02 Sep 2021

UK Supreme Court confirms liquidated damages survive termination

By Rachael Schulz, Frazer Moss

Had the Court of Appeal decision not been overturned, the issues raised by Sir Rupert Jackson’s reasoning would, almost certainly, have been considered by the Australian courts at some point, and resulted in a significant blow to the certainty of operation of liquidated damages clauses in this country if followed.

The UK Supreme Court has overturned a Court of Appeal decision and unanimously upheld the accepted position that accrued rights to liquidated damages survive termination.  

Triple Point Technology v PTT Public Company Ltd [2021] UKSC 29 involved a bespoke software contract, but its findings about the application of liquidated damages have clear implications for construction contracts.  This relevance was recognised by the Supreme Court, particularly Lady Arden, who drew upon established construction law principles several times throughout her judgment.

Had the Court of Appeal decision not been overturned, the issues raised by Sir Rupert Jackson’s reasoning would, almost certainly, have been considered by the Australian courts at some point, and resulted in a significant blow to the certainty of operation of liquidated damages clauses in this country  if followed.  

 Did accrued LDs survive contract termination?

In 2013, Triple Point Technology Inc (Triple Point) entered into a contract with PTT Public Company Ltd (PTT) to design, install and maintain software for PTT.  However, Triple Point refused to perform the contract following a payment dispute, and PTT eventually terminated and claimed liquidated damages for the period between the date for completion under the contract and the date of termination. 

A question in issue was whether PTT's claim for liquidated damages could be maintained because the termination of the contract meant that completion never occurred.

At first instance, Jefford J found that PTT was entitled to recover liquidated damages for the period between the specified completion date up to the date of termination.  However, that decision was overturned by the Court of Appeal, who found in favour of Triple Point.

The decision by the Court of Appeal, delivered by Sir Rupert Jackson, relied heavily on the decision of British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143 (Glanzstoff).  In that case, the contract was terminated before the original date for completion under the contract and the works were completed by another contractor.  His Lordship considered the wording of the liquidated damages clause (which he considered similar to the clause in Glantzstoff) to be of some significance:

 “If Contractor [Triple Point] 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% … of undelivered work per day of delay from the due date of delivery up to the date PTT accepts such work… .”

The Court of Appeal concluded that, because the work had not been completed and PTT had "not accept[ed] such work", PTT could have no entitlement to liquidated damages. 

Emphasising that the operation of a liquidated damages clause depended on its precise wording, Sir Rupert Jackson concluded that, in this instance, the clause did not apply because it did not provide for a circumstance where the parties terminate before the works are complete.  His Lordship noted:

"Although accrued rights must be protected, it may sometimes be artificial and inconsistent with the parties' agreement to categorise the employer's losses as £x per week up to a specified date and then general damages thereafter.  It may be more logical and more consonant with the parties' bargain to assess the employer's total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract."

Supreme Court reinstates orthodox position

The Supreme Court unanimously rejected the Court of Appeal's decision on this issue.  Instead, it held that Triple Point was liable for liquidated damages from the date for completion under the contract to the date of termination.

The Supreme Court upheld the "orthodox" position that liquidated damages would apply up to the date of termination of the contract and rejected the suggestion made by Sir Rupert Jackson that accrued rights to liquidated damages would be lost upon termination in place of general damages for breach of contract unless positive words in the clause stated otherwise.  Lady Arden observed that such an approach would "render the liquidated damages clause of little value in a commercial contract".

In agreement with Lady Arden, Lord Leggatt concluded that "there is no reason - in law or in justice - why termination of the contract should deprive the employer of its right to recover such damages, unless the contract clearly provides for this."  The court acknowledged that the accepted function of liquidated damages was to provide a "predictable and certain" remedy avoiding the need for parties to go to the expense and effort of quantifying its loss. 

The Supreme Court was critical of the Court of Appeal's reliance on the little-known case of Glanzstoff and made it clear that Glanzstoff should not be treated "as having created some special rule applying to liquidated damages clauses."  Lady Arden's analysis of Glanzstoff also suggests that the case should be limited to its facts, having no binding effect on the interpretation of a liquidated damages clause, even a similar clause, in another case.

The Supreme Court rejected Sir Rupert Jackson's suggestion that some positive wording is required in the liquidated damages clause for it to apply in the event of termination.  Lady Arden concluded,"[i]n my judgement, additional wording is not needed.  It would be sufficient to interpret the words "up to the date PTT accepts such work" as meaning "up to the date (if any) PTT accepts such work".  

Central to the Supreme Court's finding was the "commercial reasoning" and "commercial common sense" applied to the principle of liquidated damages.  Lady Arden and Lord Leggatt considered it highly unlikely parties would agree (in the absence of clear words) that an accrued entitlement to liquidated damages would not survive termination. 

Concluding comments

The Supreme Court's judgement has resolved the uncertainty cast by the Court of Appeal's decision and affirmed the generally accepted principle that accrued rights to liquidated damages survive termination, with general damages to apply after the date of termination. 

The Supreme Court's finding also avoids the unpleasant possibility created by the Court of Appeal's decision that would incentivise contractors not to complete unprofitable works, holding out instead for the principal to terminate, as a means of avoiding liability for liquidated damages, albeit exposing them to the uncertainty of general damages.

In all, a welcome decision for the construction industry both in the UK and Australia.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.