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Liquidated Damages Post Termination?

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Andrew Archer Commbar News

In his judgment in Hall & Shivers v Van der Heiden No. 2 [2010] EWHC 586, handed down on 23 March 2010, Mr Justice Coulson (an experienced TCC judge) so held on the basis that ‘as a matter of principle, I reject the submission that the defendant’s liability to pay liquidated damages came to an end when the employment was terminated’ at [77].

Hitherto, the accepted wisdom has been the right to liquidated damages in such circumstances ceases upon termination and the principal’s losses for delay post termination are recoverable under the ordinary principles of damages, subject always to the terms of the contract. That is the position apparently endorsed by the learned authors of Keating on Construction Contracts. The eighth edition at [9-028]:

‘If the contract is brought to an end by determination or otherwise, then prima facie, all future obligations cease and no claim can be made for liquidated damages accruing after determination.’ Curiously, earlier at [9-006], the authors of Keating retreat a little from that emphatic position when they say: Similarly, it will be a question of the construction of the contract whether a liquidated damages clause is intended to survive and continue to apply in the case of an accepted repudiatory breach’

 

Back home, the fourth edition of Brooking on Building Contracts at [6.10] provides:

‘…. but after [termination] the liability of the contractor for liquidated damages will cease… This is the consequence of the rule that the effect of the acceptance of the repudiation of a contract is to put an end to the contract so far as its future performance is concerned, leaving the repudiating party to a action in damages’

– citing Y P Barley Producers Ltd v E C Robertson Pty Ltd [1927] VLR 194. Coulson J’s reasoning is set out in [76]:

I reject the suggestion that the defendant’s liability to pay liquidated damages somehow came to an end when his employment under the contract was terminated. There is no such provision in the contract. Any such term would reward the defendant for his own default. Take the example of a contractor who has wholly failed to comply with the contract, is in considerable delay, and is facing a notice of termination. The defendant’s case would mean that such a contractor was only liable to pay liquidated damages for delay before the decision was taken to terminate, thereby penalizing the employer for trying to get the works completed by another contractor, and rewarding the contractor for sitting on his hands and failing to carry out the works in accordance with the program. If the defendant was right, the contractor would be better off not coming back on site to carry out the works because, if he refused to do so, the contract would then be terminated and his liability to pay liquidated damages would automatically come to an end. That would not be a commonsense interpretation of this (or any) construction contract.’

 

It will be interesting to see if the decision or its outcome withstands appellate scrutiny and, the writer gleans, a more exposed jurisprudential analysis. Interesting questions arise including the interaction of the proposition with the laws of mitigation and debt, and an analysis against the background of the law of primary and secondary contractual obligations. Much has occurred in that area since the case cited in Brooking.

Thankfully, the Delphic boundaries of those questions and their answers are comfortably beyond the reach of this short case note. Meanwhile, parties might well be reminded to deal with the matter expressly in their contractual arrangements.

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