Liquidated damages and termination: the final word from the Supreme Court

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The Supreme Court has delivered its long-awaited judgment on how to interpret a liquidated damages (LADs) clause when the delayed works have been terminated before reaching practical completion (Triple Point Technology v PTT Public Limited) [2021] UKSC 29). 

Background to the case

This case concerned a specific situation where Triple Point was in culpable delay past the agreed completion date. Their contract was terminated before practical completion and there was a contractual right to levy LADs “up to the date PTT accepts such work”.  Sir Jackson in the Court of Appeal decided that these agreed words were to be taken literally so that LADs had “no application in a situation where the contractor never hands over completed work to the employer”. This interpretation has now been overturned, with Lady Arden in the Supreme Court ruling that the Court of Appeal’s judgment was “inconsistent with the commercial reality and accepted function of liquidated damages.” Instead, the Supreme Court has decided that it was “more probable” that the parties intended liquidated damages to apply up to the date of termination, that this was necessary to protect the accrued rights of the Employer, and that this reflected “commercial common sense.”

The Supreme Court examined previous authorities, which had been relied upon by the Court of Appeal. In particular, it referred to what had been the leading authority on this matter, British Glazstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp [1913] Ac 143, in which the House of Lords examined a LAD provision and said that “if the contractors have actually completed the works, but have been late in completing the works, then and in that case only, the clause applies.” The Supreme Court objected to the universality of this interpretation. The clause referred to in Glazstoff was bespoke, which Lady Arden said should not be treated “as having created some special rule applying to liquidated damages clauses”. Instead, the interpretation of LAD clauses should be considered in the same way as any other question of interpretation, with due regard for the general principles behind the provision.

Lady Arden said that the Court of Appeal’s judgement was “inconsistent with commercial reality and the accepted function of liquidated damages. 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 to do. Parties must be taken to know the general law, namely that the accrual of 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…Parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read” (paragraph 35).  She added that it might be prudent for parties to specify that LADs are payable up until completion and/or acceptance of the works so that there is no question that LADs are still due thereafter (upon which general damages are to apply). However, she added that including such a provision does not diminish the employer’s accrued rights up to the event of termination. 

In deciding this case, the Supreme Court ruled that the function of the LAD clause was to provide for liquidated damages in the event of delay. The reference to acceptance of the works by PTT was to ensure that there was to be an end date to the provision of LADs but this did not extend to mean that there was to be no levy of liquidated damages if there was no acceptance. 

What does this mean for the industry?

This is no doubt a welcome judgment in the industry, as it reaffirms that the purpose behind a LAD clause should be paramount when considering its interpretation. This helps provide clarity for parties on being able to rely on LADs, which is often in both the employer’s and contractor’s interest. The employer knows that they can call upon LADs as a remedy up until termination, without having to resort to using general damages, which would require them to prove their loss and deal with arguments on foreseeability and mitigation. The Contractor may also be able to better manage their risk with a LAD provision, because they can anticipate what their expected losses will be and LADs can be a way to limit their liability.  

Employers should continue to be aware that the effect of this judgment protects accrued rights up to the date of termination and any subsequent losses post termination will still be subject to general damages. For this reason, employers should continue to carefully consider the benefit in having a performance bond to provide some financial security in the event that they sustain losses after termination. A bond may help cover some of the costs in procuring a second contractor for the completion of the works. Employers should also seek to protect their position when making a general damages delay claim post termination by keeping good records to prove their ongoing loss and taking appropriate steps to mitigate any losses that could potentially be irrevocable from the Contractor. 

Do you have any questions in regards to liquidated damages?

If you have any queries with regards to liquidated damages (LADs) or any other construction-related questions, please contact one of our construction experts listed below and visit our real estate page for information on all of the services we offer.

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