Termination of ICT contracts, unfinished works and liquidated damages

The Court of Appeal has considered the application of liquidated damages following termination of an ICT contract. Amy Brown analyses the ruling and provides some practical tips.

In Triple Point Technology v PTT [2019] EWCA Civ 230 PTT, an oil and gas company, engaged Triple Point Technology to supply a software system for use in its commodities trading. The project was split into two phases: Phase 1 to replace the existing system and Phase 2 to develop the system to accommodate new types of trade. The parties agreed that milestone payments would be made on completion of each stage of the project.

Unfortunately, the project progressed slowly and the first milestone of Phase 1 was achieved 149 days late. Triple Point submitted an invoice for these works which PTT duly paid. PTT refused, however, to pay further invoices rendered by Triple Point in respect of work which was not yet completed, relying on the milestone payments within the contract. Triple Point refused to continue without further payment and suspended working, resulting in PTT terminating the contract.

Triple Point issued a claim in the Technology and Construction Court (TCC) to recover the sums due on the unpaid invoices. PTT responded with a counterclaim which included liquidated damages for delay. The judge awarded liquidated damages in respect of both the work which was completed and the work which was never completed. In the latter case, the delay was calculated between the agreed completion date and the date of termination of the contract. On appeal, Triple Point contended that liquidated damages did not apply in respect of work which was never completed by the supplier and accepted by the employer.

Decision

Were LDs payable in respect of work which was not completed prior to termination?

The Court of Appeal identified three approaches to a liquidated damages clause under a terminated contract amongst the relevant case authorities:

1. Liquidated damages do not apply in respect of works not completed prior to termination.
2. Liquidated damages apply in respect of works not completed but only until the date of termination of the contract.
3. Liquidated damages continue to apply to the works until the point they are completed (i.e. irrespective of termination of the contract, damages may accrue until the works are completed by a second supplier).

The court was doubtful of the third approach, as this gives the employer and the replacement supplier the ability to control the period for which liquidated damages will run against the original supplier.

The second approach was identified as the orthodox position, and was the approach taken by the TCC. However, the Court of Appeal was critical of this approach, recognising that it may be “artificial and inconsistent” with the parties’ agreement. The parties may not have envisaged a scenario where the works are not delayed but instead not completed at all. This was the court’s interpretation of the liquidated damages clause in the present case.

Article 5.3 of the parties’ contract stated that “[if the] Contractor fails to deliver work within the time specified…the Contractor shall be liable 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…”. In the court’s view, this clause seemed to be focused specifically on delay between the contractual completion date and the date Triple Point actually achieved completion. It had no application in a situation where the supplier never hands over completed work to the employer.

In such a case, the court suggested it may be more logical to assess the employer’s total losses from the termination and apply general damages throughout, rather than apply the liquidated damages formula in respect of part of the loss and general damages thereafter.

On this analysis, the court took the first approach listed above. It held that PTT was entitled to recover liquidated damages only in respect of Triple Point’s delay in completing those first stages of Phase 1. In respect of the outstanding works, PTT was entitled to recover general damages, assessed on ordinary principles.

Implications

It remains unclear how a court will approach the application of liquidated damages to unfinished works where the contract has been terminated. This case has demonstrated that any one of the three approaches may apply and which one is most appropriate will depend on the precise wording of the parties’ liquidated damages clause.

The court’s findings in this case turned on the fact that the wording in the clause only envisaged liquidated damages applying up to the date the employer accepted the works (implying that completion was a requirement) and did not make provision for a situation where the supplier never handed completed work over to the employer to accept. The orthodox position of applying the liquidated damages formula for the duration of the contract was overturned in favour of applying a literal interpretation of the terms agreed between the parties. This is consistent with recent and increasing judicial unwillingness to undermine the parties’ written agreement.

The less prescriptive the clause, the more difficult it will be to determine which approach a court may take to applying it. If the parties’ clause had not stipulated an end date to the delay but instead left the delay open to run from the contractual completion date, then it is possible the court would have applied the orthodox approach and allowed PTT to recover liquidated damages up to the date of termination.  

Practical tips

• The right to recover liquidated damages is a valuable remedy for the employer which should be protected by clear drafting in the contract. The contract should make it expressly clear how the liquidated damages clause will operate in the event of termination. 
• The drafting should be explicit as to whether liquidated damages will apply (a) only in respect of completed works or (b) regardless of whether or not the works are completed. This will give both parties greater clarity and reduce the uncertainty around which approach a court might adopt.
• The judgment also dealt with an issue concerning the liability clause. This was interpreted such that the liquidated damages fell within the overall cap on the supplier’s liability. As the cap had been wholly used up by the award of general damages, PTT was prevented from recovering any liquidated damages at all. To avoid a similar situation, the parties should make it expressly clear if liquidated damages are to be carved out of the supplier’s total liability cap.

Amy Brown is a Solicitor in Sharpe Pritchard’s ICT & Data team. The firm has extensive experience in advising on commercial contracts and would be happy to advise further on liquidated damages clauses.