Supreme Court clarifies Liquidated Damages in cases of Abandonment

This Supreme Court decision provides clarity on how courts will approach the award of liquidated damages for delay when a contractor does not eventually complete its work. It reverses the Court of Appeal’s ruling of 2019 on the same point. While the Supreme Court confirmed the “orthodox approach” to the application of liquidated damages, precise drafting of a liquidated damages clause remains important in ensuring a predictable outcome when enforcing such provisions.

Triple Point Technology, Inc. v PTT Public Company Ltd [2021] UKSC 29
Facts

Triple Point is an IT services provider which was engaged by PTT to replace its Commodities Trading, Risk Management and Vessel Chartering System (CTRM) under a "CTRM contract" and a series of associated Order Forms. Triple Point was paid for stages 1 and 2 of the first phase of its work, which it completed with a 149- day delay. It then raised a series of invoices in relation to further stages of the work (covering activities that it had not yet undertaken), which were disputed by PTT. In the absence of payment for the further stages of work, Triple Point suspended work and left the site, and the remaining elements of the work were never completed.

The dispute between the parties related to Triple Point's entitlement to payment under the disputed invoices and to PTT's entitlement to liquidated damages in respect of delays to Triple Point's work, both prior to the dispute arising and after Triple Point suspended work.

The liquidated damages provision in the CTRM contract provided “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 TCC and Court of Appeal

The TCC found that Triple Point had repudiated the contract by reason of its wrongful suspension of work. PTT was entitled to recover its costs of procuring an alternative system and its wasted costs, subject to the contractual cap, and also to uncapped liquidated damages up to the date of termination.

Triple Point appealed, and PTT cross-appealed. The Court of Appeal held (amongst other matters) that PTT was not entitled to liquidated damages in relation to stages 3 onwards of the contract. The Court of Appeal considered a number of previous judgments in reaching this decision, and grouped them into three different judicial approaches:

  1. those where the liquidated damages clause was held not to apply, including the case of British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143;
  2. those where the clause was found only to apply until termination of the initial contract (which has tended to be treated by textbooks as the “orthodox” approach); and
  3. those where the court considered that the clause continued to apply until a second contractor achieved completion of the work abandoned by the original contractor.

The Court of Appeal found that the precise wording of the liquidated damages clause in question will determine whether the liquidated damages clause either (i) does not apply where the contract is terminated or abandoned; or (ii) continues to apply to the date of termination or abandonment. Particular weight was given to the Glanzstoff decision.

Applying those principles to the liquidated damages clause in the CTRM contract, the Court of Appeal ruled that PTT was only entitled to recover liquidated damages for the delay to stages 1 and 2 of the first phase of project, which had eventually been completed late by Triple Point. However, where work had never been completed by Triple Point, the liquidated damages provision was not engaged. Therefore PTT was not entitled to liquidated damages for the incomplete work on later stages but was entitled to recover general damages (i.e. unliquidated damages recoverable as a matter of common law) for Triple Point's failure to complete, assessed on ordinary principles.

The Supreme Court Decision

The Supreme Court unanimously reversed the Court of Appeal’s decision on liquidated damages for incomplete work and reverted to the TCC’s original ruling.
The Supreme Court disagreed with the Court of Appeal’s approach to previous judgments. In the leading judgment, Lady Justice Arden expressed the view that no “Glanzstoff principle” existed and that Glanzstoff was not in itself a case of any particular legal significance. In general, the meaning and effect of one clause is not binding precedent as to the meaning and effect of a similar clause in another case. There was no suggestion that the clause in Glanzstoff was market-accepted wording, or a standard form of wording recognised in a specific industry, which would take the parties outside that general rule. The decision the court was asked to make in this case was therefore a matter of contractual interpretation which turned solely on the drafting of the contract between Triple Point and PTT.

As a matter of contractual interpretation, the Supreme Court held that PTT was entitled to liquidated damages for the period from the date when the work should have been completed to the date of termination of the contract. Lady Justice Arden explained that:

  1. It is well-understood and accepted by contracting parties that liquidated damages will provide for particular sums to be paid on the occurrence of a particular event. Upon termination of the contract the parties know that liquidated damages will cease to apply and they will need to fall back on the general law to recover damages. The liquidated damages clause does not therefore need to state expressly what will happen upon termination.
  2. If PTT was not able to recover liquidated damages, that would mean that it would be deprived of rights that had already accrued at the date of termination. That is, liquidated damages would have started to accrue from the date that the work should have been delivered, and should not be taken away simply because the contract has terminated before the work has been completed. Accrued rights should not be taken away in the absence of clear contractual wording.
  3. It is unrealistic - and not in line with commercial common sense - to read the liquidated damages provision as meaning that if work is never accepted, any entitlement to liquidated damages disappears. It is more likely that the parties’ reference in the clause to acceptance was intended simply to ensure that liquidated damages would not continue to accrue beyond acceptance.
  4. There was nothing in the liquidated damages clause to suggest that the parties intended liquidated damages to apply only in circumstances where work was late but eventually completed and that PTT would need to fall back on general damages where work was late and the contract was terminated prior to completion (the approach taken by the Court of Appeal). No commercial reason for such an approach had been put forward by either party.
Key Practice Points

In cases of delay and subsequent non-completion of work, disputes regarding liquidated damages will come down to the proper interpretation of the liquidated damages clause in question. That said, if liquidated damages have started to accrue at the time of termination, they will not lightly be taken away – even where parties have made no express provision for what is to happen upon termination.

As well as taking care with drafting, contractors and suppliers should take advice as to the type (and amount) of damages recoverable before terminating a contract where work is delayed and incomplete.

To read more articles related to this topic or to view other know-how material relevant to dispute resolution please visit our dedicated know-how portal Disputes+.

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