Gravel2Gavel Construction & Real Estate Law Blog
Can an employer recover liquidated damages (LDs) from a contractor if the contract terminates before the contractor completes the work?
Surprisingly, heretofore, English law provided no clear answer to this seemingly straightforward question, and inconsistent case law over the past century has left a trail of confusion. Given the widespread use of English law in international construction contracts, this uncertainty had gone on far too long.
The good news is that drafters of construction contracts throughout the world can now have a well-deserved good night’s sleep courtesy of the English Court of Appeal’s March 2019 decision in Triple Point Technology, Inc. v PTT Public Company Ltd [2019] EWCA Civ 230.
The Triple Point case concerned the delayed supply by Triple Point (the “Contractor”) of a new software system to employer PTT. The contract provided for payments upon achievement of milestones, however order forms incorporated into the contract set out the calendar dates on which fixed amounts were payable by PTT, resulting in an apparently contradictory requirements on when payment was due. Triple Point achieved completion (149 days late) of a portion of the work milestones, and were paid for that work. Triple Point then sought payment for the work which was not yet completed, relying on the calendar dates in the order forms rather than achievement of milestone payments. Things got progressively worse as PTT refused payment, Triple Point suspended the work for PTT’s failure to pay, PTT terminated the contract and then appointed a new contractor to complete the work.
In the ensuing first instance court proceedings, Triple Point sought to recover the sums under the calendar dates and PTT counterclaimed for delay LDs and damages arising from termination of the contract. The trial court decided in PTT’s favour and Triple Point appealed. Among other grounds, Triple Point challenged the first instance decision that the LDs were recoverable.
The Court of Appeal, using established principles of contractual interpretation, held that the milestone payment scheme governed and the payment dates in the order forms did not require PPT to pay for work not completed by Triple Point. No new ground broken there, but where things began to get interesting was in the Appeal Court’s analysis of the application of the LD provision.
The starting point for the Court of Appeal’s analysis of the LDs was the wording of the LD clause itself. Should the LD clause be applied: (a) up to termination/abandonment; (b) beyond termination/abandonment; or (c) cease to apply after termination/abandonment? The LD clause 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…”
Because the LD clause provided that the LDs were recoverable “up to the date PTT accepts such work,” the Court of Appeal interpreted this wording to mean “up to the date when PTT accepts completed work from Triple Point.”
The Court of Appeal considered other approaches which have emerged in prior case law dealing with LD provisions where one contractor fails to complete and a second steps in, namely:
- the clause only applies up to termination of the initial contract; and
- the clause continues to apply until the second contractor achieves completion.
The Court of Appeal saw the approach in (a) as problematic: once a construction contract is abandoned or terminated, the employer will be “in new territory” which may not have been addressed by the LD clause. Despite the importance of preserving the accrued rights, doing so may result in an “artificial” distinction between the employer’s losses being a certain amount prior to termination, and general damages thereafter.
The Court of Appeal also expressed doubts about the correctness of the approach in (b): to allow the employer to recover LDs after the contractor is no longer performing the contract would effectively mean that the employer and the new contractor will control the period for which the LDs will run.
Accordingly, the Court of Appeal held that the LD clause applied to the works that had been completed, but fell away entirely on termination in respect of the incomplete milestones, and that PTT had a right to claim general damages for delay in respect of the latter. Finally, an unambiguous answer to the straightforward question posed at the beginning of this article. Of course, an LD clause which has different wording may lead to a different result.
In light of the decision in the Triple Point case, both contractors and employers under English law governed contracts should consider the implications of termination on the employer’s entitlement to LDs where the contractual date for completion has been exceeded. Furthermore, particular care is needed when drafting the LD provisions, or using standard form contracts such as, for example, FIDIC. If the parties intend for the LDs to apply after termination, they need to say so clearly. Maybe drafters of construction contracts throughout the world are not about to get a good night’s sleep after all.