Liquidated damages clauses are commonly used in commercial, technology and construction contracts to give customers certainty over the damages they can recover for a contractor’s late or defective performance. An unorthodox decision by the Court of Appeal in Triple Point Technology Inc v PTT Public Company Ltd  EWCA Civ 230 had created confusion and concern as to how those clauses should operate post-termination of the contract. Thankfully, following a further appeal, the Supreme Court has provided welcome clarity on this point and taken us back to familiar ground.
In Triple Point Technology v PTT Public Company Ltd  UKSC 29, PTT, a commodities trader, had engaged Triple Point to replace its existing trading system (referred to as “Phase 1”), and develop a new system to include new types of trades (Phase 2). The contract included the following liquidated damages provision: “If [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, [Triple Point] shall be liable to pay the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…”.
Phase 1 was completed 149 days late, which subsequently delayed the commencement of Phase 2. PTT nevertheless paid Triple Point for Phase 1. However, it refused to pay anything in respect of Phase 2 on the basis that the dates for payment were tied to milestones for completion, which had not been met. Triple Point suspended its work, leading PTT to terminate the contract for repudiatory breach. In response, Triple Point sued PTT for its unpaid invoices, and PTT counterclaimed for damages and liquidated damages under the contract.
The primary issue that the Court had to determine was how a liquidated damages provision operates in circumstances where the contract is terminated prior to completion, or acceptance by the customer, of the works, but after the contractor’s obligation to pay liquidated damages has already accrued.
At first instance, Jefford J held that the liquidated damages applied for both phases up to the date of termination, with general damages recoverable thereafter; the orthodox approach. The Court of Appeal surprisingly chose to change tack, awarding liquidated damages for Phase 1 on the basis that all works had been completed, but not for Phase 2, as no works had been completed or accepted. Instead, PTT could pursue general damages in the usual way (i.e. if it could prove that it had suffered actual losses as a result of the delays). This decision created significant concern that liquidated damages might not be available in circumstances where the clause referred to liquidated damages for delay accruing up until completion or acceptance and the contract was terminated prior to that occurring.
The Supreme Court reaffirmed the orthodox approach, holding that unless a contract expressly provides otherwise, liquidated damages accrue up to the date of termination of the contract, and those accrued rights survive the termination, with general damages being recoverable from that point onwards. If the parties want to contract on a different basis, they will need to include a carefully drafted clause with express, clear wording setting out their agreement. As such, it is important that contracting parties seek legal advice to ensure that their proposed liquidated damages provisions have the intended effect.