In Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230, the Court of Appeal had previously held that a liquidated damages clause did not apply in respect of work which was never completed by the original contractor e.g. because the contract was terminated before completion.
The clause in question focused on liquidated damages for delay between the contractual completion date and the actual date of completion by the contractor. The Court of Appeal held that this meant liquidated damages could not be claimed at all where the contract was terminated and the works were never actually completed by that contractor.
The Court of Appeal's judgment caused considerable alarm to employers and their advisors, who had generally assumed in the past that liquidated damages could be claimed up until the date of termination. While the Court of Appeal's decision was based on the specific wording of a clause in a bespoke IT contract, there was concern that the same logic might be applied to standard form construction contracts such as the JCT and NEC suites, and that an employer would lose any right to liquidated damages if it terminated a building contract.
As noted by Lady Arden in the Supreme Court, the "difficulty about [the Court of Appeal's] approach is that it is inconsistent with commercial reality and the accepted function of liquidated damages."
The Supreme Court has now resolved this inconsistency and returned to the orthodox position: save where a clause clearly states otherwise, it should normally be expected that a liquidated damages clause will apply for any period of delay in completion up to the date of termination (although not beyond).
"Reading the clause in that way meets commercial common sense and prevents the unlikely elimination of accrued rights.... the interpretation accepted by the Court of Appeal in effect threw out the baby with the bathwater."
This judgment will be welcomed by many, as it makes the position clearer and more predictable for employers and contractors alike.
Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract (see Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844 and 849). After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law.
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