In Triple Point Technology v PTT, the UK Supreme Court reestablished the orthodox position regarding the impact of dismissal before the end of work on the functioning of a flat-rate compensation scheme.

Penalty clauses for delays in completing work are a common feature of commercial contracts. However, in 2019, by the judgment of the Court of Appeal of England & Wales in Triple point technology v PTT [2019] EWCA Civ 230 (see here): If the contract is significantly delayed, but is terminated before the work is completed, to what extent (if at all) is the contractor liable on a flat-rate basis?

The UK Supreme Court decision in Triple point technology v PTT [2021] UKSC 29 restores the orthodox understanding of how penalty clauses work in the event of termination and underscores the robust approach of English law to enforcing clauses agreed between the parties that set out recoverable amounts in advance.

background

PTT, a commodity trading company, commissioned Triple Point to develop a new commodity trading and risk management system. The contract stipulated that payment would be made according to milestones and that Triple Point would be liable for flat-rate damages for work that was delivered late. In fact, only the first of these milestones was completed 149 days late. Nonetheless, Triple Point demanded additional payments for work that was not yet completed and stopped working if those demands were not met. The PTT then finally terminated the contract.

Triple Point brought an action in the High Court for the additional payments it had requested. PTT asserted (among other damages) lump-sum damages caused by delay, both for the work before completion and for the work that was never completed. On appeal, Triple Point requested a ruling that the liquidated damages provision only applies to work that was delayed but completed by Triple Point, and not to work that PTT did not accept prior to the date of completion.

In its ruling, the appellate court suggested that the post-termination situation was “uncharted territory for which the penalty clause may not have made provisions,” and raised concerns that the granting of contractual penalties for delays up to termination and general claims for damages for delays after delay Termination “can sometimes be artificial and incompatible with the agreement of the parties”. Ultimately, the appeals court ruled that the wording of the penalty clause applies only to work performed by Triple Point and submitted to PTT prior to termination, and not to work that Triple Point never completed. Only general damage (ie financial damage that PTT was able to demonstrate) would be recoverable for the delay in these other parts of the work, even if the delay occurred before the termination of the contract (see further here).

PTT appealed to the UK Supreme Court on a number of grounds, including that the Court of Appeal misapplied the law on this point.

The Supreme Court

The Supreme Court ruled that while the appellate court had conducted a thorough review of the authorities dealing with the construction of a penalty clause, it had failed to adequately consider what the parties were likely to have intended in the words they used. The Supreme Court’s unanimous conclusion was that the interpretation adopted by the Court of Appeal was “inconsistent with commercial reality” and was therefore inconsistent with the intentions of the parties.

Just because the parties expressly intended to pay lump-sum damages until the work was accepted by PTT, this does not mean that Triple Point owes lump-sum damages only if its work is accepted. Rather, the parties should be aware that, under English law, there is no lump-sum compensation when the contract is terminated, but claims that arise before the contract is terminated are retained. On this basis, the parties did not need any special formulation in order to achieve this result.

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The ruling of the Supreme Court primarily removes the ambiguity created by the Court of Appeal in this area of ​​law and makes it clear that under English law, in the absence of a clear contrary formulation, there is no right to lump-sum compensation lost in the event of contract termination. Although the judgment does not expressly state whether flat-rate damages can continue to arise after this Termination (a controversial issue that has arisen in other cases), Lord Leggatt clearly found it unlikely that a contractor would agree to such an arrangement without clear wording on it.

In a broader sense, this ruling affirms that the English courts will attempt to maintain an agreement between the parties to pre-determine damages in their contract. The Supreme Court ruling emphasizes in several places the positive, commercial benefits of a contractual penalty and gives both parties an assurance of the risk each of them will take. This certainty would be diminished if the amount of the damages to the parties were dependent on whether the contractor finally completes its work or not.

Along with the ruling of the Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 – which limited the circumstances in which a penalty clause could be construed as a sanction – it is clear that English law continues to emphasize the importance and desirability of maintaining penalty clauses. This is in contrast to courts in civil code jurisdictions, which under the applicable civil codes have much greater leeway to adjust the parties’ agreed amount of damage to the actual damage.

Finally, on the important issue of knowing the amount of compensation payable for delays, we note that steps are taken with FIDIC contracts to provide certainty about the amount a contractor can claim back when compensated by an employer. In 2020 FIDIC proposed a new form of the Green Paper (short form of the contract), which stipulates that “renewal costs” are specified in the contract rather than leaving the contractor to provide evidence. Whether the market will embrace this idea remains to be seen, but as the Supreme Court in Triple point, there is certainly an appeal to agree on amounts to be collected in advance that are otherwise difficult to quantify.

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