Termination and Liquidated Damages

The UK Supreme Court on Friday handed down its highly anticipated judgment in Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 in which it restored the orthodox approach to the interpretation of a liquidated damages clause following termination.

The Court of Appeal introduces three possible approaches

The case concerned the interpretation of a liquidated damages clause in an IT contract where the contractor had been terminated following delays and non-completion of work. The central issue was whether the contractor could be liable for liquidated damages following termination for work that it never completed.

The orthodox view was that delay liquidated damages could only apply until termination at which point they would cease to accrue and the employer would instead have to prove an entitlement to general damages post termination in the usual way. However, the Court of Appeal instead identified three possible approaches to a liquidated damages clause:

1. that there was no right to liquidated damages at all (i.e. the clause did not apply);
2. that liquidated damages only accrue up to the point of termination (the orthodox view); and
3. that liquidated damages continue to accrue post termination until the replacement contractor achieves completion.

Unsurprisingly, the Court of Appeal said that the correct approach to be taken in the circumstances would depend on the precise wording of the liquidated damages clause in question.

In this case, the Court held that the first approach applied as the clause in question stated that liquidated damages were to be calculated "up to the date PTT accepts such work". As the work was not accepted prior to termination, no liquidated damages would apply.

Whilst the eradication of accrued rights was a concern, it was the suggestion that a liquidated damages clause could survive following termination (the third approach) that was of the greatest concern in the industry. That is because that interpretation would leave a contractor liable for liquidated damages during a period in which the original contractor would have no control over the work. As a result of the Court of Appeal decision, the industry began to see contracts (including standard forms) introducing wording to make it clear that an employer would not be entitled to continue to accrue liquidated damages post termination of the contract.

The Supreme Court restores the orthodox approach

The Supreme Court has now quelled these concerns as it has restored the orthodox view as the primary approach; namely that the employer's accrued right to liquidated damages survives up until the date the contract is terminated, and thereafter damages are assessed in the usual way.  The Supreme Court described this as "general law" that parties must be taken to know. This was not "new territory" not contemplated by the liquidated damages clause in question; the territory is well-trodden such that the parties could take the consequences of termination on liquidated damages clauses as read.

Accordingly, it was not realistic to interpret a liquidated damages clause as meaning that if the event does not happen (i.e. PTT does not accept the work) the contractor is suddenly free of all liability from liquidated damages and any accrued rights will be extinguished on termination. Rather, the words in this case would be treated as "up to the date (if any) PTT accepts such work" such that accrued rights to liquidated damages remain until termination, and there is a right to general damages thereafter.

This will come as welcome news to contractors and employers alike as it provides greater certainty and, as emphasised by the Supreme Court, is consistent with the commercial reality and widely accepted function of liquidated damages clauses.

The Supreme Court did, however, leave the window open for parties to agree otherwise, but noted that very clear words must be used before valuable accrued rights are given up or altered. It is therefore possible to contract on the basis that liquidated damages continue to apply post termination (or not apply at all), but the parties must be clear that was their intention. Given the potential consequences, it is difficult to envisage a scenario in which an employer and contractor would readily do so.