Accrual of liquidated damages ends on termination of the contract, the Supreme Court has ruled
The Supreme Court in Triple Point Technology, Inc vs PTT Public Company Ltd  UKSC 29, handed down on Friday 16 July 2021, has made clear a fundamental point of law on liquidated damages.
Sir Rupert Jackson, sitting in the Court of Appeal, had found that the liquidated damages clause providing for liquidated damages to be paid for each day of delay by the contractor “from the due date for delivery up to the date [the employer] accepts such work” did not require liquidated damages to be paid in respect of work that had not been completed (and thus had not been accepted by the employer) before the contract was terminated.
The approach taken by the Court of Appeal raised concern. To many it seemed odd that a contractor could miss a completion date but still avoid payment of liquidated damages simply because the contract was terminated before the obligation was fully completed. Whether the approach taken by the Court of Appeal was based on a principle of law or on the construction of the particular clause was not entirely clear.
The Supreme Court has decided that the Court of Appeal’s approach was inconsistent with commercial reality and the accepted function of liquidated damages
The fundamental point is now clear: the Supreme Court ruled it is a principle of law that the accrual of liquidated damages comes to an end on termination of the contract and after that event, the parties’ contract is at an end and they must seek damages for breach of contract under the general law. Further, parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read. In short, the approach of the Court of Appeal on liquidated damages has been overruled.
On 8 February 2013 PTT entered into a contract with Triple Point whereby Triple Point was to design, install (by data transmission), maintain and license a customised software system for PTT to assist in its commodities trading business. The project had two phases. Phase 1 involved replacing PTT’s existing software system and phase 2 involved developing the Triple Point system for new types of trade. Triple Point was to be paid by reference to milestones, with particular work to be completed by each milestone.
Triple Point achieved completion of the first two stages of phase 1 on 19 March 2014, 149 days late. PTT paid Triple Point’s invoice for that work. PTT terminated the CTRM contract on 23 March 2015. Triple Point commenced proceedings in the Technology and Construction Court to recover outstanding sums on unpaid invoices. PTT counterclaimed for damages and liquidated damages for delay.
Article 12.3 placed a cap on the amount of damages that could be recovered and contained an exception from that cap for “negligence”. Mrs Justice Jefford dismissed Triple Point’s claim, holding that PTT was entitled to damages of US$4,497,278.40, under the heads of: liquidated damages for delay (uncapped), the costs of procuring an alternative system and wasted costs (both subject to the article 12.3 cap). Triple Point appealed and PTT cross-appealed against the finding that any of the damages were capped.
As discussed above, the Court of Appeal set aside the judge’s award of liquidated damages, holding that PTT was only entitled to liquidated damages for work that had been completed prior to termination of the contract, that all damages were subject to the cap and that the exception for negligence applied only to freestanding torts and not to breaches of the contractual obligation to exercise care.
Lady Arden, giving the leading judgment, noted that the Court of Appeal had departed from the generally understood principle that, subject to the precise wording of the clause, liquidated damages accrue until the contract is terminated (at which point the contractor would become liable to pay damages for breach of contract). The Court of Appeal had suggested it might be inconsistent with the parties’ agreement to categorise the employer’s losses as subject to the liquidated damages clause until contractual termination and thereafter as damages.
However, the Supreme Court has decided that the Court of Appeal’s approach was itself inconsistent with commercial reality and the accepted function of liquidated damages. The Supreme Court found that the parties’ aim was that the employer should not have to quantify its loss, which it may be difficult for it to do, and that the parties should be taken to know that liquidated damages would cease to accrue on termination; and that they did not have to provide for that expressly.
Overall, reading the clause in that way reduced the risk that the contractor was not liable for liquidated damages for delay and the extinction of accrued rights to liquidated damages. Glanzstoff (the case that had influenced the Court of Appeal) was said to turn on the interpretation of the particular clause in that case and did not create some special rule applying to liquidated damages clauses.
The last word on this topic must go to Lady Arden who, at paragraph 36 of the judgment, said: “Of course, the parties may out of prudence provide for liquidated damages to terminate on completion and acceptance of the works so as to remove any question of their being payable thereafter. But if they do, it is in my judgment unrealistic to interpret the clause as meaning that if that event does not occur the contractor is free from all liability for liquidated damages, and that the employer’s accrued right to liquidated damages simply disappears. It is much more probable that they will have intended the provision for liquidated damages to cease on completion and acceptance of the works to stand in addition to and not in substitution for the right to liquidated damages down to termination.”
Hamish Lal is a partner in Akin Gump Strauss Hauer & Feld