04 November 2021
Normally when a contractor is late, it pays LD’s from the contractual completion date to through to the earlier of termination or completion. termination. If work is still outstanding after completion, the contractor must pay the employer further damages by reference to the cost to complete. In this case, the Court of Appeal confined LD's to cover only work completed before termination. This potentially created massive headaches for employers, but the Supreme Court (Lady Arden) has restored "commercial reality" and read the LD's clause "in a way that meets commercial common sense".
Supreme Court restores the normal rules for Liquidated Damages
Triple Point Technology vs PTT. BLM (2021) 556, UK Supreme Court
PTT was a commodity trader and Triple Point was a software designer. In February 2013 PTT contracted to pay Triple Point $6,900,000 to design and supply a sophisticated software program to support its commodity trading business. The contract provided for liquidated damages of 0.1% of the value of unusable or undelivered works from the due date to completion.
The parties fell out over payments and performance, then in March 2015 PTT terminated the contract with Triple Point for non-performance. Triple Point sued for outstanding payments,and PTT counterclaimed for (1) Liquidated Damages (“LD’s”) for delay to the date of termination and (2) general damages from that date for the extra cost of getting the work completed by others.
The High Court ruled that PTT were right to terminate, and awarded LD’s from contractual completion dates to termination, and general damages for cost to complete thereafter.
The Court of Appeal however ruled that on the wording of the Contract, LD’s were only due on items or stages of work that had been finished as at termination. Anything incomplete was not covered by the LD’s provision.
The UK Supreme Court over-ruled the CA, saying it was “inconsistent with commercial reality”. PTT was awarded LD’s on all work that was late, up to the date of termination, and damages for the cost to complete thereafter.
This is a very welcome decision which has restored how we all understood Liquidated Damages clauses to work, i.e. that LD’s apply from the contractual completion date to termination, and general damages for cost-to-complete apply thereafter.
At paragraph 35 of her judgment, Lady Arden in the UKSC robustly dismissed the Court of Appeal’s ruling as inconsistent with commercial reality and with the accepted function of LD’s. She noted rightly that parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do.
She insisted that when interpreting what parties meant by their contracts, they must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract. After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. Consequently, parties do not have to provide specifically in their negotiations for the effect of the termination of their contract. They can take that consequence as read.