Availability of liquidated damages – an update from the Court of Appeal
Most construction contracts contain liquidated damages clauses that provide the employer with a defined rate of compensation if a project is delivered late. But what happens if the contractor does not deliver a completed project at all? One example might be a contractor abandoning site. Another might be termination by the employer for prolonged poor performance. In those circumstances the project will be delivered to completion not by the defaulting contractor but by a third party contractor and invariably later than originally envisaged. Do liquidated damages bite?
The Court of Appeal has earlier this month handed down judgment on this question. While the case did not involve a construction contract, the decision will of course be of application to our industry.
Triple Point Technology Inc v PTT Public Co Ltd (2019) concerned a software supply contract. The parties fell into dispute. The supplier suspended performance for non-payment and the supply contract was terminated by the employer. The supplier sued for payment of sums claimed to be owed. Under the terms of the supply contract damages were payable at a prescribed rate for delay. The employer counterclaimed for damages under this liquidated damages provision at the prescribed rate. In the High Court the employer’s claim for liquidated damages was successful. However, the Court of Appeal overturned this part of the decision. Having considered the authorities the Court of Appeal concluded that there were three alternative ways to analyse how liquidated damages clauses should be engaged in circumstances where a supplier (or indeed any contractor) failed to complete its obligations and a third party stepped in to complete the performance:
- The LAD clause did not apply, as this was not a case of late performance at all;
- The LAD clause provided for damages at a prescribed rate until the contract was brought to an end, but thereafter had no application; or
- The LAD clause continued to provide for LADs after termination and until the replacement contractor had completed the performance of those obligations.
While, quite rightly, the Court of Appeal placed the caveat on their decision that the answer to this question would ultimately be a question of interpreting the words used in the contract itself, in this particular case it was the first of three alternatives that applied. On a proper construction of this particular contract the Court of Appeal decided there was no entitlement to liquidated damages unless the supplier completed the supply of obligations (albeit late). That ruling did not deprive the employer from any remedy of course. However, damages would need to be assessed rather than calculated with reference to the prescribed rate in the contract.
In a construction context the costs incurred and losses suffered by an employer terminating and engaging a replacement could be significantly greater than the liquidated damages so the ability to claim general damages rather than being fixed with liquidated damages is important. Of course the assessment of damages without reference to a liquidated damages clause does enable the paying party to argue over quantum as well.
What this case does not do is rule out the application of the second and third alternatives. Indeed there may be circumstances where, based on a proper construction of the contract, the second or third alternatives would apply. What the decision does highlight is the importance of employers checking their contract and seeking advice where appropriate before terminating, to ensure that the financial implications of termination are properly understood and taken into account before any decision to terminate is made.