That’s enough LADs: Court of Appeal concludes that liquidated damages may not be recoverable after termination

Introduction

The case law on liquidated damages provisions always attracts a lot of attention amongst practising lawyers, academics and, of course, construction professionals charged with preparing, negotiating and overseeing building contracts. It is clear that Sir Rupert Jackson was acutely aware of the scrutiny he would face when he handed down his judgment on this case on 5 March 2019.  The judgment is  clear, reasoned and mercifully short. 

Background

The facts of Triple Point Technology Inc -v- PTT Public Company Ltd are actually of little relevance here, save to note that Triple Point was engaged by PTT to provide certain software solutions under a contract that had key milestone dates and a provision for liquidated damages.  The work was divided into key phases, and Triple Point achieved completion of Stages 1 and 2 of Phase 1 late and then continued to work on the remainder of the work.  The parties then fell into dispute over the payment of invoices, Triple Point suspended the works and PTT terminated claiming Triple Point had wrongfully terminated.  Although not a construction contract, it is easy to see how these facts are similar to scenarios which occur frequently on construction projects when a construction project goes wrong, it usually goes into delay before any termination. The employer will then be left trying to recover their losses which will include both the extra over cost of having another contractor complete the works and the losses stemming from delay.

Issues in dispute – when might LADs apply?

In the original case (before the TCC), the judge awarded $3,459,278.40 as liquidated damages for delay pursuant to Article 5.3 of the contract. On appeal, Triple Point argued that Article 5.3 was not engaged because that Article only applies when work was delayed, but nonetheless completed and then accepted by the employer.  They submitted that the clause does not apply in respect of work which the employer never accepted, as in this case. 

Sir Rupert Jackson considered three different options in respect of the validity of liquidated damages clauses in the event of termination of the contract, which I have converted into a visual for the purposes of this article:

LADs forever?

The Court of Appeal had no difficulty in rejecting option (iii), despite it having been preferred in Hall v Van der Heiden (N0 2) [2010] (a pure construction case) which was in turn followed by the High Court of Hong Kong in Crestdream v Potter Interior Design [2013] and, the High Court in GPP Big Field LLP v Solar EPC Solutions SL [2018] (regarding the construction of a solar facility).  Sir Rupert Jackson held that “If they are correct, it means that the employer and the second contractor can control the period for which liquidated damages will run.”  It will be of interest to readers to note that the relevant contract in Hall was a JCT Minor Works Building Contract (with contractor's design).

Best of both?

The orthodox position was, arguably until this judgment, option (iii), where the measure of damages was split. There is considerable logic behind this interpretation but the Court noted that there are some difficulties, suggesting that “It may be more logical and more consonant with the parties’ bargain to assess the employer’s total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract.” 

Sir Rupert Jackson concluded that option (iii) may apply, depending on the wording of the clause.

No LADs!

In the present case then, the Court of Appeal concluded that the wording of the relevant clause of the contract was inconsistent with an intention for it to apply in circumstances where the works were not completed by the original contractor. The Court followed British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd [1912] in which the Court of Sessions had concluded that the clause allowing unliquidated damages on termination was an alternative to the remedy of liquidated damages for delay under clause 24. 

It should be noted that again, Sir Rupert Jackson was keen to emphasise that this was a matter of the interpretation of the precise clause in the contract before the court: “In some cases, the wording of the liquidated damages clause may be so close to the wording in Glanzstoff that the House of Lords’ decision is binding. That is a decision of our highest court, which has never been disapproved.”  He did, however, go on to conclude that the present case was one such case and that he considered Glanzstoff to be binding to the extent that the liquidated damages provision fell away in respect of works not completed at the point of termination.  This meant that PTT could recover LADs for the late delivery of stages 1 and 2 of phase 1 but had to prove actual losses for the remainder of the works.

Another case of it depends

Sir Rupert Jackson and the Court of Appeal were charged with applying the law to the facts in respect of the specific case before them. The judgment does this in the clearest terms but does not, despite what some commentators may claim, set down new and conclusive rules about entitlement to claim LADs as apart of damages following the termination of a building contract.  At paragraph 110 of the judgment, Sir Rupert Jackson stated “In my view, the question 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 upon 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.”

So what now?

If you are already in contract and the building works are in delay and you are considering terminating the contract (whether you are the employer or the contractor), it is important to get advice on all aspects of the prospective termination, including the likely basis of calculating damages for delay following this most recent judgment.

If you are not yet in contract and want certainty going forward, it is important to remember that the Courts will always look to give effect to the intentions of the parties when interpreting contracts. Clear and effective drafting in the schedule of amendments to your standard form building contract (or in your bespoke building contract) will be critical to ensure that you do not have any surprises in the event of termination coupled with delay. 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.