LADs: Are they always recoverable?
It is trite that liquidated damages (LAD) clauses are put into construction contracts to make the consequences of delay more certain for both contractors and employers. Both sides will know the financial implications of delay. Neither side has to spend time proving (or denying) the effect of lost time. The LAD clock just starts to tick when the agreed time for completion passes.
The law on the recoverability of LADs has a long pre-history. Lawyers tend to think a new dawn broke in 2015 with the Supreme Court decision in Cavendish Square Holdings BV v Makdessi,[1] which clarified the law on penalty clauses. However, finding that a LAD clause is a penalty because it “imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the party in the enforcement of the primary obligation [carrying out the works]”[2] is only one example of when LADs will be irrecoverable.
The question of whether LADs are recoverable also arises when an employer terminates a contract. When that happens it is almost invariably the case that the works have not yet finished – but sometimes the time for completion will have passed and sometimes it will not have. The courts have not always taken a uniform approach to interpreting and applying LAD clauses in employer termination cases.
The important starting point is that whether LAD clauses apply and how they operate are matters of contractual interpretation. (The Supreme Court does not tire of repeating the principles governing such interpretation.)[3] On first principles, when a contract is terminated, accrued rights remain enforceable and future obligations disappear.[4] However, on the question whether an employer remains entitled to LADs after termination and before the works are complete, the courts have generally given 1 of 3 answers.
Answer (1) says that unless the works are completed, there can be no LADs at all. This answer has a long pedigree. In British Glanzstoff Manufacturing v General Accident Fire and Life Assurance[5] a contractor went bankrupt and the employer sued the contractor’s guarantor for the costs of employing a replacement, who then overran. The first instance (Scottish) court dismissed the claim for LADs. The House of Lords agreed with that decision. Lord Haldane LC held that “if the contractors have actually completed the works, then, and in that case only, the [LADs] clause applies”. British Glanzstoff was followed in Gibbs v Tomlinson,[6] in which a claim for LADs under a JCT Minor Works form was dismissed because the works were not completed when the contract was repudiated.
Answer (2) says that LADs are payable up to the point of termination, with unliquidated (i.e. general) damages payable thereafter. This answer was given by several TCC judges in a series of cases over the course of the last 15 years or so in which British Glanzstoff was not cited: Greenore Port Ltd v Technical & General Guarantee Company Ltd,[7] Shaw v MFP Foundations and Pilings Ltd[8] and Bluewater Energy Services BV v Mercon Steel Structures BV.[9]
Answer (3) says that LADs are payable from the time for completion until the actual time of completion (by whoever the employer gets in to complete). It seems the first judge to give this answer was Coulson J in Hall v van der Heiden (No. 2).[10] In that case, the contractor walked off site before practical completion, despite being paid all certified sums. The employer terminated and got in a replacement contractor. The replacement completed the works some 6 months after the original contractor’s deadline. Coulson J held that the original contractor’s period of culpable delay stretched all the way through to the replacement contractor’s completion. Though the decision garnered some criticism, Hall was followed in England and elsewhere.[11]
Then came Triple Point.[12] Last year the Court of Appeal considered all 3 answers. Inevitably the court emphasised that which answer was most appropriate would depend on the precise wording of the LAD clause in question and its position within the contract.[13] For that reason the decision was hardly definitive and did not pick a single answer, but it offers practitioners useful clues to how the courts approach the overall question.
Triple Point concerned the supply of software for commodities trading. A trader wanted a new system and employed a supplier to replace its existing system and then develop the new system to handle new types of trade. The contract included an LAD clause and a mechanism capping the supplier’s liability to fees received. Though the supplier worked slowly and failed to integrate the new system, it sought further payment and, when this was refused, suspended work. The employer terminated. The employer was awarded LADs at first instance, but the supplier appealed contending that it had not completed the works – an argument obviously designed to prompt answer (1).
On the facts, Sir Rupert Jackson held that the LADs clause was focussed on delay between the completion date and actual completion and had no application where the supplier never actually handed over the finished product to the employer. Sir Rupert shook the dust off British Glanzstoff. He said he saw “much force” in its reasoning and recognised that it was authority of the highest level untouched for a century.[14] That said, it is hard to overlook the fact that answer (1) seems to override the accrued right to LADs payable before termination. Moreover, Sir Rupert considered answer (2) was “not free from difficulty” because it may well be artificial to say that an employer’s loss stops being the LAD rate as soon as a contract is terminated. And he doubted answer (3) – rightly pointing out that an employer in such a case could control the LADs period and effectively hold a contractor to ransom.[15]
There is no doubt that the decision in Triple Point offers encouragement to those looking for answer (1). However, the TCC has already indicated that it still considers that answer (2) remains “perhaps the orthodoxy”.[16] In November 2019 PTT was given permission to appeal Triple Point to the Supreme Court, though key construction cases have an unhappy recent tendency to settle before these highest appeals are heard.[17] If nothing else, until such time as the appeal is heard, Triple Point serves as a reminder to both employers and contractors to spell out as clearly and exhaustively as possible what they want the answers to questions of delay and the allocation of risk to be.
[1] [2015] UKSC 67.
[2] Makdessi, at para. [32]
[3] Wood v Capita Insurance Services Ltd [2017] UKSC 24, at paras. [8]ff.
[4] Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, at 848ff.
[5] [1913] AC 143.
[6] 35 Con LR 86, at 116.
[7] [2006] EWHC 3119 (TCC).
[8] [2010] EWHC 1839 (TCC).
[9] [2014] EWHC 2132 (TCC).
[10] [2010] EWHC 586 (TCC).
[11] Crestdream v Potter Interior Design (2013) HCCT 32/2013; GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).
[12] Triple Point Technology Inc v PTT Public Co. Ltd [2019] EWCA Civ 230.
[13] Triple Point, at paras. [108], [110].
[14] Triple Point, at para. [109].
[15] Triple Point, at paras. [107]-[110].
[16] PBS Energo AS v Bester Generacion UK Ltd [2020] EWHC 223 (TCC), at para. [441].
[17] For instance the appeal from S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 was withdrawn as the parties settled the case before the Supreme Court appeal was heard.
Written by Douglas James.
This article was originally published in Chartered ICES Construction Law Review.
