The Court of Appeal has dusted off a House of Lords decision from 1913 to decide its latest liquidated damages case.
Key point
- Liquidated damages clauses may not apply where the contractor never achieves completion
Sir Rupert Jackson’s judgment in Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230 has much to delight anyone’s inner legal geek. Not only is it the latest tour de force from a judge who combines a brilliant legal brain with the clearest of writing styles, but it also answers a cracking construction law conundrum.
The facts
During 2013, Triple Point entered into a contract to provide a new software system for PTT’s commodities trading business. The contract value was $6.92m and the work was split into various phases, with payments due once Triple Point had achieved certain milestones. Triple Point did not perform well. Although the first two stages of phase one were achieved in March 2014, and PTT paid the agreed amount of $1.038m, Triple Point was already 149 days late.
Triple Point remained in delay and PTT refused to pay anything else. Triple Point submitted invoices on the days when the milestones to which the payments related should have been reached. PTT relied on a clause which stated that the payments were only due if the milestones had in fact been reached. Triple Point refused to carry on working and, in May 2014, suspended work and left the site. PTT claimed that the suspension was unlawful and terminated the contract. Triple Point sued for the unpaid invoices and PTT counterclaimed for delay and the damages it had suffered as a result of terminating the contract and employing a new contractor to complete the work.
At first instance, Jefford J dismissed Triple Point’s claim and awarded PTT just under $4.5m on its counterclaim. Triple Point appealed.
The appeal
Central to the issue for Jackson (who heard the case along with Lewison and Floyd LJJ) was the meaning of the liquidated damages provision in the contract: “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…”
Triple Point argued that the liquidated damages provision only applied when the delayed work was subsequently completed and accepted by PTT. Because Triple Point had not completed the work, the clause was irrelevant. This is the conundrum mentioned earlier (and one that certainly got Jackson’s attention): how does the liquidated damages clause operate where the contract has been terminated or abandoned and someone else completes the work?
Neither party had cited authority on this issue until asked to do so by the Court of Appeal. Jackson’s review of those authorities is fascinating. He felt the cases threw up three possible answers:
- the clause does not apply at all;
- the clause only applies up to the termination of the original contract with general damages payable afterwards; or
- the clause applies until the replacement contractor completes the work.
The forgotten judgment
Although there was judicial support for all three answers, the middle option is generally treated as the correct one by legal textbooks. That was not without its difficulties because it might not be an artificial distinction. Jackson wondered if it might be more logical to assess the employer’s total loss flowing from the abandonment or termination using the ordinary rules for assessing contractual damages.
He also had significant doubt about the third option, since this seemed to give the employer and the replacement contractor the ability (unfairly from the first contractor’s perspective) to control the period for which liquidated damages would run.
Which leaves the first option: that the liquidated damages provision does not apply at all. This analysis is supported by the House of Lords’ decision in British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Co Ltd 1913 SC (HL) 1, which, despite being “a decision of our highest court, which has never been disapproved”, had somehow not been cited or considered in a number of the authorities reviewed by Jackson (including one of his own judgments).
Glanzstoff was also a case where the original contractor did not complete the work and the liquidated damages provision made it clear that it applied if “the contractor fails to complete the works by the date named”. The House of Lords held that, because the contractor did not complete the work, the clause did not apply at all. Jackson had no difficulty in applying it to the facts of Triple Point.
Because Triple Point had completed the first two stages of phase one, PTT was entitled to liquidated damages for the 149 days of delay (although, no additional money was owed to PTT because of Jackson’s separate finding in relation to an overall cap in the contract). Any other delay had to be assessed by general damages.
The law going forward
Although Jackson stressed that any case would turn on the precise wording of the liquidated damages clause in question, it is worth noting that many building contracts – not least the current JCT suite – have liquidated damages provisions prefaced on the contractor failing to complete the works or a section by the relevant date.
As such, Glanzstoff should remain absolutely central to assessing delay damages in cases where the contract has been abandoned or terminated. So long as similar wording is used, liquidated damages will almost certainly not apply and loss will be calculated in accordance with the ordinary principles of damages recovery. In the context of delay, such damages are referred to as being “at large” rather than fixed in advance.
Stuart Pemble is a partner at Mills & Reeve
