Court of Appeal clarifies Liquidated Damages in cases of Abandonment

By Rachel Glass, William Alms

04-2019

Triple Point Technology, Inc. v PTT Public Company Ltd [2019] EWCA Civ 230

This Court of Appeal decision has provided some clarity on how courts will approach the award of liquidated damages for delay when a contractor does not eventually complete its work. While Sir Rupert Jackson's judgment does not provide a single definitive test, it underlines that precise drafting of a liquidated damages clause is essential in ensuring a predictable outcome when enforcing such provisions.

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. PTT 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 TCC ruled against Triple Point: it was not entitled to further payments, and was found to have 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.

Triple Point appealed, and PTT cross-appealed. Much of the appeal related to the proper interpretation of the payment provisions of the CTRM contract and its caps on liability, from which a useful clarification of the Court's approach to priority clauses in lengthy contracts emerges. However, the Court of Appeal was also asked to consider the broader question of the correct approach to liquidated damages for delay in circumstances where the delayed work was never in fact completed.

The Court of Appeal Decision

Liquidated Damages

The liquidated damages provision in the CTRM contract provided for payment "per day of delay from the due date for delivery up to the date PTT accepts [the] work". As the project had been abandoned, Triple Point argued that the work was never completed and the clause did not come into play.

There have been a number of historic cases on liquidated damages in termination and abandonment cases and those cases have given rise to potentially conflicting decisions. The Court of Appeal grouped the judgments into three different judicial approaches:

(i) those where the liquidated damages clause was held not to apply;
(ii) 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 correct approach); and
(iii) 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.

Although noting that the second approach could sometimes produce an artificial result, in determining what overall rules are to be distilled from these decisions 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. It expressed doubts about the third trend in historic cases, where the liquidated damages clause was held to continue to apply until a second contractor achieved completion of the work abandoned by the original contractor, since this had the effect of ceding control over the end point for the liquidated damages to the employer and new contractor.

Applying those principles to the liquidated damages clause in the CTRM contract, the Court of Appeal held 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 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.

Priority Clauses

The CTRM contract required PTT to pay for services by reference to Triple Point achieving certain delivery milestones in the project. It also contained an order of precedence provision, placing the CTRM contract terms at the top. The Order Forms, however, required payment on specific calendar dates. Triple Point had raised a series of invoices in reliance on the Order Forms, notwithstanding that the associated work had not been undertaken and the milestones had not been completed.

In the face of apparently irreconcilable payment regimes, Triple Point argued that the provisions could be read together since the Order Forms provided for payment for delivery of software and licences, and the CTRM payment clause provided only for payment for implementation services. The Court of Appeal, however, agreed with the trial judge that the payment clause in the CTRM contract on its proper construction covered all payments (the implementation work being no use to PTT in isolation); and while the Court of Appeal acknowledged the traditional rule that one must construe a contract as a whole, it distinguished substantial construction or IT contracts which are sometimes "so vast that no human being could possibly be expected to read them from beginning to end." In these cases, conflicts between different parts of a contract that are often a combination of numerous contributors' work should be resolved by reference to order of precedence clauses.

Key Practice Points

In cases of delay and subsequent non-completion of work, which generally arise where one party terminates or abandons the work mid-project, disputes regarding liquidated damages will come down to the proper interpretation of the liquidated damages clause in question. In light of the Triple Point decision, it is likely that (depending on its precise terms) the clause will either not apply at all, or apply only until termination of the contract. If the clause has no application, general (unliquidated) damages may nonetheless be available in the normal way. It also seems unlikely that liquidated damages will apply to the period from termination until completion of the work by a second contractor, but this will always come down to the particular factual matrix and contract wording. As well as taking care with drafting, contractors and suppliers should therefore take advice before terminating a contract where work is delayed and incomplete as this may determine the type (and amount) of damages recoverable.

Finally, in light of the Triple Point decision, it appears that order of precedence clauses are likely to have increased significance within very large contracts, particularly in IT and construction, where the contract is the combined work of many different specialists, has probably not been read end to end, and the ordinary approach of trying to give meaning to each and every part of the contract is not practicable. It therefore follows that such clauses should be included (particularly in lengthy or complex contracts) whilst noting that best practice remains to identify whether any conflicts do in fact exist and to resolve them before agreeing the final version.

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