding that clause 24 has no application to the present case ...

[88] The Earl of Halsbury and Lord Atkinson agreed with the Lord Chancellor's speech.

[89] Lord Shaw delivered a separate speech to similar effect. At the end of the first paragraph he said:

"... Clause 24, in my judgment, gives no foundation for such a hypothetical claim. It only applies to the failure by Brown himself to complete this contract timeously, but it does not apply to a state of matters in which, under section 26 of the contract, a different remedy has been adopted under what is really a separate code."'

Sir Rupert then considered a series of authorities. One was from 1976 following Glanzstoff and involving a 1967 edition of the JCT, a Scottish case heard in the Inner House of the Court of Session and then a series of English cases in the nineties and noughties which did not cite Glanzstoff. He stated:

'[109] 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. That is a decision of our highest court, which has never been disapproved. Unfortunately, Glanzstoff appears not to have been cited in most of the post 1992 decisions.

[110] 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.'

How does Triple Point apply to the JCT main contract forms?

The JCT liquidated damages provisions are within s 2. In summary, for liquidated damages to start running, a certificate of non-completion must have been issued. Also, if the employer takes early possession before practical completion, then the liquidated damages payable are reduced to reflect the relative value to the whole of the area taken into possession.

However, the JCT contracts do not deal expressly with what happens in respect of liquidated damages in the event of termination.

The JCT termination provisions in s 8 provide that the employer may terminate for contractor default. In the event of termination, the employer may retain others to complete the works. Where the contract is terminated for contractor default, the contract states that no further sums are due to the contractor until a balancing exercise takes place which takes into account the following:

  • the costs incurred by the employer in completing the works and direct loss and expense caused to the employer and for which the contractor is liable whether arising as a result of the termination or otherwise;
  • payments made to the contractor; and
  • the contract sum.

The resulting balance is paid as a debt by the contractor or as a debt by the employer.

The JCT contracts also deal with situations in which the employer either abandons the works or is slow in commencing, in which case, subject to adjustment, a similar balancing exercise and recovery occurs. These termination provisions are materially similar to cl 26 in the Glanzstoff case.

Implications

In the absence of an express clause on liquidated damages in the event of termination and based on the decision in Triple Point, it would seem likely therefore that the liquidated damages provision in an unamended JCT would not apply in the event of termination – but general damages would.

Generally, one does not see draft amendments dealing expressly with this issue in schedules of amendments. However, following Triple Point, parties will no doubt wish to consider whether it is appropriate to cater expressly for what happens in respect of liquidated damages in the event of termination.

This article was first published in Construction Law on 5 August 2019.

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