6 minute read
Laying down the law
Laying down the law Martin Fleetwood
Calming the waters on liquidated damages
Within the rail industry there are many contracts which deal with the construction of objects, whether that is a major piece of infrastructure, such as HS2, a fleet of new trains or something much smaller such as a set of signal equipment cabinets
Each contract is likely to have a provision which allows for liquidated damages (LDs) to be claimed by the purchaser in certain circumstances, primarily where the product being provided is not delivered on time or to the quality levels set out in the contract. The aim of LDs is to offer a party financial compensation in the event that another party acts in breach of its contractual obligations.
The interpretation of the LDs clause and the ability to make a claim against a party in breach has been the subject of the long running case of Triple Point Technology Inc v PTT Public Company Ltd, which finally reached its conclusion on 16 July when the UK’s Supreme Court passed its judgement. While this column has commented on this case before, the Supreme Court’s judgement marks the end of the line for the parties and clearly sets out the position that all contactors need to take account of. The origins of the case Triple Point Technologies Inc (Triple Point) was contracted by PTT Public Company Ltd (PTT) to provide software and software implementation services (the Works) to PTT. The Works were to be provided in phases over a period of time and the contract contained a timetable identifying each phase of the Works and the individual stages within each phase.
Within the contract was a provision (in Article 5.3) that required Triple Point to pay compensation at an agreed rate from the date that a stage of the Works was due to be delivered under the timetable until the actual date that PTT accepted that stage of the Works. There was a level of protection for Triple Point as PTT had limited grounds for refusal. The Works were delayed. Stages 1 and 2 of Phase 1 were completed 149 days later than anticipated in the timetable and work did not start on preparing the Phase 2 scope of works. Following discussions between the parties, PTT accepted the Works performed for stages 1 and 2 of Phase 1 and paid the relevant invoice.
However, Triple Point also demanded payment in respect of other invoices it delivered relating to its licence agreement and orders for the Works. PTT refused to pay these on the basis that they were not due for payment at that point under the terms of the contract and in May 2014, as a result of the refusal to pay, Triple Point suspended work. PTT argues that this amounted to a wrongful suspension of work and terminated the contract in March 2015.
Following the termination of the contract, Triple Point brought proceedings against PTT for the outstanding amounts in its unpaid contracts. PTT counterclaimed for:
• Damages for breach of contract on termination in respect of PTT’s wasted costs for hardware purchased prior to termination. • Liquidated damages for delayed completion of the Works up to the date of termination. • The costs of procuring a replacement system, plus interest.
The earlier court hearings In the original court hearing, PTT was successful and was awarded $5 million (£3.6 million) in damages, of which some $3.46 million (£2.49 million) was in respect of LDs for delays prior to termination. Triple Point appealed on various grounds including the level of the LDs.
The decision of the Court of Appeal was problematic as while it found that LDs were payable by Triple Point, it decided that they were only payable in respect of the Works that had been both completed under the various stages identified in the contract and accepted by PTT. The key point for the court was that Article 5.3 specifically referred to LDs being payable for the period ‘up to the date PTT accepts such work’.
In the Court of Appeal’s interpretation of the contract, LDs could not be claimed in a blanket fashion for any other stages or phases of the Works, even if they should have been delivered under the timetable as there had been no ‘acceptance’ to set the period over which the claim could be made. Because the contract was terminated there had been no acceptance.
This decision caused considerable anxiety within the contracting community and inevitably the case came before the Supreme Court.
The Supreme Court’s decision In the leading judgement, Lady Justice Arden was unequivocal in finding that the Court of Appeal had erroneously interpreted Article 5.3. She found the decision that work needed to be both completed and accepted in order for Article 5.3 to apply, “inconsistent with commercial reality and the accepted function of liquidated damages.”. The court took the view that LDs offer predictability and certainty when it comes to remedying an event such as delay to completion. It did not follow that the parties would require this certainty only in circumstances where the works are completed and accepted.
Lady Justice Arden also noted that:
• It was general law that LDs accrued up until termination of a contract. • It was only after termination that the parties should seek damages for breach of contract. • The application of LDs clauses such as
Article 5.3 do not become qualified on works having been completed and accepted. • Parties do not have to specifically provide for the effect of termination of their contract on their LDs obligations.
A practical conclusion The Supreme Court’s decision confirms the orthodox interpretation of the LDs clause – that LDs are recoverable up until the point at which the contract is terminated and that any wording in a LDs clause specifying that acceptance of the work is required, as in Article 5.3, is additional to, and not a substitute for, any such right. This confirmation may come as a relief to parties and their legal teams who are no longer faced with the immediate concern that negotiated LDs clauses may not apply as traditionally thought, and as suggested by the Court of Appeal.
This case acts as an important reminder that parties should, at all times, seek to apply drafting that is clear in its intention and application. There have already been official amendments proposed to the NEC Suite of standard form contracts to clear up any uncertainty. All NEC4 contracts now contain an express stipulation that any delay damages will cease at termination, with further delay losses after termination forming part of a claim for general damages.
Martin Fleetwood is a Consultant at Addleshaw Goddard’s Transport practice. The Rail Team has over 30 lawyers who advise clients in both the private and public sectors across a wide range of legal areas. As well as contractual issues, the team advises on operational matters, franchises, concessions, finance, regulatory, property, employment, environmental and procurement issues.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.
SPOT THE ODD ONE OUT
It’s not tried, tested and proven technology. It probably won’t work all-year round, in all weather conditions. It may well let you down... when you need it most.
IN SHORT - IT HASN’T BEEN MADE BY PROLECTRIC.
