Liquidated Damages and Termination - Clarity from the Court of Appeal - in depth - Gateley
In depth

Liquidated Damages and Termination - Clarity from the Court of Appeal

Gateley Legal

Whether or not liquidated damages (LDs) continue to run from the time of the breach of the relevant contract until such time as the contract is terminated, has been hotly debated in the construction industry.  A new Court of Appeal decision, Triple Point Technology v PTT [2019] EWCA Civ 230, has added clarity on this point where there had previously been some doubt due to different judicial interpretations, as summarised in this note.

One position was that liquidated damages do not continue after termination, as expressed by Edwards-Stuart J in the TCC case of Shaw & Anor v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC) as follows:

‘So far as liquidated damages are concerned, in respect of any period of culpable delay up to the date when the contract is terminated the employer is entitled to recover liquidated damages at the contractual rate… However, after the date of termination the parties are no longer required to perform their primary obligations under the contract and so the contractor’s obligation to complete by the completion date no longer remains and the provision for liquidated damages therefore becomes irrelevant.’

The rationale for this view seems clear: if the contractor’s employment under its building contract has been terminated by its employer, the contractor no longer has any obligation, or right even, to complete works under the contract. Accordingly, the contractor loses control over whether or not the remaining works are completed. Where the former contractor has no control over the conduct of the remaining works it would, or so the majority of authorities to date have agreed, be inappropriate to measure the damages of the employer using the provision of LDs. Using the words of the Lord President from the House of Lords in British Glanzstoff Manufacturing Company, Limited v. General Accident, Fire, and Life Assurance Corporation Limited [1912] SLR 477:

‘The contractor is gone. He has got no more power…to stop the running of the time. He will be liable of course in damages for his breach of contract…at common law, as a contractor is in every contract if he breaks it. But this particular clause, which provides for a penalty per week for delay in completion, seems to me upon the face of it necessarily to apply, and to apply only, to a case where the works are finished by the original contractor.’

In the last sentence of the above quote it is possible to discern how the Shaw and British Glanzstoff cases differ. In summary:

The judge in Shaw took the view that the LDs clause under consideration did apply to the dispute and that consequently damages were payable under that clause, but only up to the date of termination;
In British Glanzstoff the judge’s view was that the wording of the clause was such that it did not apply and consequently the employer’s only remedy was for general damages for breach of contract.
Importantly, both cases agreed that LDs would not be applicable post termination of the relevant contract. However, later in 2010 the case of Hall and another v Van Der Heiden (No 2) [2010] EWHC 586 (TCC) turned the orthodox position on its head and Coulson J (as he then was) concluded in the TCC that a LDs clause could continue to apply post termination and that LDs would be payable notwithstanding the termination. Coulson J’s rationale ran as follows:

‘Take the example of a contractor who has wholly failed to comply with the contract, is in considerable delay, and is facing a notice of termination. The defendant’s case (that no LDs applied post termination) would mean that such a contractor was only liable to pay liquidated damages for delay before the decision was taken to terminate, thereby penalising the employer for trying to get the works completed by another contractor, and rewarding the contractor for sitting on his hands and failing to carry out the works in accordance with the programme. If the defendant was right, the contractor would be better off not coming back on site to carry out the works because, if he refused to do so, the contract would then be terminated and his liability to pay liquidated damages would automatically come to an end.’

This same rationale was followed by Mr Richard Salter QC sitting as a deputy High Court Judge in GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm) who adopted the decision in Hall.

Following the above two decisions the situation in respect of LDs and their applicability, or otherwise, post termination of the building contract was left extremely unclear. The most recent cases seemed to support the conclusion that LDs were applicable post termination but themselves stood somewhat on their own against the considerable weight of the decisions made previously in both Shaw and the House of Lords case, British Glanzstoff. Further, the rationale in Hall had been quickly called into question following the decision as, unusually, the defendant in the case was unrepresented and neither case nor textbook authorities were cited to Coulson J during the course of the proceedings. It was a decision which needed clarification by the higher courts.

Fortunately, Triple Point Technology v PTT [2019] EWCA Civ 230 came before the Court of Appeal in January and their decision has helpfully reformulated the position, albeit, there are still a number of ways in which LDs clauses could possibly be interpreted.

In his Triple Point judgment Sir Rupert Jackson helpfully set out all three of the interpretations of post termination LD clauses discussed in this article, they are:

The clause does not apply: as in Glanzstoff;
The clause only applies up to termination of the first contract: as in Shaw.
The clause continues to apply until the second contractor achieves completion: as in Hall and GPP.
Jackson concluded in Triple Point that the drafting of the LDs clause in this was focused specifically on delay between the contractual completion date and the date when completion was actually achieved. Consequently, taking a similar view to British Glanzstoff, Jackson concluded that the LDs clause had no application in a situation where the contractor is not the contractor to complete the works.

Commenting on the three approaches Jackson observed:

‘The textbooks generally treat category (ii) as the orthodox analysis, but that approach is not free from difficulty. If a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision. Although accrued rights must be protected, it may sometimes be artificial and inconsistent with the parties’ agreement to categorise the employer’s losses as £x per week up to a specified date and then general damages thereafter. It may be more logical and more consonant with the parties’ bargain to assess the employer’s total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract. In my view, the question whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.’ (emphasis added).

It is clear from the above that Jackson does not envisage any strict legal obstacle to any of the three interpretations. He does express ‘doubts’ about the approach in Hall (the third interpretation) but goes no further. However, Jackson does not prescribe any hard-and-fast rules of interpretation either, leaving it as a matter of interpretation on the wording of the clause itself in each case.

Following Triple Point decision, the position on the applicability of LDs clauses post termination of the contract is at least a little clearer. The Triple Point decision tells us that each of the three interpretations of a LDs clause may all possibly be applicable in the right circumstances. Which interpretation is correct will depend upon the drafting of the clause itself. Careful drafting of LDs clauses will therefore be required in order to ensure that the clause has the desired effect, particularly if one wishes to provide for LDs to apply post-termination and test the doubts of Sir Rupert Jackson.

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