Liquidated damages clauses are often found in construction or software contracts. Due to the nature of these types of contracts, court proceedings to determine general damages for a breach of contract can be complex, time consuming and disproportionately costly. For this reason, the parties to these contracts often pre-determine the level of damages to which a party is entitled in the event of certain specified breaches occurring. These pre-determined damages are known as liquidated damages and are often triggered when there is a failure to complete works within a specified time. In this blog we take a look at the recent case of Triple Point Technology Inc v PTT Public Company Ltd and consider whether a liquidated damages clause can survive the termination of a contractor’s engagement.
Liquidated damages – current position
The question of whether or not a liquidated damages clause will trigger a payment obligation when a contractor does not complete works has been disputed by the courts on numerous occasions over the past few years. The conventional position, derived from earlier case law, is that an employer will be entitled to claim liquidated damages for delay up to the point of termination but must bring a general damages claim for any delays which accrue after that date. The logic is that, after termination, the contractor loses control of the time for completion, especially if another contractor is employed to complete those works. However, the cases of Halland another v Van Der Heidenand GPP Big Field v Solar EPC Solutionsmuddied the waters by concluding that an employer could claim liquidated damages for the period after termination. So where do we stand now? The recent Court of Appeal case of Triple Point Technology Inc v PTT Public Company Ltd has offered some much needed clarity on this issue.
Triple Point Technology background
In 2012 Triple Point Technology entered into a contract with PTT Public Company Ltd for the supply of a software system. Under the contract, Triple Point were to provide the new software system in two phases, with each phase having multiple stages of work. In the first phase, the new CTRM System would replace PTT’s existing system, and in the second phase the new CTRM System would be developed to accommodate new types of trade. The contract also contained a liquidated damages clause, referred to as Article 5(3), which stated:
“if contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, the 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…”
In February 2013 Triple Point Technology began working on the project however the first two stages of phase 1 were completed 149 days late. Nevertheless, Triple Point submitted an invoice in respect of this work, which was duly paid by PTT. Triple Point then submitted further invoices in respect of work which had not yet been completed, on the basis that the payment dates for such work had passed. However, PTT refused to make such payments and in May 2014 Triple Point Technology suspended work. By February 2015 PTT had terminated the CTRM contract and Triple Point technology had commenced proceedings in the High Court.
High Court decision
Following termination of the contract, Triple Point Technology commenced High Court proceedings against PTT for the sums it said they were due. PTT counterclaimed for damages for delay and damages upon termination. In the High Court, Mrs Justice Jefford dismissed the claim and awarded PTT just under $4.5 million of which just under $3.5 million represented liquidated damages for delay pursuant to Article 5(3) of the contract. As the further milestones had not been reached, Triple Point Technology were not entitled to further payments. Triple Point were therefore not entitled to suspend work in May 2014 and were accordingly in repudiatory breach of contract.
The appeal decision
Triple Point Technology appealed Mrs Justice Jefford’s decision. Among other grounds of appeal, Triple Point Technology argued that Article 5(3) should not be engaged because it should only apply when work was delayed, but nonetheless completed and then accepted by the employer. In this case, the work was delayed and the contract was subsequently terminated.
The Court of Appeal held that there were three different approaches towards clauses providing liquidated damages for delay, namely:
- The liquidated damages clause would not apply at all (as in the case of British Glanzstoff manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd);
- The liquidated damages clause would only apply until the point of termination (as in the case of Greenore Port v Technical & General); or
- The liquidated damages clause would continue until the second contractor achieved completion (as in the case of Hall and another v Van Der Heiden).
In the court’s view, the question of whether the liquidated damages clause ceased or continued to apply up until termination, or even beyond that date, depended on the wording of the clause itself and there was no blanket rule that applied by default. Relying heavily on the reasoning in British Glanzstoff manufacturing, Sir Rupert Jackson stated that there was “no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”
Sir Rupert Jackson also held that Article 5(3), which focused specifically on delay between the contractual completion date and actual completion, had no application in a situation where a contractor never completes the work. It followed that PTT was entitled to recover liquidated damages of $154,662 in respect of Triple Point Technology’s 149 day delay and would have to bring a claim for general damages in respect of any other delays. Although Sir Rupert Jackson emphasised that every case would turn upon the wording of the clause in question, he did cast doubt on the previous decisions in Halland GPP.
Liquidated damages – concluding thoughts
The case of Triple Point Technology v PTT Public Co illustrates how the law in relation to liquidated damages is far from settled. Parties to construction or software contracts should think carefully about when they want their liquidated damages provisions to apply. Clear and effective drafting is therefore key to ensure that you do not encounter any surprises when bringing a claim for breach of contract. If you have any questions about liquidated damages clauses in construction contracts or software agreements please contact Neil Williamson.