Liquidated damages pt 1.

There are many similarities between IT and construction projects, notably the routine risk of late completion and the resulting complex delay claims.

The Supreme Court recently delivered its highly anticipated judgement in Triple Point Technology, Inc v PTT Public Company Ltd.

While the case concerned software engineering rather than building work, an earlier judgement had given construction clients great cause for concern as the Court of Appeal had allowed an IT contractor to escape liability for liquidated damages simply because the work had not been completed before termination. However, this judgement has now been overturned in a landmark ruling by the Supreme Court.

There are many similarities between IT and construction projects, notably the routine risk of late completion and the resulting complex delay claims. In order to simplify matters, it is common for the client and contractor to agree a pre-determined rate of liquidated and ascertained damages (LADs) that applies if the contractor is responsible for late completion. In theory, this benefits both parties – the contractor is not exposed to an unexpected level of damages, while the client does not need to prove the actual losses it suffered as a result of the delay.

The case

In this particular case, software contractor Triple Point suspended work following a payment dispute with its client, PTT. However, Triple Point’s suspension was found to be a repudiatory breach, sufficient for PTT to terminate the contract and claim damages. This is a common scenario that will resonate with those more familiar with cement than software.

Triple Point raised a number of arguments in its defence. It failed to persuade the Court of Appeal that the agreed rate of LADs constituted an unenforceable penalty (penalty clauses being forbidden in contracts by English law). In fact, the LADs claimed by PTT were modest compared to the actual financial consequences of any delay in installing the software. Although the contractual formula was not perfect, it did represent a genuine pre-estimate of real losses.

However, Triple Point had an alternative defence. It argued that the employer should not be permitted to claim LADs if the contract was terminated before completion of the work. Unhelpfully there was inconsistency in the existing case law, with various judgements supporting three different outcomes in this situation: LADS not applying at all; LADS only applying up to the date of termination of the first contract; and LADs continuing to apply until a subsequent contractor achieves completion.

Andrew Keeley

Partner Construction T: +44 (0)1483 252581 andrew.keeley@crsblaw.com

The first ruling

Despite acknowledging that textbooks generally assume LADs would apply until the date of termination, the Court of Appeal nevertheless found in favour of Triple Point and decided that the LADs clause did not apply at all unless the original contractor completed the work.

The Court of Appeal’s ruling sent shockwaves through the construction industry.

As the Court of Appeal’s judgement was based on the specific wording of a complex and bespoke IT contract, nobody could be certain how the precedent might be applied to differently worded LADs clauses. Some argued that the principle would equally apply to common forms of construction contract, such as the JCT suite. Termination decisions were nervously reassessed by construction clients, who were now at risk of losing a previously clear-cut right to LADs.

The overturn

The Supreme Court’s decision last week was therefore keenly awaited by the construction industry.

To the relief of developers throughout England, the Supreme Court confirmed that the orthodox position was correct after all. In her leading judgement, Lady Arden said that the Court of Appeal’s interpretation was “inconsistent with commercial reality” and “threw out the baby with the bathwater”. The parties plainly intended that LADs should apply and the employer should not have to quantify its actual loss.

The position is now clear. Unless a clause unambiguously states otherwise, LADs will continue to apply up to the date of termination. After termination LADs will cease to accrue, although the contractor may still be liable for any additional losses which the employer can prove it has suffered.

This article by Andrew Keeley was first published in Construction News on 29 July 2021 and is reproduced with their kind permission.

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