Liquidated Damages After Termination: Court Of Appeal Calls Time On The Uncertainty?

Introduction

Commercial contracts where one party is obliged to supply goods or services by a specified date often contain liquidated damages clauses. These clauses set a pre-determined level of damages that a party is entitled to recover should delivery or completion not take place by the specified date. Construction contracts commonly use liquidated damages clauses to set the damages to be paid by the contractor to the employer in the event of delay beyond the stated completion date.

The commercial rationale is clear; liquidated damages promote certainty and avoid the need for the innocent party to establish its actual losses as a result of the delay (which can often be very costly and protracted).

However, there has been uncertainty as to whether liquidated damages could be levied in circumstances where the project is in delay and the employer terminates the contractor's employment before completion takes place. There are a number of conflicting decisions on this point, with the English Courts adopting three broad approaches:

Liquidated damages fall away completely and the employer may only claim general damages. The clause will only apply to those parts of the works (if any) which have been completed prior to termination. The employer can levy liquidated damages up-to the date of termination. Thereafter, he must claim general damages for loss arising from delay. The employer can levy liquidated damages up-to the date of completion by a replacement contractor. In the recent case of Triple Point Technology ('TPT') v PTT Public Company ('PTT'), concerning a software supply agreement, the Court of Appeal has provided guidance on this topic, which may impact how liquidated damages and the consequences of termination are drafted in contracts.

Facts

TPT supplied software to PTT and the contract provided for various milestones to be achieved. If the supply was delayed beyond the milestones, TPT was liable to pay liquidated damages from the due date for delivery "up to the date PTT accepts such work".

Stages 1 and 2 of the project were completed (and accepted by PTT), albeit they were 149 days late. However, PTT terminated the contract before the subsequent stages had been completed. At the point of termination, the project was in significant delay. In the litigation that followed, one of the issues before the court was whether PTT was entitled to rely on the liquidated damages clause and, if so, whether the liquidated damages accrued up to the...