Hong Kong: Liquidated Damages On Work Never Completed

Last Updated: 2 May 2019
Article by Damon So, Nigel Sharman, Joyce Leung and Mark Crossley

The English Court of Appeal recently considered what should happen when a contractor, through its own fault, never delivers any completed work, despite having contracted to do so by a particular date. In Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230, 5th March 2019, the Court of Appeal had to choose between three different approaches set out in previous case law, but in which consistency seemed notoriously absent.

A software solution?

PTT, a commodities trader based in Thailand, entered into a bespoke contact to procure a software system from Triple Point, a software systems supplier. The contract included milestone payments and specific dates for payment.

Work under the contract was delayed and Triple Point sought payment according to the contractual dates set out in the contract, even in respect of work it had not delivered. PTT refused payment whereupon Triple Point suspended work and PTT purported to terminate the contract.

The contract required Triple Point to pay "the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work". The issue before the Court was whether Triple Point could claim liquidated damages for delay in circumstances in which PTT never accepted the work because (with the exception of the first two stages), it had never delivered any.

The Technology and Construction Court Judge (Jefford J) found that Triple Point had failed to properly perform its contractual duties, had breached its contractual duty to exercise skill and care and that it was entitled to no further payment.

In respect of PTT's counterclaim, Jefford J awarded PTT liquidated damages of US$154,662 in respect of delay to the first two stages and US$3,304,616 for the remainder. She also awarded PTT US$1,038,000, being its costs of procuring an alternative system and wasted costs, pursuant to a clause in the contract that appeared to limit the damages that could be recovered to the sum Triple Point had received in the provision of the services. Both parties appealed.

Penalty? What penalty?

Despite the use of the term "penalty" in the liquidated damages clause, the Court of Appeal took the opportunity to give a reminder that words do not always mean what they say. Triple Point relied upon Cavendish Square
Holdings BV v Makdessi [2015] UKSC 67, [2016] AC 1172, and in particular the judgment of Lord Neuberger PSC, to suggest that the clause imposed a detriment on Triple Point "out of all proportion to any legitimate interest of the innocent party".

The Court disagreed. The losses flowing from late delivery of the software and its impact on PTT's business could well be much greater than set out in the clause. The contractual formula, while not perfect, was a "genuine pre-estimate of the losses likely to flow from delay".

The Court of Appeal also dismissed as "hopeless" a suggestion that the clause permitted double recovery, saying "a liquidated damages clause (if valid) operates in substitution for a general assessment of the claimant's losses caused by delay. It does not enable the wronged party to recover compensation for the same losses twice over."

Triple Point - Triple Choice

In analysing whether the award of liquidated damages was appropriate, Sir Rupert Jackson (together with Lord Justice Floyd and Lord Justice Lewison) identified three conflicting approaches from earlier case law, namely that in such cases:

  1. the liquidated damages clause does not apply;
  2. the liquidated damages clause does apply but only up until termination of the contractor's engagement; or
  3. the liquidated damages clause continues to apply until the replacement contractor achieves completion.

Sir Rupert Jackson said he saw much force in the first approach (originally set out in British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd 1913 SC (HL) 1), but noted it was not cited frequently in modern cases despite it being a "decision of our highest court, which has never been disapproved."

The Court found difficulties with the commonly held view that liquidated damages apply up to the date of termination of the contract, but not beyond. Whilst this might be said to preserve rights that have already accrued, it may be artificial to divide an employer's right to damages for delay into a period of liquidated damages prior to termination and a period of general damages after termination. It might 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."

Although the outcome in each case depended on the exact wording used, the Court of Appeal also doubted the more recent cases that held that liquidated damages continue post-termination until the works are completed by the employer or a replacement contractor. The Court of Appeal did not consider that any other approach might reward the contractor for its own default, a stance adopted by the Commercial Court in GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).

In the present case, the clause specifically referred to liquidated damages accruing "up to the date PTT accepts such work". The Court of Appeal was of the view that the clause did not apply where the contractor never hands over completed work to the employer.

PTT was therefore entitled to recover liquidated damages in respect of Triple Point's delay in delivering the first two stages, but the Court of Appeal unanimously upheld Triple Point's appeal holding that no liquidated damages accrued for incomplete milestones in circumstances of termination. Sir Rupert Jackson relied heavily on the Glanzstoff reasoning, holding that it was the wording of the clause itself that was crucial: "There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss."

PTT would however be entitled to recover damages at large, based on ordinary principles and subject to proof by PTT.

Cap in hand

Both parties attacked the Judge's analysis of the limitation clause. Triple Point argued it was intended to apply to all of the damages for delay (including liquidated damages for delay), while PTT said it should not have applied to any of the damages claimed.

The clause in question required the contractor to exercise all reasonable skill, care and diligence under the contract and to comply with international standards. The contractor's total liability was capped at the total amount that had been paid to the contractor for the services or deliverables under the contract. There was then an exception in terms of "liability resulting from fraud, negligence, gross negligence or wilful misconduct of contractor or any of its officers, employees or agents".

Sir Rupert Jackson agreed with Jefford J that "negligence" should be narrowly construed and should not include breach of a contractual duty of skill and care. He therefore dismissed PTT's cross appeal, going on to allow Triple Point's appeal that the clause did create a standalone limitation of liability that applied to liquidated damages. The decision on this point echoes other recent judgments in which the courts have affirmed the ability of parties to allocate risk amongst themselves.

Best to be clear

A party considering terminating a construction contract where the contractual date for completion has overrun now needs to understand that termination in such circumstances may mean that any entitlement to liquidated damages for delay no longer applies, requiring the terminating party to prove actual delay losses.

Parties to construction contracts should consider carefully, when drafting and negotiating such contracts, whether to include or strengthen the express wording to ensure that accrued rights are preserved on termination, particularly where works remain incomplete, for example, because the contractor suspends for non-payment or abandons the project. They may also wish to make it clear whether any cap on liability applies to liquidated and other damages and whether the employer is entitled to claim general damages over and above the liquidated damages specified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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