ENTITLEMENT TO LIQUIDATED DAMAGES FOR TERMINATION BEFORE COMPLETION
In Triple Point Technology, Inc (Respondent) v PTT Public Company Ltd (Appellant) [2021] UKSC 29, the Supreme Court unanimously allowed the appeal on the issue of entitlement to liquidated damages, holding that on the construction of the liquidated damages clause, although work was not completed, the clause applied so that rights to liquidated damages accrued prior to termination were not lost.
We had previously blogged on the English Court of Appeal’s decision at https://www.chanceryllc.com/news/post-termination-liquidated-damages.
Background. In brief, this appeal concerned the software contract (“the CTRM Contract”) made between the appellant, PTT Public Company Ltd (“PTT”) and Triple Point Technology, Inc (“Triple Point”) (at [2]), which “was not … simply a standard-form contract but was tailored to the requirements of this particular project. The governing law was English law.” (at [3])
This article will only focus on the principal issue of the availability of liquidated damages; i.e. whether PTT is entitled under the CTRM Contract to liquidated damages for delay in respect of work which had not been completed before the contract was terminated (at [5]).
Summary. Lady Arden (with whom Lord Leggatt, Lord Burrows, Lord Sales and Lord Hodge agree on this issue) found that “the Court of Appeal fell into error … in its approach to the liquidated damages clause, which failed to take account in the process of interpretation of the legal incidents and function of such clauses” (at [6]).
Pertinently, Article 5 of the Main Part provided for Triple Point to perform the Services (defined in Article 1.2) in accordance with the Project Plan (which set out the timetable for performance) and to pay damages for delay (at [11]). The key provision, Article 5.3, is set out as follows:
“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, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.”
(emphasis added)
On the facts, “The completion of the Phase 1 business blueprints was significantly delayed. Work did not commence on the preparation of the Phase 2 scope of works at all. … Triple Point did not complete the works in respect of any other part of Phase 1 or any part of Phase 2 prior to termination.” (at [18]) PTT then gave notice to terminate the CTRM Contract.
In the Court of Appeal, Lewison and Floyd LJJ and Sir Rupert Jackson held that, among others, PTT was entitled only to liquidated damages in respect of works that had been completed (at [23]).
Issue. The issue before the Supreme Court is therefore whether liquidated damages are payable under Article 5.3 of the Main Part, when Triple Point had never completed the work and PTT had never accepted the work (at [24]).
The decision below. According to Lady Arden, “the Court of Appeal regarded the point as raising questions of principle although the application of the principle would be affected by the terms of the contract in question.” (at [25]) In doing so, Sir Rupert Jackson, with whom Lewison and Floyd LJJ agreed, relied heavily on British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143 (“Glanzstoff”).
In Glanzstoff, the claim was dismissed, and the decision upheld by the House of Lords because the clause in question was held to not apply as, among others, per Viscount Haldane LC, “upon its construction I read it as meaning 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.” (at [27])
Sir Rupert Jackson in the Court of Appeal then examined other cases on the operation of liquidated damages clause and arrived at three different categories where the contractor fails to complete and a second contractor steps in (at [28]):
1. Category 1. The clause does not apply; e.g. as per Glanzstoff.
2. Category 2. The clause only applies up to termination of the first contract.
3. Category 3. The clause continues to apply until the second contractor achieves completion.
According to Sir Rupert Jackson, Category 2 was the “orthodox analysis” although it was “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.” (at [29])
Sir Rupert Jackson then took the view that the wording of the liquidated damages clause in question was so close to the wording in Glanzstoff that the House of Lords decision was binding (at [30]). On this basis, the Court of Appeal held that “if the liquidated damages clause did not make specific provision for a particular circumstance, the employer was in new territory for which the liquidated damages clause may have made no provision.” (at [31]) Consequently, “the Court of Appeal considered that the words “up to the date PTT accepts such work” meant that article 5.3 had no application in a situation where the contractor never completed the works, and, by definition, the employer never accepted them.”
The appeal. The Supreme Court found difficulty with the Court of Appeal “departing from the generally understood position as to the meaning of liquidated damages clauses” (at [34]) as the approach “is inconsistent with commercial reality and the accepted function of liquidated damages.” (at [35]) In particular, Lady Arden held as follows at [36]:
“Of course, the parties may out of prudence provide for liquidated damages to terminate on completion and acceptance of the works so as to remove any question of their being payable thereafter. But if they do, it is in my judgment unrealistic to interpret the clause as meaning that if that event does not occur the contractor is free from all liability for liquidated damages, and that the employer’s accrued right to liquidated damages simply disappears. It is much more probable that they will have intended the provision for liquidated damages to cease on completion and acceptance of the works to stand in addition to and not in substitution for the right to liquidated damages down to termination.”
(emphasis added)
Lady Arden recognised that the Court of Appeal was aware of the importance of accrued rights from the judgment of Sir Rupert Jackson but pointed out that under the approach taken by the Court of Appeal, “accrued rights are not protected. They are lost.” (at [37])
Therefore, Lady Arden reasoned that for Article 5.3, “It would be sufficient to interpret the words “up to the date PTT accepts such work” as meaning “up to the date (if any) PTT accepts such work”.” (at [38])
As for the Court of Appeal’s reliance on “the little-known case of Glanzstoff [which] led the Court of Appeal to their radical re-interpretation of the case law on liquidated damages clauses” (at [42]), Lady Arden stated that Glanzstoff “is an illustration of how a liquidated damages clause can be interpreted” (at [47]) and should not be treated “as having created some special rule applying to liquidated damages clauses” (at [42]) or “as establishing any point of principle” (at [43]).
Hence, “[i]n the instant case, article 5.3 of the Main Part on its true construction provided for liquidated damages if Triple Point did not discharge its obligations within the time fixed by the contract irrespective of whether PTT accepted any works which were completed late. The function of the words on which the Court of Appeal relied was to provide an end date for liquidated damages on acceptance of the works by PTT to ensure that in that event there was no further claim for liquidated damages in respect of the relevant delay. But it did not follow that there were to be no liquidated damages if there was no such acceptance. To reach that conclusion would be to render the liquidated damages clause of little value in a commercial contract. To use an idiomatic phrase, the interpretation accepted by the Court of Appeal in effect threw out the baby with the bathwater.” (at [48])
Concurring judgment. Lord Leggatt agreed with Lady Arden and added his own reasons for reaching the same conclusion. Lord Leggatt agreed that “[for] cogent commercial reasons … if the parties wish to obtain the benefits of a liquidated damages clause …, I can see no reason why, in the event that the contract is terminated before the work is completed, they would wish to forgo those benefits of certainty, simplicity and efficiency in quantifying the damages in relation to delay which has already occurred.” (at [80])
More importantly, Lord Leggatt stated that “a clause which had this effect would give a contractor who badly overruns the time specified for completion an incentive not to complete the work in order to avoid paying liquidated damages for the delay which its breach of contract has caused. It makes no sense to create such an incentive.” (at [81])
Hence, per Lord Leggatt at [89]-[90]:
“89. The meaning and effect of article 5.3 is in my view reasonably straightforward. Where the two conditions specified in the opening words are met - that is, (1) the Contractor fails to deliver work within the time specified, and (2) the delay has not been introduced by PTT, then liquidated damages are payable for each day of delay from the due date for delivery of any item of work up to the date when PTT accepts the work.
90. It could not reasonably have been intended that, if PTT unjustifiably refuses to accept completed work, liquidated damages should continue to accrue until PTT chooses to accept the work, and it is not suggested that the clause has that effect. It seems to me that, on the wording of the clause, the way in which such a consequence is avoided is that any delay in accepting work after it has been completed would be delay “introduced by PTT”. Hence Triple Point would not be liable to pay the specified sum in respect of any such period.”
Conclusion. This decision is important because the United Kingdom Supreme Court unanimously held that subject, of course, to the wording of the liquidated damages clause in question, the general position would be that liquidated damages would be recoverable up to the date of termination of the contract, with general damages recoverable thereafter.
This clarification by the United Kingdom Supreme Court will no doubt come as a relief as the “orthodox” position was, for a period of time, unsettled by the England and Wales Court of Appeal’s decision.
Nonetheless, as pointed out by Lord Arden, if “the clauses in question … were not said to be some market-accepted wording or clauses from some standard form recognised in the industry where the interpretations of the courts in reported cases may in practice be treated as binding in later cases involving the same wording [,] in general the decision of one case as to the meaning and effect of a clause cannot be binding as to the meaning and effect of even a similar clause in another case.” (at [30])
Readers must therefore continue to pay attention to the precise wording of the liquidated damages clause in question, especially when it comes to bespoke contracts.
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