The recovery of liquidated damages where the contractor’s employment or the contract has been terminated or abandoned prior to the completion of works has come under scrutiny by the courts. A party thinking about terminating in circumstances where there is potential culpable delay by a contractor should read the contract carefully to avoid inadvertently losing the right to claim liquidated damages. The same advice applies in reverse to any party who faces a claim for liquidated damages following termination.
The orthodox position was thought to be that liquidated damages could be claimed up to, but not beyond, the date of termination. However, there are authorities for all three positions, namely liquidated damages: cannot be claimed at all; or can be claimed up to the date of termination; or can be claimed up to the date of completion by a third party.
The Court of Appeal’s decision in Triple Point Technology Inc v PTT Public Co [2019] EWCA Civ 230 examined the authorities and was that, in the context of the particular contract, the right to liquidated damages was predicated on the contractor completing the works. It therefore had no application where the contractor’s employment under the contract or the contract itself was terminated before works were completed, the so called “Glanzstoff” approach named after the House of Lords decision which is authority for the proposition.
Jackson, L.J. doubted the correctness of the authorities for the third proposition, that liquidated damages can be claimed until the works are completed by a third party contractor on the basis that time for completion is out of the original contractor’s control.
The decision that liquidated damages had no application where the works were not completed was heavily dependent on the wording of the relevant contract clause as is evident from paragraph 112 of Jackson, L.J.’s judgment
“Let me now turn to article 5.3 in the present case. This clause, like clause 24 in the Glanzstoff case, seems to be focused specifically on delay between the contractual completion date and the date when Triple Point actually achieves completion. The phrase in article 5.3 “up to the date PTT accepts such work” means “up to the date when PTT accepts completed work from Triple Point”. In my view article 5.3 in this case, like clause 24 in the Glanzstoff case, has no application in a situation where the contractor never hands over completed work to the employer.”
Therefore it is important to read the wording of the contract carefully when faced with the situation as the result could be materially changed by apparently subtle drafting differences. This is illustrated by the recent decision in PBS Energo AS v Bester Generacion UK Ltd, 2020 WL 00618546, where a liquidated damages provision was applied in a termination situation because the entitlement was based on the late completion of a milestone, rather than on works as a whole being completed.
Triple Point is the subject of an appeal to the Supreme Court in recognition of the important points of principle in relation to the construction and application of liquidated damages provisions in a termination context. Further useful guidance will be contained in the Supreme Court judgments.
In the meantime, remember:
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The importance of the drafting of the liquidated damages provisions. If the entitlement to liquidated damages is subject to completion of the works it will probably not apply in a termination situation.
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Even if liquidated damages do not apply there will still be a right to claim general (unliquidated) damages i.e. loss than can be proved to flow from culpable delay.
