Court of Appeal provides guidance on the impact of termination on liquidated damages

The Court of Appeal has provided guidance on whether liquidated damages (LADs) remain payable following the termination of a contract. In short, the answer will very much depend on how the liquidated damages provisions are drafted, but clients should be aware that LADs may cease to be recoverable if the contract is terminated.

The facts

In Triple Point Technology, Inc v PTT Public Company Limited, Triple Point Technology (TPT) supplied software to PTT Public Company (PTT). The contract included a liquidated damages clause which required TPT, if the supply was delayed, to pay liquidated damages from the due date for delivery “up to the date PTT accepts such work”. PTT ended the contract before the work had been accepted and the question was whether the liquidated damages accrued up to the date of termination, up to and beyond the termination date or not at all.

Potential approaches

The Court of Appeal considered three potential approaches. The first is that liquidated damages should not apply if the contract is terminated. The rationale for this approach is that liquidated damages are an employer’s remedy for a contractor’s delay in completing the works. If a contractor is not able to complete the works as their contract has been terminated, the remedy should not apply and the contractor should be liable instead for general damages. The second potential approach is that liquidated damages accrue up to the termination date but not thereafter. The reasoning for this approach is that an employer’s accrued rights should be protected even if they wish to terminate a contract, with the employer entitled to seek general damages for the post-termination delay to the works being completed. The third approach, which was recently followed by the Commercial Court in GPP Big Field LLP v Solar EPC Solutions SL, is that liquidated damages accrue beyond termination and up to completion of the works, even if a different contractor completes the works. The reasoning behind this approach was that the contractor would be rewarded for its own default if liquidated damages did not accrue beyond termination. With this approach, the employer should not be entitled to general damages as the liquidated damages are substituted for general damages.

The decision

In the TPT case, the Court of Appeal made clear that the approach taken will depend on the wording of the liquidated damages clause itself. In this particular case, the Court reviewed the wording of the clause and interpreted "up to the date PTT accepts such work" to mean "up to the date when PTT accepts the work from TPT". As PTT had ended the contract, TPT was not in a position to complete the work. Therefore, liquidated damages did not accrue at all. However, the Court decided that PTT was still entitled to seek general damages from TPT in relation to the termination.

Key takeaway

The wording of the contract will determine the impact that termination has on the payment of LADs. Whilst it might be assumed that liquidated damages will continue to accrue at least up to the date of termination of the contract, this might not always be the case.