Can liquidated damages apply post-termination of a contract? - in depth - Gateley
In depth

Can liquidated damages apply post-termination of a contract?

Gateley Legal

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Paul Scott, Legal Director in Gateley’s construction unit looks at a recent case that clarifies the position on whether liquidated damages continue to apply post-termination of a contract.

Liquidated Damages and termination – the historic position

Construction contracts often make provision for a pre-determined level of damages to apply in the event of specified breaches, such as delay to completion or failure to meet performance targets. These are known as liquidated damages clauses (“LDCs”).

In circumstances where an LDC is triggered, the non-defaulting party may deduct the pre-determined amount from a payment due to the defaulting party or, alternatively, take action to recover this sum. There is no need to show that the losses claimed have actually been suffered (either at the pre-determined level or at all).

Prior to Triple Point Technology, Inc. v PTT Public Company Limited [2019] EWCA Civ 230, there had been a number of potentially conflicting authorities on the application of LDCs in circumstances where a contractor had failed to complete its contractual obligations and the original contract had been terminated, with a second contractor stepping in to complete the works.

In Triple Point, the Court of Appeal categorised the different potential approaches as follows:

  1. the LDC does not apply at all;
  2. the LDC only applies up until the termination of the first contract; and
  3. the LDC continues to apply until the second contractor achieves completion.

Each of these approaches is considered in further detail below.

The LDC does not apply at all

In British Glanzstoff Manufacturing Co. Limited v General Accident, Fire and Life Assurance Co. Limited 1912 SC 591, Glanzstoff employed a contractor, to construct a new factory.

Clause 24 of the contract provided that the contractor shall pay or allow to the employer £250 per week for the first four weeks, and £500 per week for all subsequent weeks as liquidated damages for every week of delay in completing the work. Clause 26 of the contract provided that if the contractor ceased work, the employer could engage another contractor to complete the works and recover any additional costs from the original contractor.

The Court determined that the LDC would only apply in the event that the contractor had actually completed the works. The LDC did not apply if the contract was terminated before completion.

The LDC only applies up until termination of the first contract

In Shaw v MFP Foundations and Pilings Limited [2010] EWHC 1839 (TCC), the claimants employed the defendant to carry out works under a JCT Minor Works Building Contract. The works were delayed and the contractor had committed other contractual breaches.

In relation to damages for delay, the Technology and Construction Court (“TCC”) determined an employer is entitled to recover liquidated damages at the contractual rate up to the date of termination. However, after termination, the parties are no longer required to perform their contractual obligations. The LDC, therefore, becomes irrelevant. The appropriate remedy after termination is therefore damages under the ordinary principles.

Whether you followed the approach in British Glanzstoff or that in Shaw, the generally accepted position was therefore that LDCs were only effective until termination. However, the case law also referred to a further alternative.

The LDC continues to apply until the second contractor achieves completion

In Hall v Van Der Heiden (No 2) [2010] EWHC 586 (TCC), the claimant employed the defendant under a JCT Minor Works Building Contract. Clause 2.9 of the contract required the contractor to pay liquidated damages for delay at the rate of £700 per week. Completion was required by 3 November 2007.

The defendant fell behind with the works and subsequently left the site, maintaining that he had achieved practical completion, but had not been properly paid. In fact, the defendant had not completed the works. The claimant engaged another contractor, who achieved practical completion on 17 May 2008.

The TCC awarded liquidated damages to the claimant at the full contractual rate for the entire period between the contractual completion date and the date that the works were actually completed, rejecting the submission that liability for liquidated damages came to an end at termination. In other words, the LDC continued to apply after termination.

Triple Point

Given the potentially conflicting interpretations, the Court of Appeal judgment in Triple Point has provided some welcome clarity on the application of LDCs when works are completed by another contractor.

The ‘Triple Point’ contract

The Claimant, Triple Point Technology, Inc. (“TPT”) contracted with the Defendant, PTT Public Company Limited (“PTT”), to provide a new commodities trading, risk management and vessel chartering (“CTRM”) system.

The CTRM contract (the “CTRM Contract”) provided (amongst other things) that if TPT failed to deliver work on time, it shall be liable to pay the sum of 0.1% of undelivered work per day of delay.

Performance under the CTRM Contract

TPT completed the first two stages of Phase 1 (albeit some 149 days late), and accordingly, submitted its invoice, which PTT duly paid.

TPT then asked PTT for payment in respect of work which it had not completed. PTT refused and TPT suspended work and left the site. PTT asserted that TPT had wrongfully suspended work and sought to terminate the CTRM Contract.

TPT issued a claim against PTT for unpaid sums. PTT denied that any further payments were due and counterclaimed for damages for delay and upon termination.

The Court of Appeal decision

The Court of Appeal determined that a LDC has no application beyond the date of the termination/abandonment event where the contractor never completes the work. As such, PTT was entitled to recover liquidated damages of $154,662 in respect of TPT’s delay to the completion of stages 1 and 2, but was not entitled to recover liquidated damages for any other delays because it had not completed any other phases of work. PTT was instead entitled to recover for breaches after termination/abandonment of the CTRM Contract, assessed on ordinary legal principles.

The Court stated that the question of whether the LDC continues to apply up to termination/abandonment (or even beyond that date) depends on the wording of the clause.

Conclusion

Triple Point is a potentially highly significant judgment for the housebuilding industry. The scenario where a trade subcontractor is in delay and its employment is terminated (perhaps as a result of the delay or other points of dissatisfaction with its performance) will no doubt be all too familiar.

Whilst Triple Point provides some clarity in an area of previously conflicting authorities, it has not conclusively laid out a ‘universal’ approach to the interpretation and implementation of LDCs for delay following termination/abandonment.

Essentially, the correct way to implement a LDC will depend upon its precise wording. However, it appears that it will be rare that liquidated damages will continue to accrue against an original contractor until the works are completed by others.

It seems more likely that an employer will be able to recover liquidated damages against the defaulting contractor up to termination; but that any claims it may have against that original contractor for damages post-termination must be calculated using traditional principles (i.e. demonstrating actual losses and linking those losses to default).

Those drafting LDCs may wish to consider specifying the precise circumstances in which the LDC should apply. If a party feels that it has no choice but to terminate a subcontractor’s employment, it should keep detailed records of its losses post-termination, so as to maximise the prospect of recovery.

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