Liquidated Damages (LD) are paid pursuant to a contractual agreement between the parties as to what happens in the event that say completion of a project is delayed or a fleet of vehicles are returned each having exceeded the agreed mileage. LD’s are not a debt owed by the contractor to the recipient but a secondary obligation consequent on breach.
A recent decision of the Supreme Court Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 (16 July 2021) helps clarify when LD’s are payable and up to what point. The case revolved around consequences of delay in the context of an IT supply contract.
Cases such as these will usually turn on the wording of the contract. In the Triple Point case, the brief facts and relevant wording was as follows:
Background
PTT Public Company Ltd traded in oil and gas. Triple Point Technology Inc specialised in the development and implementation of commodities trading software.
Triple Point and PTT entered into a contract in February 2013 for TP to provide PTT with software and software implementation services. Triple Point were to achieve nine milestones, with the total contract price (USD6.92 million) to be paid in associated instalments.
Works began in March 2013 and Triple Point suspended work in May 2014 due to a dispute over payment. PTT terminated the contract in 2015. At that point only the first two payment milestones had been achieved.
The Liquidated Damages
In the case of delay, Triple Point was to pay LDs in accordance with the following clause:
“…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…”
Judgment
The Court of Appeal had decided the case in a way which created much uncertainty. The Supreme Court restored the element of certainty.
(a) Issues before the Supreme Court
The issue relating to the delay which the Supreme Court was required to decide was as follows:
“Where one party (the “employer”) contracts with another (the “contractor”) to carry out works for it, and the contract provides that liquidated damages are payable if the works are delayed, whether (a) the employer only has a right to such damages if the contractor completes the works, or (b) such damages are still payable even if the employer terminates the contract before completion.”
(b) Findings
The Supreme Court reversed the Court of Appeal’s decision, with the Supreme Court confirming that delay LDs applied up to the date of termination, with general damages available thereafter. Lady Justice Hale confirmed that there is no need for parties to include an express confirmation of this position in their contracts, because it reflects the current law.
The Court said: “On its true construction [the clause] provided for liquidated damages if Triple Point did not discharge its obligations within the time fixed by the contract irrespective of whether PTT accepted any works which were completed late. The function of the words on which the Court of Appeal relied was to provide an end date for liquidated damages on acceptance of the works… But it did not follow that there were to be no liquidated damages if there was no such acceptance. To reach that conclusion would be to render the liquidated damages clause of little value in a commercial contract. To use an idiomatic phrase, the interpretation accepted by the Court of Appeal in effect threw out the baby with the bathwater.”
The Supreme Court confirmed that “…it is ordinarily to be expected that, unless the clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract”.
Conclusions
The Judgment will be welcomed by many clients who have employed contractors/ suppliers.
The point of liquidated damages clauses is to make it easier for the innocent party to recover the losses that would ordinarily be extremely difficult to quantify or evidence. The Court of Appeal put a cat amongst the pigeons with its ruling, but thankfully, the cat is back at home after the Supreme Court ruling.
Whilst the Supreme Court’s decision is to be welcomed and will provide greater certainty as to the sum that is available to them in the event that a supplier delays in the implementation of an IT project or a contractor constructing a development, clients must still consider carefully when/ if to terminate, and perhaps most importantly, make sure that the contractual wording is clear.
