The Supreme Court handed down its judgment in July 2021 in the case of Triple Point Technology Inc v PTT Public Company Ltd  UKSC 29 (“Triple Point”). Triple Point is the current authority for considering damages for delay after termination of the contract and is essentially a reminder to us all that it is necessary to carefully consider the drafting of a contract to assess whether a particular clause allows any liquidated damages to survive termination.
The basic facts of Triple Point related to a commodities trading company called PTT (the “Employer”) employing Triple Point (the “Contractor”) to replace and develop a new software system under a contract governed by English law. The contract envisaged that the Contractor would be paid a portion of the contract price on the basis of achieving a certain number of milestones. The Contractor only completed two milestones and then abandoned the site and the Employer subsequently terminated the contract.
FIRST INSTANCE CLAIM AND DECISION
The Employer raised a claim for liquidated damages (“LDs”) to cover the losses arising after termination resulting from the Contractor’s delay. This included the additional costs of a replacement contractor to attend the site to finish the work that was left uncompleted by the Contractor. Initially this claim was granted in the Employer’s favour but the Contractor appealed the decision before the Court of Appeal.
The Contractor appealed, on the grounds that the LDs clause (as it was actually drafted) only applied from the point in time when the work was delayed up and until such delayed work was actually completed by the Contractor (and not by a replacement contractor) and accepted by the Employer. The Contractor said the clause did not apply where the work was never completed at all by the Contractor itself.
COURT OF APPEAL’S FINDINGS
The Court of Appeal agreed that the LDs clause in question specifically referred to LDs only applying up to the date the Contractor completed the works and hence did not continue thereafter.
The Court of Appeal further held that given that the Contractor’s employment in this case had been terminated before the works were completed and the LDs clause specifically referred to liquidated damages applying up to the date the Contractor (and not a replacement contractor) completed the works, it was no longer possible for the Employer to claim LDs as a result of the termination.
The view was that the drafting of the LDs clause meant that the termination itself had essentially axed the Employer’s rights to claim further LDs from the Contractor.
WHAT DID THIS MEAN IN THE CONTEXT OF THE LAW RELATING TO LIQUIDATED DAMAGES?
In reaching its decision, the Court of Appeal undertook an examination of the case law surrounding LDs and the approaches taken in relation to the interpretation of the same. The legal effect of liquidated damages clauses has long been a point of contention. There has been a plethora of case law on the point, although the application of liquidated damages clauses by the courts has seen differing results and varying decisions and approaches being adopted.
The Court of Appeal in Triple Point acknowledged that where a contractor’s employment is terminated before the works have been completed, the recent and most commonly accepted position in respect of the deduction of liquidated damages had been that the client was entitled to:
- recover liquidated damages for delay at the contractual rate up to the date when the contract is terminated; and
- general damages thereafter.
This has become more commonly referred to as the “orthodox” position. The Court of Appeal decided that where a contractor’s employment has been terminated before the works had been completed, liquidated damages cannot be applied (including for the period of delay prior to termination). Instead, the terminating client must establish the actual losses arising from delay and claim these as general damages.
The Court of Appeal noted that the above will invariably turn on the precise wording of the liquidated damages clause in question and this point remains critical for the application of LDs moving forward.
THE SUPREME COURT’S FINDINGS
The Supreme Court considered a number of issues on appeal. However, on the question of interpretation of the liquidated damages clause, the Supreme Court allowed the Employer’s appeal and reverted to the decision at first instance, holding that the liquidated damages clause in question applied up to the date of termination and that only general damages were recoverable from that point onwards.
The Supreme Court’s decision thereby upheld the “orthodox” position that existed prior to the Court of Appeal’s judgment that, subject to the terms of the contract (a key point which will be returned to at the end of this article), liquidated damages cease to accrue on termination but rights accrued as at the date of termination survive. Further, the Supreme Court clarified that the cases which the Court of Appeal had heavily relied on in coming to their judgment, were confined to their specific facts and did not apply more generally to the law governing liquidated damages.
WHAT DOES THIS MEAN MOVING FORWARD?
The decision by the Supreme Court that the orthodox position is to prevail, will be welcome news to many. However, it is important to note that the Supreme Court confirmed that LDs may still be in play post-termination depending on the contractual wording. Accordingly, it remains best practice for parties to the contract to carefully consider the potential position in respect of entitlement to LDs before seeking to terminate.
The market reaction to Triple Point has shown signs of welcoming the return to the “orthodox” position. However, it is important to note that the Supreme Court (and indeed the Court of Appeal) did agree that the orthodox position can be set aside by way of contrary drafting, if indeed that is the mutually agreed intention of the parties. In this respect, we as a firm often work with clients on international construction deals that are project financed, where the stakeholders often wish to adopt a position whereby LDs for delay are payable by the construction contractor for the entire duration of the delay (irrespective of the date of termination) until the date of completion.
Undoubtedly, this approach presents challenges and hence this may explain why the approach does not exist in various international standard forms. However, for those parties that wish to adopt a commercial position that permits LDs to survive termination then the same can be achieved by use of carefully drafted express wording.