What happens to liquidated damages for delay if a contractor or supplier does not reach completion?

Liquidated damages clauses are frequently used in construction contracts to compensate the employer for delay. Once the provision is triggered the employer is entitled to recover liquidated damages for the delay at the specified rate, without needing to prove the quantum of its claim. There are many parallels between construction and IT project contracts and, in the recent case of Triple Point Technology Inc v PTT Public Co Ltd [2019], the Court of Appeal looked at the use of liquidated damages - not in the context of a construction contract but in a contract for the delivery of software.

Background

PTT engaged Triple Point to design and develop a Commodities Trading, Risk Management and Vessel Chartering System (“CTRM”). There were to be two stages to the project. The first was the replacement of PTT’s existing system. The second stage was to develop the system (which was based on Triple Point’s proprietary software) to accommodate new types of trade.

The contract included the following liquidated damages provision:

“If Contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, Contractor shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.”

According to the judgment, the work proceeded slowly. Triple Point failed properly to resource the project and failed to integrate the relevant software packages. The system which it did install did not have the functionality specified. 

Stages 1 and 2 of Phase 1 were delivered 149 days late.

There was some confusion in the contract terms about whether further payments were due to be paid on specified dates or by reference to specific milestones. Triple Point relied on the specified dates and invoiced PTT for work which was not yet completed (indeed Triple Point appeared to concede it hadn’t even started Phase 2). 

PTT refused to make further payments on the basis that, apart from Stages 1 and 2 of Phase 1, the milestones had not been met. This was not disputed by Triple Point but they nonetheless refused to carry out further work without payment and left site. PTT maintained this was a wrongful suspension of the work and purported to terminate.

Undeterred Triple Point issued proceedings to recover its unpaid invoices. 

PTT defended the proceedings on the basis that no further payments were due and counterclaimed for damages for delay and damages due on the termination of the contract. 

The first instance decision

At first instance, the judge decided that payments were to be made by reference to the milestones. There were therefore no further payments due to Triple Point. They were not entitled to suspend work and were in repudiatory breach of contract. Instead it was PTT who was entitled to damages. 

PTT recovered $1,038,000 for the costs of procuring an alternative system and wasted costs (which were subject to a contractual cap). 

It was also awarded liquidated damages for delay totalling $3,459,278.40 which the judge found were not subject to the cap. $154,662 of these damages were for the 149 days’ delay in completing Stages 1 and 2 of Phase 1. The remaining damages were calculated from the specified completion dates for each stage up to the date of termination of the contract. 

The Appeal 

Triple Point appealed the decision and PTT cross appealed. There were a number of grounds raised, one of which was the extent to which the liquidated damages clause was engaged. Triple Point argued that the clause only applied when work was delayed, but subsequently completed and accepted. Here the work had not ever been completed and the contract had been terminated. 

The Court of Appeal reviewed a chain of authorities on this point starting with the case of British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd [1912]. 

In Glanzstoff the contractor became bankrupt. A replacement contractor was appointed. The employer sought to recover liquidated damages pursuant to a bond claiming for the delay period up until the second contractor completed the work. The House of Lords found that the liquidated damages provision did not apply at all because the original contractor had not completed the works.

Glanzstoff was subsequently applied in a number of cases but there were then a number of cases in which, for some reason, it was not cited. These cases have resulted in three alternative, conflicting ways in which the court has addressed the question of liquidated damages when the contractor has not completed the works:

1. The clause does not apply at all (as was the case in Glanzstoff) and the employer can instead recover unliquidated damages;
2. The clause applies but only up to the date of termination of the first contract, after which the employer can recover unliquidated damages;
3. The clause continues to apply until the second contractor achieves completion. This is the approach that was adopted by the court very recently in the case of GPP Big Field LLP v Solar EPC Solutions SL [2018].

Having reviewed the authorities, Sir Rupert Jackson expressed his doubts about the cases which fell within the third category as they allowed the employer and second contractor to control the period for which the liquidated damages would run. He considered the second category was treated by textbooks as the orthodox analysis but it was not an approach that was free from difficulty.

In his view, whether the liquidated damages would cease to apply or continue up to termination (or even beyond) must depend on the wording of the clause itself. Here the wording of the clause referred to delay between the contractual completion date and the date on which PTT accepts the work. Accordingly Article 5.3 had no application because Triple Point had never handed over the work to PTT.

PTT could therefore not claim liquidated damages but was entitled to recover damages for breach of contract, assessed on ordinary principles but subject to the contractual cap. 

Comment

As ever the operation of a particular contractual clause is going to depend on the wording of the clause in question. However, the decision here serves to provide a useful reminder of the different ways in which liquidated damages may be treated following termination and casts doubt on the third category.

In cases where, as here, the wording of the liquidated damages provision is referable to the contractor completing or handing over work, it is likely that the liquidated damages clause will fall away entirely if the contract is terminated, leaving the employer to prove unliquidated damages.

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