July 26, 2021

Liquidated damages (LADS) case has implications for construction contract disputes

Construction Solicitor and Associate, Lawrence Pearce, and legal support, Gabriella Karaulanova, discuss an important Supreme Court decision with ramifications for liquidated damages clauses and disputes regarding construction contracts.

In the recent case of Triple Point Technology, Inc v PTT Public Company Ltd [2021], the UK Supreme Court provided some clarity as to whether liquidated damages (“LADS”) in contracts should be awarded until the date of termination, but not thereafter.

Although not a construction case, the inclusion of liquidated damages clauses in construction contracts is common due to the time-sensitive nature of projects. A liquidated damages clause in a construction contract will provide for establishing the pre-agreed amounts (or calculations) of compensation to be paid by party A to party B in the event part A breaches the contract in one of the ways specified by the contract. In the absence of a liquidated damages clause, Party B would be required to make a claim through the Courts for general damages.  

Facts of the liquidated damages case

On 8th February 2013, PTT entered into a software contract (CTRM Contract) with Triple Point Technology, Inc (“Triple Point”) for the design, installation, maintenance and licencing of software to assist PTT with its business in commodity trading. Triple Point customised the software to PTT’s needs and payment was required by reference to milestones set out specifically in the contract, which specified for specific work to be completed by each milestone (Similar to the way milestones are used in construction contract). The project was divided into phases; Phase 1 was completed on 19 March 2014; however, it was significantly delayed by 149 days. Consequently, this meant that the work for Phase 2 did not commence at all.

PTT paid Triple Point an invoice of $1,038,000 for the Phase 1 work but they refused to continue payment because no further work was completed as set out by the milestone provisions in the CTRM Contract. Instead, PTT gave notice and terminated the contract on 23 March 2015. Consequently, Triple Point commenced proceedings in the Technology and Construction Court against PTT in respect of the unpaid invoices for the software licence fees. PTT counterclaimed damages for breach of contract, including liquidated damages for delay up to the date of termination, and termination loss for the costs of acquiring a replacement system.

The principal issues in question

The primary question was whether PTT is entitled under the CTRM Contract to liquidated damages for delay in incomplete work prior to the termination of the contract.

There were two more significant issues in question which related to article 12.3 of the Main Part of the CTRM Contract:

  • Whether the exception from the cap in article 12.3 for negligence applied to Triple Point’s negligent breach of contract.
  • Whether liquidated damages fell within the cap imposed by article 12.3 on Triple Point’s liability.

First instance decision

Jefford J held Triple Point accountable for the delay in performance of the CTRM Contract due to breaching article 12.1 of the Main Part, by failing to exercise reasonable skill, care and diligence in the performance of its services.

The judge dismissed Triple Point’s claims and entitled PTT to an award of damages for the termination of the contract which were capped under article 12.3 of the CTRM Contract. Liquidated damages were also awarded for the delay, however they were not subject to the cap. The total sum awarded was $4,497,278.40.

Triple Point challenged the liquidated damages decision.

Court of Appeal decision

Consequently, the Court of Appeal set aside the judge’s verdict regarding liquidated damages and held:

  • That PTT was only entitled to liquidated damages for work that was completed prior to the termination of the contract pursuant to article 5.3.
  • That all damages awarded to PTT were subject to the cap in article 12.3.
  • That the negligence exception in article 12.3 online applied to ‘freestanding torts or deliberate wrongdoing’, not a breach of a contractual obligation to exercise reasonable skill, care and diligence.

The effect of this was that PTT was not entitled to the recovery of any further delay leading to termination as such work was not accepted by PTT. Subsequently, they appealed.

The Supreme Court decision

The key issue was whether liquidated damages should be paid for incomplete or unaccepted work prior to the termination of a contract.

Lady Arden took the view that the Court of Appeal were incorrect on their point of ruling regarding the first two issues but did correctly conclude that a cap existed on the liquidated damages as per article 12.3.

In conclusion, Lord Leggatt held that liquidated damages are payable for any period in delay in completion up to the date of termination, but not beyond, unless the contract states otherwise. Therefore, article 5.3 should have been interpreted such that, regardless of whether PTT accepted the work, liquidated damages are payable if the contractual completion date had overrun. Accordingly, PTT recovered just over $14.5 million, with no limitation of liability.

Comment from a construction solicitor

Over the years many academics and those within the construction industry have questioned the potential ‘hybrid’ version of LADS that would have morphed from the Court of Appeal decision and the Supreme Court have now taken us back in time to the Orthodox position that will be welcomed by many. The decision should provide certainty to parties within a contract regarding the enforceability of a liquidated damages clause, specifically in the situation where contractors have delayed the completion of work.

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Key Contact

Lawrence Pearce

Associate

lpp@holmes-hills.co.uk

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