I have learnt the hard way that sometimes it is best not to jump straight in.
My Legally Bound article in Gulf Construction’s March 2019 issue was about whether delay liquidated damages can continue to accrue after the contract has been terminated.
The question was prompted by an interesting English High Court decision (GPP Big Field LLP v Solar EPC Solutions SL) stating that liquidated damages continued to run after a termination, all the way to the point at which commissioning was achieved by replacement contractors.
This outcome was a surprise and I did (respectfully) state that the court’s reasoning looked odd – not least because the original contractor’s fate in paying further delay damages was wholly in the hands of others in completing of the works.
As luck would have it, in the week of publication of the March article, a ruling from the English Court of Appeal (Triple Point Technology Inc v PTT Public Company Limited) effectively overruled the GPP Big Field decision. This was news in itself, but the court raised an even more fundamental issue, in deciding that liquidated damages could not be recovered at all when the contract had been terminated before works completion. This is important for four reasons:
• This decision is, in my view, based on a natural reading of the relevant contract terms rather than any specifically English law concept. So, regardless of the chosen governing law in your contracts, this case raises some points to consider;
• The reasoning behind this judgement appears to apply to the most common published forms of contract;
• The now-common provisions for automatic termination (or rights to terminate summarily) on reaching caps on delay liquidated damages, need careful consideration; and
• Equally common engineering, procurement and construction (EPC) exclusions of consequential losses could come into play if an owner has to revert to claiming general damages for delay.
Looking at the background, Triple Point was engaged by PTT to provide software for the latter’s commodities trading business. Delivery was required on a programme and delay liquidated damages were agreed. The work proceeded more slowly than was promised and some work products were not delivered on schedule.
The parties fell out in the time-honoured way, with Triple Point’s demands for payment for completed parts of the work being refused because of the delayed parts, followed by suspension of work by Triple Point and then termination by PTT.
At the time of termination, substantial parts of the work remained undelivered and were late (beyond the required delivery dates) so PTT claimed the liquidated damages that had accrued on those parts, but only up to the date of termination. The Court of Appeal identified three alternative approaches to decide such claims:
• The liquidated damages clause does not apply at all; or
• Liquidated damages accrue only up until termination (in line with PTT’s claim); or
• Liquidated damages accrue up until the works are actually completed by the substitute contractor (in line with GPP Big Field).
Here, the relevant clause was drafted in a conventional way: levying a rate of 0.1 per cent of the contract price “per day of delay from the due date for delivery up to the date PTT accepts such work…”
For the court, this wording provided the deciding factor, because it was “focused specifically on the delay between the contractual completion date and the date when Triple Point actually achieves completion”.
So, where the contractor never hands over completed works, the court decided that the clause simply has no application. The right to accrued liquidated damages was lost and was replaced with the task of proving general damages for delayed completion.
This reasoning potentially applies very widely because liquidated damages provisions are usually (like the above clause) focused on the period between required and actual completion. Here is a selection of published forms:
Fidic Silver Book Second Edition Clause 8.8 requires liquidated damages to “be paid for every day which shall elapse between the relevant time for completion and the relevant date of completion of the works or section”.
The JCT (Joint Contracts Tribunal) DB 2016 Clause 2.29 allows the employer to levy liquidated damages “for the period between the completion date and the date of practical completion of the works or that section”.
The ICC Design and Construct 2011 Clause 47(2)(b) allows liquidated damages to be levied “for every week or day (as the case may be) which shall elapse between the date on which the prescribed time expired and the date of substantial completion of that section”.
Termination is always a step to be approached with caution – although increasingly it is triggered when the cap on liquidated damages is reached. This case gives us all another reason to think carefully about the consequences.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.