UNITED KINGDOM:

Supreme Court guidelines on liquidated damages

August 13, 2021

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The Supreme Court provided welcome clarification to the law regarding liquidated damages in the recent Triple Point Technology Inc (Respondent) v PTT Public Company Ltd (Appellant) ruling (2021). The Supreme Court came to the conclusion that the “radical reinterpretation” of the law on damages clauses by the appellate court was “incompatible with the economic reality and the recognized function of the contractual penalty”.

The appeal concerned a software contract in which the parties had agreed on flat-rate default damage. Article 5.3 of the contract provided for liquidated damages “until the date of acceptance of this work by PTT”. The main issue for the Supreme Court to rule was whether PTT was entitled to liquidated damages for delay if the work was not completed or accepted before the contract was terminated.

Before the Court of Appeal, Sir Rupert Jackson stated that “a lot will depend on the exact wording of the penalty clause in question”. He went on to say that this particular clause “has no application in a situation where the contractor never hands over completed work to the employer”.

The appeal court’s decision was controversial. It was widely viewed in building law circles as deviating from the generally understood position on contractual penalty clauses.

“Trodden” territory

In delivering the verdict, Lady Arden disagreed with Sir Rupert Jackson’s view that when a construction contract is abandoned or terminated, “the employer is in uncharted territory for which the penalty clause may not have made provision”. Lady Arden came to the conclusion that this was “trodden” territory and that it was “unnecessary to include this in the contractual penalty regulations”. Lady Arden also disagreed with the obvious importance the Court of Appeal had attached to UK Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd (1913) (HL).

Lady Arden said it was “more likely” that the parties still intended to apply liquidated damages up to the date of termination if the parties include a contractual penalty that ends after the work is completed and accepted. This interpretation met with “common sense”. If necessary, the words in Article 5.3, the liquidated damages “up to the date on which the PTT accepts such work”, could be interpreted as meaning “up to the date (if any“PTT accepts such work.” This interpretation also prevented the unusual situation in which an employer’s accrued claims for lump sum damages could retrospectively lapse if dismissed later (a situation that the appellate court’s decision appeared to take into account).

Lord Leggatt issued a separate judgment and agreed. He pointed out that a standard form could not be found that would provide for the payment of liquidated damages only if a contractor actually completes the work. This confirms his view that “such a clause is not one that the parties to a commercial contract would find useful”.

Therefore, the Supreme Court ruled that Article 5.3 of the treaty provided for flat-rate compensation to PTT if Triple Point failed to meet its obligations within the set deadline. A lack of acceptance of the work did not mean that flat-rate damages would not be incurred.

Purpose of the contractual penalty clauses

The Supreme Court has now provided helpful advice on contractual penalty clauses:

  • Penalty clauses are agreed by the parties to provide a predictable and safe remedy to an event (usually a delay in completion).
  • These are a standard feature of construction and engineering contracts and usually provide that after the contractual completion date has expired, damages will be paid for each day or week of delay in completion of the work by the contractor.
  • The provisions benefit the employer as he does not have to quantify his damage, “which can be difficult and time-consuming” and can lead to costly disputes. These provisions also give the employer security in relation to the amount he will get back as late payment compensation.
  • Contractual penalty clauses also benefit the contractor in that they limit the contractor’s risk in relation to potentially unlimited claims for delay.
  • The termination of a contract only affects the rights and obligations of the parties in the future. If, at the time of termination, a claim for lump-sum damages has arisen, “there is no legal or legal reason why the termination should deprive the employer of his claim to damages, unless the contract clearly provides for this”.
  • Unless otherwise clearly stated in the contract, the occurrence of lump-sum damages ends with the termination of the contract.
  • After termination of the contract “the parties must demand compensation for breach of contract in accordance with general law”. The employer is at liberty to prove any claim to lump-sum damages, subject to the usual rules of reasonable predictability and reduction.
  • There is no need for a separate regulation of the effect of the termination in the contract, the parties can take this “consequence”.

comment

Contractual clauses on the subject of default remain an important risk management tool for the parties. The Supreme Court decision provides important guidance on the interpretation and application of these provisions. The decision restores the orthodox position that contractual penalty clauses apply until a contract is terminated, but not afterwards. Clear wording must be used if the parties wish to agree on a different approach.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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