15th July 2019
Construction contracts commonly contain a clause dealing with the employer’s entitlement to recover a pre-determined level of damages from the contractor in the event of certain specified breaches occurring. The most common example is a failure to complete the works within a specified time. The purpose of the liquidated damages clause is to promote certainty and to avoid the need for the employer to prove that it has actually suffered a loss.
But what happens when the works are delayed and the employer decides to terminate the contractor’s employment (or the contract itself) before the works are practically complete? Is the employer entitled to claim liquidated damages at all? Can they claim up until the point of termination or even up to the date of completion by the replacement contractor?
The Court of Appeal, in its recent decision on the Triple Point Technology, Inc. v PTT Public Company Ltd case, confirmed that the employer was entitled to claim liquidated damages in relation to the completed stages of work (up to the date of termination). However, the employer's loss in relation to the delayed incomplete works had to be claimed as general damages.
Triple Point Technology, Inc. (Triple Point) was engaged by PTT Public Company Ltd (PTT) to deliver a software system. The contract sum was a substantial $6.92 million and the work was split into various phases, where payments to Triple Point were due after certain milestones were achieved. According to the terms of the contract, in the event that Triple Point failed to deliver the work within the specified time, it was liable to pay liquidated damages to PTT from the delivery due date “up to the date PTT accepts such work”.
Whilst the first two stages of phase one were achieved, the project ended up in significant delay and PTT eventually terminated the contract.
In the subsequent litigation, Triple Point sued on its unpaid invoices while PTT counterclaimed for delays and damages suffered as a result of terminating the contract and instructing a replacement contractor to complete the works. One of the issues that the Technology and Construction Court (TCC) was asked to decide on was whether PTT could rely on the liquidated damages clause in the contract and, if so, whether PTT was entitled to liquidated damages up until termination or beyond.
What the courts said
The TCC found that PTT was entitled to liquidated damages: (i) up to the date of completion on the completed stages, and; (ii) up to the date of termination in respect of the incomplete stages. PTT was awarded, amongst other things, nearly $3.46 million in relation to liquidated damages. Triple Point appealed against the TCC's decision.
On appeal, Triple Point argued that, according to the liquidated damages clause in the contract, PTT was only entitled to liquidated damages when the delayed work was completed by Triple Point and accepted by PTT. This clearly did not happen. The Court of Appeal was therefore asked to consider how the liquidated damages clause operates where the contract is terminated and some of the works remain incomplete.
The Court of Appeal reviewed the general principles concerning the operation of liquidated damages clauses in termination or abandonment cases and, in the end, followed the House of Lord’s 1913 decision for the case of British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Co Ltd.
In Glanzstoff, where the employer’s entitlement to liquidated damages arose when the contractor failed to complete the works by the specified date, the House of Lords held that the liquidated damages clause did not apply at all when the contractor did not complete the works.
While the Court of Appeal agreed with the TCC’s decision to allow PTT to claim liquidated damages for delays to the completed stages of work (amounting to $154,662 of liquidated damages), PTT was not entitled to recover liquidated damages for any of the other delayed but incomplete works. The Court of Appeal held that any delay associated with the incomplete stages had to be assessed by the ordinary rules principles of general damages.
The Court of Appeal also confirmed that the entitlement to liquidated damages after termination will always depend on the particular wording of the contract provisions. Its judgment hints that Glanzstoff remains an important case when assessing damages caused by the contractor's delay where the contract was terminated or abandoned.
Any employer who terminates the contract prior to practical completion needs to be aware that, unless the contract allows the employer to levy liquidated damages for delays to completed sections of work, the employer is unlikely to recover any liquidated damages for delayed and incomplete works. That said, the employer is not to be left without a remedy. It can proceed down the general damages route. However, additional hurdles will have to be jumped in order to bring a claim for breach of contract against the contractor and to prove a loss has been suffered.
As currently written in the Joint Contracts Tribunal (JCT) suite of contracts, the liquidated damages clause is not set up to allow an employer to claim liquidated damages if the contract is terminated prior to completion. To remedy this, amendments advised by experts are advised.
To find out more about anything covered in the above article, or to discuss your construction contract needs, please get in touch with Eszter Lakos or a member of the Construction team.