UK Supreme Court: liquidated damages survive termination

Allen & Overy LLP

Allen & Overy LLP

The UK Supreme Court has held that accrued liquidated damages survived termination where the contractor never completed the work in question.

The relevant contract was for the development of software by Triple Point, and provided for the payment of liquidated damages for undelivered work “per day of delay from the due date for delivery up to the date PTT accepts such work”.

The Court of Appeal had noted that the “orthodox” position was that, if the work was never finished, liquidated damages accrued up to the date of termination of the contract, but not after. However, in Triple Point, the provision that the liquidated damages were to be paid up to the date of completion (when the works were accepted) meant that they had no application where the contractor never completed the works at all, and the employer would instead need to claim general damages with respect to the outstanding works. The Court of Appeal considered that the little-known case of British Glanzstoff v General Accident may, in some cases, provide binding authority that liquidated damages expressed in similar language do not apply at all.

Reversing the Court of Appeal judgment, the Supreme Court held that the orthodox position did apply, with the result that liquidated damages accrued until termination even where the work in question was never completed. The words “up to the date PTT accepts such work” simply provided for an end-date for the payment of liquidated damages, and did not mean that liquidated damages only applied where the work was accepted.

The Supreme Court considered the Court of Appeal’s approach to be inconsistent with commercial common sense and the accepted purpose of liquidated damages – namely the quick and certain resolution of claims for delay. It would be difficult to see why parties would want to provide for that benefit where work was delayed and completed, but would not want the same benefit where the work was delayed but never completed. Nor was it likely that they would intend for accrued rights to liquidated damages to be extinguished on termination of the contract. Moreover the Court of Appeal’s approach would have the effect that a contractor who badly overruns would be incentivised never to complete the works, which did not make sense. The Supreme Court considered that the British Glanzstoff case turned on its own facts and established no new proposition of law.

The Supreme Court’s decision provides welcome clarity (and finality) on the issue and represents a return to the generally understood position on liquidated damages. If parties do wish to limit the application of liquidated damages to instances where the work is ultimately completed, very clear words are likely to be required to achieve that effect.

Post script
There were two other issues that the Supreme Court addressed:

  • Thankfully the Supreme Court clarified that the Court of Appeal had gone down the wrong route in concluding that the word "negligence", in the liability cap carve-out, referred only to an independent tort (ie separate from a contractual breach of an obligation to exercise reasonable skill and care).
  • On the particular wording the Supreme Court agreed with the Court of Appeal that liquidated damages fell within the cap on liability.

Judgment: Triple Point v PTT

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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