Liquidated damages are payable until termination – Triple Point v PTT in the Supreme Court
Most people in construction, and some other sectors, will have come across liquidated damages at some point. They are usually payable by a contractor for delay past the completion date; for example, the contract may specify that £10,000 per month is payable for every month between when completion should have happened and when completion actually happens.
The Supreme Court has recently given some welcome clarity to the situation in which a construction contract is terminated in circumstances when liquidated damages would otherwise be payable. This situation arises fairly frequently. If an employer has a contractor who is working slow, and has already gone past the completion date, that employer will inevitably think that they would be better off getting another contractor in to complete the works, and may want to terminate.
Given how common this sort of situation could arise, you would have thought there would be clarity about when liquidated damages are payable in this sort of situation. Sadly, prior to 16 July 2021 (when the Supreme Court gave its recent judgment) that was not the case. Sir Rupert Jackson in the Court of Appeal back in March 2019 (Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230, which was a dispute about a software contract, originally decided by the judges in the Technology and Construction Court in August 2017) gave a judgment that created a great deal of uncertainty.
What Sir Rupert did in the Court of Appeal was to identify three different approaches, as follows:
- A liquidated damages clause does not apply at all when the contract is terminated; or
- A liquidated damages clause applies only until termination of that contract; or
- A liquidated damages clause applies until completion is achieved by the subsequent contractor.
Sir Rupert could have chosen one of those three options as the correct interpretation of the law generally, and ideally would have chosen the second, which is what almost everyone thought the law was before his judgment. That would have given lawyers and businesses certainty, helped to resolve disputes and generally been better for everyone.
Instead, Sir Rupert said the following:
- With regard to the first option, he can “see much force in the…reasoning”.
- With regard to the second option, he said that “textbooks generally treat category (ii) as the orthodox analysis, but that approach is not free from difficulty”.
- With regard to the third option, he believed it was “doubtful”.
This was woefully unhelpful guidance from Sir Rupert. When advising clients on what the consequences of termination will be, there is no benefit at all in saying that the Court of Appeal thinks that their argument is “not free from difficulty” or “doubtful”, and it is not even that helpful to say that the court can “see much force in the reasoning” of a position. In the end, Sir Rupert chose the first option for the particular clause in that case, asserting that liquidated damages were not payable at all. This was (as Lady Arden in the Supreme Court later said) a “radical departure” from the generally understood law on liquidated damages and supported by a less-than-unambiguous analysis and judgment.
Thankfully, the Supreme Court has now come to the rescue. Lady Arden gave very practical and commercially-focussed guidance at paragraph 35 of her judgment:
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. Parties 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. That is well-understood. Parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read.
This gives much more certainty. Unless the clause in question is worded in an unusual way, it is option 2 that will apply. Liquidated damages will be payable from the contractual completion date up until termination of the contract and not beyond it. This certainty should help to resolve disputes quicker and let everyone get on with running their respective businesses.
