January 20, 2020

Do liquidated damages clauses survive contractual termination?

Following what has been a series of conflicting judgements, the case of Triple Point in the Court of Appeal has begun to shed some much needed light on the application of liquidated damages clauses in circumstances where the contract is terminated or abandoned.

In short, the answer is that it depends on the wording of each individual contract. Whilst this may not seem particularly satisfactory or ground breaking, and will hopefully be built upon in future case law, the judgment does at least provide some parameters and revive an important authority, which had somehow become sidelined.

The facts

Commodities trader, PTT, acquired a new software system from Triple Point. The contract contained inconsistent payment provisions. Article 18 set out a series of milestone payments and Article.5(1) required payment for license fees by reference to order forms, which contained payment dates.

Triple Point completed, and invoiced for, the first milestone (149 days late!), which PTT duly paid. The problem arose when Triple Point then asked PTT to pay further invoices in respect of uncompleted work relying on dates set out in order forms themselves. PTT refused to pay because the corresponding milestone had not yet been achieved. Triple Point refused to continue to work without further payment and left site. PTT terminated the contract on the grounds of Triple Point's repudiatory breach, Triple Point not being entitled to further payment or therefore to suspend works.

Triple Point issued proceedings to recover the outstanding invoice. PTT counter-claimed seeking liquidated damages pursuant to Article.5(3) of the contract. This provided that if the Triple Point failed to:

"deliver work within the time specified and the delay was not introduced by PTT, [Triple Point] shall be liable to pay the penalty at the rate of 0.1% … of undelivered work per day from the due date for delivery up to the date PTT accepts such work … " (emphasis added).

The amount was found to be a modest sum when compared to the loss the delay had actually caused.

Jefford J, at first instance, held that Triple Point was not entitled to further payment or to suspend works and awarded PTT's counterclaim, finding that PTT was entitled to recover $3.5m in liquidated damages for delay. Triple Point appealed, arguing that liquidated damages clauses only applied when delayed work was subsequently completed and accepted, not - as the case was here – in respect of work which the employer never accepted.

The Court of Appeal reviewed the case law and found that there were 3 possible approaches to a liquidated damages clause in these circumstances:

  1. the clause does not apply (Supreme Court ruling in Glanzstoff1 applied) – followed for nearly a century until 2006 when, through omission, it mysteriously fell by the wayside;
  2. the clause only applies up to the termination of the first contract – this is the standard textbook approach but was considered by the Court to be not without difficulty; or
  3. the clause applies until a second contractor achieves completion – the wording would need to be precisely drafted to this effect to end up with this potentially problematic and complicated outcome. What if completion of the works was delayed by the incoming contractor or worse still never completed?

The Court of Appeal concluded that much will turn on the precise wording of the provision itself. As the clauses in Triple Point and Glanzstoff were so close, the same conclusion had to be reached in both. Jackson revived Glanzstoff as authority on the matter in such circumstances and the clause was found not to apply.

For PTT, this meant they were entitled to recover damages for the 149 day delay caused by Triple Point in relation to milestone 1, but were not so entitled in respect of further milestones, which were neither completed by Triple Point nor accepted by PTT. Either way, as it turned out, the "total liability" cap in Article 12.3 was found to apply to liquidated damages and had been used up by the award of general damages.

Take home

Despite not offering a single definitive approach as to whether liquidated damages can be recovered for delay in terminated or abandoned contracts, Triple Point has at least to a certain extent cleared waters that have been muddied by a confusing run of conflicting case law and reinstated the principle in Glanzstoff.

This does mean that where liquidated damages are stated as being payable up to the date of completion – as they are in many contracts, including standard forms - they will fall away if the contract is terminated or abandoned prior to completion being achieved. Whilst this may seem counterintuitive, that is the literal effect of the drafting – whether that was the intended effect is another matter - and it does not necessarily mean that the employer is without a remedy because it can still claim for general damages for breach.

This case demonstrates, once again, the importance of clear and precise drafting. Say what you mean.

[1] British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd [1912]