What's the Point of liquidated damages clauses following termination of a contract?

In April of this year I wrote an article considering the case of Triple Point Technology Inc v PTT Public Company Ltd and its effect on the question of whether liquidated damages clauses continued to apply following termination of contract. Within this article I observed that the question was due to be determined by the UK Supreme Court (UKSC) and that decision has now been issued.

The facts of the case and procedural history are more fully narrated within my previous article. For present purposes it is sufficient to say that the principal point of appeal to the UKSC by PTT was whether the Court of Appeal erred in law in deciding that a liquidated damages clause only applied until the point of termination provided that the works had been partly carried out by the delinquent party. This essentially meant that a party’s entitlement to accrued liquidated damages was extinguished if the contract were terminated prior to completion of the works by the contractor. The Court of Appeal came to this decision in reliance of the Scottish case of British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd and so the appeal to the UKSC is of interest to practitioners both North and South of the border not withstanding that the appeal concerned the application of English Law.

My previous article anticipated that the UKSC would have a difficult task in balancing competing principles of fairness. It is fair to say the Court of Appeal decision gave rise to considerable confusion and concern for those operating within the construction sector and this decision of the UKSC has been eagerly anticipated.

The judgment of the UKSC was quite critical of the reasoning of the Court of Appeal. The Court of Appeal considered that in the present case, when considering the application of liquidated damages, the contractual words “up to the date PTT accepts such work” meant that such damages did not apply where the contractor never completed the works and therefore could never be accepted. In essence the Court of Appeal considered there were circumstances, such as these, in which a liquidated damages clause would not necessarily apply even if the contractor had been guilty of delay and had not completed the work on time.

Lady Arden delivered the leading judgment of the UKSC and was particularly critical of the Court of Appeal’s reasoning in this regard. Her Ladyship’s view was that the correct interpretation of the clause would be “up to the date (if any) PTT accepts such work“. Lady Arden held that it would be inconsistent with “commercial reality” and the accepted function of liquidated damages if they were to take the narrow approach adopted by the Court of Appeal. The UKSC therefore confirmed that liquidated damages that have become due before termination are accrued rights which will survive termination.

Giving a key part of her judgment, Lady Arden held “it is in my judgment unrealistic to interpret the [liquidated damages] clause as meaning that if that event [being completion of the works by the contractor and acceptance by the employer] does not occur the contractor is free from all liability for liquidated damages, and that the employer’s accrued right to liquidated damages simply disappears. It is much more probable that they will have intended the provision for liquidated damages to cease on completion and acceptance of the works to stand in addition to and not in substitution for the right to liquidated damages down to termination.”

Considering the Scottish case of Glanzstoff Lady Arden opined that this decision was reached on a very particular set of circumstances and, in her Ladyship’s view, was not a case of general significance and established no new legal principle in respect of the application of liquidated damages. Echoing the observations of the previous courts Lady Arden emphasised that liquidated damages clauses must be considered on a case by case basis and that “in general the decision of one case as to the meaning and effect of a clause cannot be binding as to the meaning and effect of even a similar clause in another case.”

The decision of the UKSC will be welcome news to those operating within the construction sector. As many will be aware the entire point of agreeing a liquidated damages clause is to provide a remedy that is predictable and certain without resorting to a difficult and time-consuming process. Parties can therefore generally rely, depending on the wording of the clause in question, on such clauses when seeking to recover damages arising from delay of the contractor even if the contract is subsequently terminated.