Liquidated Damages post termination

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Liquidated Damages post termination

Published 22 May 2019

In 2012, TPT a supplier of software used in commodities trading was engaged by PTT, a commodities trader, to provide a new software system for trading and risk management. PTT invited bids to replace its existing system (“Phase 1”) and then develop the new system to handle new types of trade (“Phase 2”). Triple Point’s contract for Phase 1 was signed in February 2013, and provided a table of key development/implementation milestones upon which payment could claimed.

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Prior to this decision, the orthodox view was that liquidated damages would be payable up to termination of the first contract. Whilst acknowledging the contract wording will be pivotal in each case, the Court of Appeal was clear that the liquidated damages clause (in this instance) did not apply to works not completed by the original contractor.

The contract

The contract included a liquidated damages (“LD’s”) clause which required TPT to pay if the supply was delayed from the due date for delivery “up to the date PTT accepts such work”. However, PTT terminated the contract before the work had been accepted and the question was whether the LDs accrued up to (a) the date of termination, (b) up to and beyond the termination date or (c) not at all

Triple Point was 149 days late with the first two stages of Phase 1, but PTT paid an invoice of $1.08 million. Triple Point then submitted invoices for incomplete work according to order forms ,which had been agreed post the original contract, that conflicted with the contract’s own payment milestones. PTT refused to pay, citing the payment milestones and the fact that no further milestones had been reached. TPT did not dispute that the milestones had not been reached, but suspended work in May 2013.

In February 2015, PTT terminated on the grounds of repudiation by TPT and TPT claimed for its unpaid invoices. PTT counterclaimed for LDs for delay and damages on termination.

First instance

The Judge at first instance, dismissed the claim and awarded PTT damages of $4.49 million. The Judge held that

  • the contract’s milestones prevailed over the order forms;
  • that TPT had breached its performance obligations,
  • that TPT’s delay was not down to PTT; and
  • that PTT could recover the costs of procuring an alternative system subject to the liability cap of fees paid to TPT capped at the $1.08 million PTT had paid.

The Judge went on to rule that the LDs provision was not a penalty and that payment thereof was not subject to the liability cap.  A further amount of LD’s in the sum of $3.45m was awarded.

The Appeal

In summary, the Court of Appeal agreed with the 1St instance Judge that the contract’s payment provisions took precedence over the three order forms on the basis of express provision contained within the Contract. As such TPT was entitled to receive payment when it reached the various milestones and not on the calendar dates set out in the order forms. TPT also failed in its fallback position

Liquidated damages for delay (Article 5)

Notwithstanding the above, the Court of Appeal allowed TPT’s appeal that the LD’s awarded at first instance, under Article 5, were not recoverable because the work was never completed.  A key part of the Judgment was;

“… whether the [LDs] clause (a) ceases to apply or (b) continues to apply up to termination/ abandonment, or even conceivably beyond that date, must depend on the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”

In this case it was therefore found to be pivotal by the Court that the wording in article 5 meant that LDs would apply only “up to the date when [PTT] accepts completed work from [TPT]”. As such LDs were only recoverable for the first 149 days of delay with PTT remained entitled to claim Damages for the elements not completed on ordinary principles and subject to the liability cap (see below).

Authors

Mark Roach

Mark Roach

London - Walbrook

+44 (0)20 7894 6314