We have previously written about the UK Court of Appeal’s decision in Triple Point Technology, Inc v PTT Public Company Ltd  EWCA Civ 230, in which Sir Rupert Jackson delivered a much-debated judgment, moving away from what he described as the orthodox analysis of liquidated damages provisions.
The Triple Point case concerns a Contract for a Commodity Trading and Risk Management System (CTRM Contract) made between petroleum company PTT and software provider Triple Point. Under the CTRM Contract, Triple Point would design, install and maintain a new commodity trading software for PTT.
Triple Point’s services were divided into several phases and payment would be made upon Triple Point completing a milestone.
The liquidated damages clause in the CTRM Contract provides that “If Contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, Contractor shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work …”
Completion of the first milestone in phase 1 was delayed. Dispute followed in that PTT refused to pay and Triple Point refused to continue performance. Eventually PTT terminated the contract.
Court of Appeal’s decision
One of the issues in the dispute was the interpretation of the liquidated damages clause. In the Court of Appeal, Sir Rupert Jackson approached this issue by categorizing the possible ways of interpreting liquidated damages clauses generally in a situation when the first contractor failed to complete the works and had been terminated, and a second contractor was engaged to complete the works. He rejected what he called the orthodox position that the clause would apply up to the termination of the first contract.
In his view, if a construction contract was abandoned or terminated, the employer would be in “new territory for which the liquidated damages clause may not have made provision”. In the absence of specific wording in the contract dealing with the situation, the employer is only left with a general damages claim.
This sent shock waves through the industry because the liquidated damages clauses of most industrial standard forms do not expressly state that liquidated damages will accrue until termination or abandonment of works. Sir Rupert Jackson’s decision potentially renders liquidated damages clauses inapplicable in these scenarios. One of the unintended consequences was that it might have tempted a desperate contractor in severe delay to abandon a project to avoid liquidated damages, especially a project where the employer might have difficulty in showing general damages.
Supreme Court’s decision
The Supreme Court has disagreed with Sir Rupert Jackson’s decision and restored the orthodox position. To begin with, the Supreme Court was skeptical of the categorization of the different ways of interpreting liquidated damages clauses. The CTRM Contract was a bespoke contract and its liquidated damages clause should be construed on its own wording.
The Supreme Court found Sir Rupert Jackson’s approach “inconsistent with commercial reality and the accepted function of liquidated damages”. In the Supreme Court’s view, parties agree a liquidated damages clause to provide a remedy that is predictable and certain for a particular event, say delay. The parties must be taken to know the general law, namely the accrual of liquidated damages comes to an end on termination of the contract. After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the contract law. Reading the clause in that way also prevents the elimination of an employer’s accrued right to liquidated damages.
Those who are revising their liquidated damages provisions in light of the earlier Court of Appeal decision may take a pause as they will no longer be in “new territory” if the contract is terminated or abandoned.
Having said that, sometimes it may still be prudent to expressly state in the contract that liquidated damages accrue up to termination. For instance, in international contracts the orthodox position may not be taken for granted.
Interestingly, in Hong Kong there is very little authority and the law is not yet settled. In Crestdream Ltd v Potter Interior Design Ltd HCCT 32/2013, Master Simon Lo (as he then was) accepted the plaintiff’s submission that liquidated damages accrued until the replacement contractor had completed the work, although it should be noted that the defendant was absent from the hearing and the Master did not have the benefit of any submissions in reply. In Hong Kong (SAR) Hotel Limited v Wing Key Construction Company Limited HCCT 3/2010 which also involved termination and completion of works by a replacement contractor, calculation of liquidated damages up to the date of termination was never disputed.
It is yet to be seen how the Supreme Court’s decision will be received here. Pending clarification from Hong Kong courts, it would be better to state the position in the contract/sub-contract covering a situation where the contract is terminated or abandoned, to avoid a scenario like Crestdream.
By Ian Cocking, Partner
and Simon Mok, Senior Associate