The Supreme Court has handed down the highly anticipated judgment in the case of Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29. The decision is likely to be a welcome one to those in the industry, restoring the conventional approach that, subject to the precise wording of the clause, liquidated damages will normally operate up until termination of the contract.
Background
In 2013, the Appellant, PTT Public Company Ltd (PTT), entered into a software contract with the Respondent, Triple Point Technology Inc (Triple Point). The project had two phases, with phase one being completed on 19 March 2014, 149 days late.
The contract contained the following clause (Article 5.3) in respect of liquidated damages:
“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 the penalty 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”
A dispute arose between the parties in respect of the delay and PTT refused to make further payments on the basis that milestones had not been met. Triple Point refused to continue working without further payment and as a result, PTT alleged that Triple Point had wrongfully suspended works and terminated the contract.
Triple Point commenced proceedings in the Technology and Construction Court (TCC) to recover outstanding sums on unpaid invoices. PTT counterclaimed for damages and liquidated damages for delay.
At first instance, the TCC dismissed Triple Point’s claim and decided that Triple Point was not entitled to further payments as a result of not reaching the milestones. The TCC also held that PTT was entitled to liquidated damages under Article 5.3 in the sum of nearly US$3.5m. Triple Point appealed to the Court of Appeal.
Amongst other findings, the Court of Appeal set aside the judge’s award of liquidated damages, holding that due to the wording of Article 5.3, which stated that liquidated damages were payable “up to the date PTT accepts such work”, PTT was not entitled to recover liquidated damages as the work had not been completed nor accepted.
Prior to this, in circumstances where the contract was terminated, it was generally understood that liquidated damages would accrue up until termination and general damages could be claimed thereafter.
This decision created uncertainty in the industry as it suggested that the entitlement to liquidated damages in clauses (such as the liquidated damages clause in an unamended JCT) which specifically refer to liquidated damages for delay accruing up until practical completion, could fall away completely in the event of the contract’s termination, where practical completion is never achieved.
Arguably, this could create a situation whereby the contractor is rewarded for his own breach, with liquidated damages falling away upon termination and the employer then having the burden of demonstrating its loss and facing arguments as to mitigation in a claim for general damages, rather than being able to rely on the pre-determined rates.
The case was appealed to the Supreme Court.
Supreme Court decision
The issue for the Supreme Court was where one party contracts with another to carry out works for it, and the contract provides that liquidated damages are payable if the works are delayed, whether:
- The employer only has a right to such damages if the contractor completes the works.
- Such damages are still payable even if the employer terminates the contract before completion.
The Supreme Court allowed the appeal on this issue, finding that the Court of Appeal had departed from the generally understood position that, subject to the precise wording of the clause, liquidated damages would accrue until the contract was terminated. At that point the contractor becomes liable to pay damages for breach of contract. Following the Court of Appeal’s approach would be inconsistent with commercial reality and the accepted function of liquidated damages.
The Supreme Court found:
"Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract. After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. That is well-understood.”
The decision provides much welcomed clarity and confirms that contracts do not need to provide specifically for the effect of termination in their liquidated damages clauses. Of course, if parties wish to provide that liquidated damages shall fall away where practical completion is never achieved, they may do so, but in the absence of this precise wording in the clause, they will normally operate up until termination of the contract.
Lauren Melnyk