Will your liquidated damages survive termination?
26 April 2019
In Triple Point v PTT, the Court of Appeal considered to what extent liquidated damages continue to be payable when a project falls into delay and the contract is subsequently terminated or the contractor replaced. This situation is common in construction projects – where liquidated damages clauses are ubiquitous (albeit this case was in relation to software development). The usual assumption is that no further liquidated damages will accrue after termination but those already accrued will remain payable. However, the court warned this may not be the case.
Over the years a number of different approaches have been adopted. These fall into three categories:
- the liquidated damages provisions do not apply at all if the contract is terminated before completion – any damages will need to be claimed as general damages;
- the liquidated damages accrue up to the date of termination of the contract, but not after; or
- the liquidated damages continue to accrue until the replacement contractor has completed the work.
Although recently applied in the High Court (GPP v Solar), the Court of Appeal was doubtful about the approach in category 3. It leaves the original contractor at the mercy of the employer and the replacement contractor.
While noting that category 2 is usually seen as the “orthodox analysis” the Court of Appeal warned that this approach was not without difficulty and the analysis must depend on the wording of the liquidated damages clause itself (and its interaction with the rest of the contract). Where a contract specifies that liquidated damages accrue up to the date of completion, while the works remain unfinished, or similar, this may suggest that they should not apply if the original contractor never does in fact complete the works (ie category 1) – this was the case in Triple Point.
In fact, the often-overlooked House of Lords decision in British Glanzstoff v General Accident may in some cases provide binding authority that the liquidated damages do not apply at all. In that case the ability to appoint an alternative contractor was seen as an alternative remedy. The provision for liquidated damages to accrue for the period “during which the works shall remain unfinished” had no application where the original contractor never did finish the works.
Where liquidated damages provisions do not apply, it is likely general damages will be available. However, if you want the certainty that liquidated damages provisions will accrue for any delay incurred up to the termination of the contract (or even beyond) it will be important to make this very clear in the drafting. It's also something to keep in mind when considering whether and when to terminate a contract.
Update July 2021: The UK Supreme Court has held that accrued liquidated damages survived termination where the contractor never completed the work in question.