Are liquidated damages recoverable in the event of termination?

In construction projects it is not uncommon for an employer to terminate the contract before the works are completed. In Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230, the Court of Appeal reviewed the law on liquidated damages provisions in relation to delay and considered whether liquidated damages are recoverable in the event of termination. It was held that subject to the terms of the contract, a liquidated damages provision has no application when a contractor does not complete its works.

Previous case law

Previous cases show an inconsistent approach to deciding whether a clause which entitles an employer to claim liquidated damages for delay will survive termination.

• In British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp Ltd (1912), the court held that a liquidated damages clause only applied where the original contractor completed the works and was not applicable on termination.

• In Greenore Port v Technical & General [2006] EWHC 3119, the contractor became insolvent before the works were complete. It was decided that the claimant was entitled to recover liquidated damages for delay up to the date of termination and general damages thereafter.

• In GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 it was held that liquidated damages continue post termination until the works are completed by the employer or a new contractor. It was decided that any other approach would reward the contractor for its own default.

The Court of Appeal in the recent case of Triple Point Technology Inc v PTT Public Co Ltd [2019] have clarified what happens to liquidated damages when a contract is terminated.

Triple Point Technology Inc v PTT Public Co Ltd

This case concerns a contract in which Triple Point Technology Inc (“TPT”) agreed to provide a software system and related services to PTT Public Co Ltd (“PTT”). Under the contract, the project was to be completed in two phases. A series of milestones were set up under the contract with payment according to those milestones.

Work under the contract was delayed. PTT paid sums in relation to the stages which were completed but refused to make further payments on the basis that other milestones had not been achieved. TPT suspended work for non-payment and PTT terminated the contract for TPT’s wrongful suspension.

The contract contained a liquidated damages clause which stated “if Contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, Contractor shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…”. PTT claimed liquidated damages from the specified completion dates in the contract up to the date of termination.

The Court of Appeal found that no liquidated damages accrued for incomplete work in circumstances of termination. Sir Rupert Jackson relied on the reasoning in British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp Ltd holding that “…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 on 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.”

Jackson held that the liquidated damages clause had no application in a situation where a contractor never completes the work. Accordingly, PTT’s entitlement to liquidated damages in respect of incomplete work fell away upon termination and was replaced by a right to claim general damages for delay, subject to proof by PTT. 

Practical points to consider

Each case will depend on the drafting and interpretation of the liquidated damages clause.

When drafting or amending a liquidated damages clause, if parties want their liquidated damages provisions to apply in the event of termination specific amendments will be required. It may also be necessary to amend termination provisions which interact with liquidated damages provisions.

Employers who are considering terminating a contract where the work is delayed and incomplete should consider the implications of the Triple Pointdecision and take advice before terminating a contract. Termination in such circumstances may mean that any entitlement to liquidated damages for delay no longer applies. If the liquidated damages clause has no application, general (unliquidated) damages may be available. This means that an employer would need to prove actual delay losses which may be more or less than the liquidated damages in the contract.