Are liquidated damages payable if a contract does not reach completion?

Within many commercial contracts exists a liquidated damages clause (“LD”). In essence, the LD clause allows parties to specify the amount of money that will be due in the event that one of the parties, or a specific party, should breach the terms set out in the contract. This is especially common in construction projects, where the provision exists to protect a property company, private business or individual from the potential loss they might suffer if a construction contractor does not complete the work as specified in the contract.

However, as in the recent case of Triple Point Technology Inc v PTT Public Co Ltd, the clause can often be found in IT project contracts; a sum if fixed in advanced and written in case the delivery of software or the implementation thereof does not follow the specifications set out in the contract.

 
The case of the undelivered software
In this case, PTT engaged Triple Point to design and develop a Commodities Trading, Risk Management and Vessel Chartering System (“CTRM”). The project had been split into two stages: the first was to replace PTT’s existing CTRM and the second was to develop a new system to accommodate new types of trade. Both parties entered into a binding contract and agreed to a liquidated damages provision, which stated:

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, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.

In other words, PTT and Triple Point agreed that if there was a delay in the delivery of the software that was not the fault of PTT, Triple Point would be obligated to pay 0.1% of the cost of the undelivered work every day until the project was completed.

The judgement found that both stage 1 and 2 of Phase 1 of the project were delivered 149 days late. That’s roughly 21 weeks or a quarter of a year – a long time to wait for a system you expected to be installed, tested and running long before this time. According to the judgement, Triple Point had failed to sufficiently resource the project, and the system which it did install did not have the functionality specified at the outset.

The terms of the contract had been somewhat unclear as to whether payments from PTT were due upon completion of specific milestones or specified dates – nevertheless, Triple Point invoiced PTT for the project despite having not yet commenced work on Phase 2, effectively charging for work that had not been completed.

Understandably, PTT refused to make further payments on the basis that the milestones set out in the contract had not been met. Triple Point did not deny this but refused to continue with the project until payment had been made and left the site. This was a wrongful suspension according to PTT, yet Triple Point proceeded to take legal action in order to recover its unpaid invoices.

 

PTT maintained that no further payments were due and counterclaimed for the liquidated damages for the delay in delivery of the project.

 

So, what did the judge make of the dispute? Were Triple Point within breach of the contract and would liquidated damages be payable to PTT?

 
The judge’s decision
In the first instance, the judge decided that PTT were right in regard to the payment being due upon completion of specified milestones. According to this logic, no further payments were due to Triple Point. As such, they found that the software company was in breach of the contract and was not entitled to suspend work. With regard to damages, PTT recovered 1,038,000 for the costs of procuring an alternative system and wasted costs (which were subject to a contractual cap).

Further, PTT was awarded liquidated damages for the delay totalling $3,459,278.40, which were not subject to the contractual cap. Part of this ($154,662 to be exact) were to compensate for the 149 days delay in completing Stages 1 and 2 of Phase 1.

At this point, the judge’s decision seems fair: after all, Triple Point had agreed to deliver the software by a specific date and had not reached this deadline. However, the software company proceeded to appeal the decision on a number of grounds – one of which was the extent to which the LD provision was engaged. According to Triple Point, the clause only applied when work was delayed but subsequently completed and accepted.

Take another look:

“…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.”

In this case, the work had not been completed and the contract had been terminated. Would this mean that liquidated damages were in fact not payable to PTT?

 
The Appeal
In order to achieve resolution to this particularly complex case, the Court of Appeal proceeded to review a chain of authorities on this point, starting with the historic case of British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd [1912].

In this case, the contractor became insolvent and a replacement contractor was appointed. The company engaging the contractor sought to recover liquidated damages for the delay period until the next contractor had completed the project. The decision from the House of Lords was that the LD clause did not apply in these circumstances because the original contractor had not completed the works. According to Lord Haldane LC:

 

 “… if the contractors have actually completed the works, then, and in that case only, the [LDs] clause applies.”

 

The Glanztoff case law was subsequently applied in a number of similar disputes, though there have been several cases in which it has not been referenced, with the court citing three alternative, conflicting ways in which an LD conflict should be resolved when a contractor has failed to complete the works promised:

  1. The liquidated damages clause does not apply at all and the employer can recover what’s known as ‘unliquidated damages’;
  2. The clause applies but only up until the date of termination of the initial contract;
  3. The clause continues to apply until the replacement contractor has achieved completion of the works.

 

Upon reviewing the authorities, Sir Rupert Jackson determined that PTT could not claim liquidated damages but was entitled to recover damages for breach of contract, assessed on ordinary principles. The damages would be subject to the contractual cap.

According to Sir Rupert Jackson, whether or not liquidated damages are payable depends ultimately on the wording of the liquidated damages clause itself, underlining the importance of the language used in contractual provisions and ensuring a clear understanding of each clause from all parties prior to signature.

In this case, the wording of the clause referred to the delay between the contractual completion date and the date upon which PTT “accepts the work”. As triple Point never handed the work to PTT and terminated before completion, liquidated damages were not payable.

If nothing else, the Triple Point v PTT case highlights the importance of the wording within LD clauses; it sends a warning to those drafting commercial contracts on both sides to be as clear as possible in the language used so as to minimise risk and ensure all parties understand the extent of their liability and responsibility within the relationship.

 

For more information on the subject of liquidated damages,  assistance in drafting commercial contracts or legal support through a business dispute, get in touch with the team at 360 Law Group today.