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Construction - limits on liquidated damages provisions
Commonly construction contracts include liquidated damages (“LDs”) provisions, which are fixed or determined sums agreed by the parties to a contract that are payable on breach of contract. In a construction context, they are generally payable by the contractor to the employer if the contractor does not complete by the completion date.
In the case of Triple Point Technology, Inc. v PTT Public Company Ltd, the Court of Appeal had to decide (among other things) whether a LDs provision applied after termination of the contract and/or abandonment of the works. This case related to IT software but is equally relevant to construction projects.
The (brief) background to the case is:
- PTT decided to acquire a new software system and intended there to be two phases to the project.
- Triple Point was engaged to carry out the works.
- Unfortunately, work proceeded slowly. Triple Point failed properly to resource the project. It achieved completion of Phase 1 late. It did not commence works on Phase 2 and PTT eventually terminated the contract.
Judgment on Appeal
Sir Rupert Jackson gave the leading judgment. He considered that:
“The main issue of principle which [arose was] how to apply a clause imposing liquidated damages for delay in circumstances where the contractor or supplier never achieves completion.”
After considering previous case law, he considered that in cases where the contractor fails to complete and a second contractor steps in, three different approaches have emerged to clauses providing LDs for delay:
- The clause does not apply.
- The clause only applies up to termination of the first contract.
- The clause continues to apply until the second contractor achieves completion.
He found that the question whether the LDs clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that LDs must be used as a formula for compensating the employer for part of its loss.
In this case, the relevant wording of the LDs provision was:
“If [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, [Triple Point] 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…” (emphasis added)
The LDs clause focused specifically on delay between the contractual completion date and the date when completion was achieved. It had no application in a situation where Triple Point never completed so it did not apply. However, PTT was still entitled to claim for general damages for delay.
Note that Sir Rupert Jackson had doubts about the cases in category 3 above (LDs clause continues to apply until the second contractor achieves completion). The second contractor is unlikely to accept liability for any delay the first contractor is responsible for and/or arising out of the termination of the first contract. The employer will look to recover its losses arising from this delay from the first contractor. However, in category 3, LDs could run all the way until completion of the works by the second contractor. Such a provision is unlikely to be acceptable to the first contractor.
As with all contractual wording, use clear, express terms. Consider what the potential risks are before entering the contract and ensure the proposed contract protects you from those risks.
For employers and contractors, this means considering at the outset (before the contract is agreed) the consequences of a possible termination. Consideration should include whether the LDs provision ought to expressly include for any delay in the completion of the works whether before or after termination or where works are never completed. LDs will make the loss easier to substantiate for employers but it needs to strike the right balance to be considered acceptable to contractors. A possible solution could be for the LDs provision to take effect in cases of termination and/or non-completion, but limited to a sufficient period of time after termination and/or non-completion for the employer to find a substitute contractor, by way of a post termination “LDs cap”.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.