A liquidated damages clause that did not contemplate the effect of termination ||| MTECC News edition 19.11
A liquidated damages clause that did not contemplate the effect of termination
In Triple Point Technology, Inc. v PTT Public Co Ltd  EWCA Civ 230 the English Court of Appeal considered how to apply a clause imposing liquidated damages in circumstances where the contract was terminated before the contractor achieved completion.
After a review of the case law, Sir Rupert Jackson (giving the judgment of the Court of Appeal) observed that three different approaches have emerged to clauses providing for liquidated damages for delay in cases where a contractor fails to complete the work and a second contractor steps in:
1. The liquidated damages clause does not apply.
2. The clause only applies up until the termination of the contract.
3. The clause continues to apply until the second contractor achieves completion.
The Court noted that although textbooks generally treat category (ii) as the orthodox analysis, that approach is not free from difficulty. If a construction contract is abandoned or terminated, the principal is in new territory for which the liquidated damages clause may not have made provision. Although accrued rights must be protected, it may sometimes be artificial and inconsistent with the parties’ agreement to categorise the principal’s losses as $x per week up to a specified date and then general damages thereafter. It may be more logical and more consonant with the parties’ bargain to assess the principal’s total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract. Ultimately, the question must depend on the terms of the particular liquidated damages clause in issue.
In this case, the relevant clause provided:
“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…”
The Court of Appeal interpreted the phrase “up to the date PTT accepts such work” to mean that the clause was premised on eventual acceptance of the work. That is, the clause was not intended to apply where termination occurs and the contractor never hands over completed work. The Court was therefore satisfied that no entitlement to liquidated damages had accrued.
Whilst many Australian Standard form contracts expressly provide for the calculation of liquidated damages up to the date of termination, this appeal exposes the complexity that can arise where termination is not addressed.
Society of Construction Law Australia Conference in Perth 1 to 3 August 2019
MTECC is once again sponsoring the SoCLA national conference held in Perth at the Westin from 1-3 August 2019. The conference theme is “Doing it Overseas – the legal tips and tricks for taking Construction Smarts to foreign jurisdictions”. The details are here.