The use of liquidated damages as a sole remedy for contractor delay is a well-established mechanism in the construction industry. It is designed to provide certainty for both employer and contractor in relation to the financial effects of the contractor’s culpable delay. The employer does not need to prove its loss caused by the contractor’s late completion, and the contractor knows the exact financial implications of its own actions, therefore giving both sides the certainty that they require in this scenario. Unfortunately, for a period of time recently, the Court of Appeal threw the liquidated damages mechanism into some considerable doubt in circumstances where the Contractor’s employment under the contract has been terminated.
The Supreme Court has now ruled in the case of Triple Point Technology Inc v PTT Public Company Limited  UKSC 29, reversing the Court of Appeal’s decision on this issue and bringing more certainty to the industry in relation to the legal and commercial implications of this scenario.
By way of brief reminder, the case related to a dispute between an oil and gas commodities trader and the software developer that it engaged to provide a new computer system for managing sales. The contract was split between phase 1, dealing with replacement of the existing system and phase 2, developing the system to accommodate new sales channels and trading mechanisms. The Contract said
“If the Contractor fails to deliver the work within the time specified and the delay has not been introduced by [the Employer], the Contractor shall be liable to pay the penalty at a rate of 0.1% of undelivered work per day of delay from the due date of delivery up to the date that the [Employer] accepts such work”.
Phase 1 was completed, albeit significantly late. PTT paid Triple Point for phase 1 but refused to pay phase 2 invoices on the basis of lack of progress. Triple Point did not dispute that it had missed milestones, but refused to continue without payment, suspending work and leaving site. PTT took that as repudiatory breach and terminated.
The High Court Judge, at first instance, held that the liquidated damages mechanism applied up to the date of completion of phase 1 and to termination in respect of phase 2, following which general damages were recoverable if proven thereafter.
In the Court of Appeal, three potential conclusions were considered:
- The liquidated damages mechanism falls away completely in circumstances of Contractor termination;
- The liquidated damages mechanism only applies up to the termination point, after which general damages can be claimed if proven;
- The liquidated damages mechanism continued all the way through until the original works achieved completion by the replacement Contractor.
The Court of Appeal decided that liquidated damages can be claimed for work that is completed, so point 1 above applies, therefore in circumstances where the Contractor is late and then its engagement under the contract is terminated so work is not completed, the entire liquidated damages mechanism is inapplicable, falls away and general damages must be proven.
The Supreme Court overturned the Court of Appeal’s Judgment, stating that the Court of Appeal’s conclusion that liquidated damages do not apply at all, was based on a very specific set of facts in one particular case, which is “inconsistent with commercial reality and the accepted function of liquidated damages”. The Supreme Court went so far as to comment that the situation is “well trodden”, referring to the orthodox view that liquidated damages can still be claimed by the employer for delays prior to termination, and in fact there is no need, in the Supreme Court’s view, to re-draft the clause to provide for that, thereby confirming that point 2 above is the presumptive analysis so (subject to a contract clause clearly and expressly stating otherwise) liquidated damages apply for any period of delay up to the date of termination, but not beyond. The Supreme Court could see no reason why employers would wish to forego the benefits of certainty provided by pre-agreed liquidated damages for delay. In fact, one Supreme Court of Justice asked counsel to scan standard form of construction contracts to see if any of the wording reflected the Court of Appeal’s position, but counsel were unable to do so.
As a result, employers and contractors in the construction industry do not need to redraft their contract as the Supreme Court have emphasised that the liquidated damages mechanism works in this way and the parties should be taken to understand that from the start. From the employer’s position, accrued rights are protected, and termination liability has a prospective effect. From the contractor’s perspective, the financial implications of delay can be predicted. For the period prior to termination, neither party has to prove/defend a large claim for general damages – that would only apply for any period after termination, rather than the whole job.
The Supreme Court only accepts appeals from the Court of Appeal where they relate to matters of general public importance, and certainly for the entire construction industry that uses liquidated damages mechanisms on a daily basis, this need for certainty is fundamental and on this issue, has now been achieved.