New guidance on the applicability of liquidated damages

A recent case in England has shone a light on just how much care is needed when drafting liquidated damages and ascertained damages (LADs) clauses, especially when it comes to their application post-termination.

Common in all types of construction and engineering contracts, including standard forms, LADs are a fixed amount of damages, giving the benefitting party such as an employer a remedy for delay under a building contract. These are generally a lump sum (eg £1,000) over a fixed period such as a day, week or month.

Where LADs apply, the benefitting party does not need to prove loss.

Over the past century, there have been several different judicial decisions about whether LADs can be applied when the contractor’s employment is terminated.

A recent English case of Triple Point Technology v PTT sought to give those drafting, operating, interpreting and advising on such clauses some guidance.

Before Triple Point

Before this decision, judges had come to the following conclusions where the contractor’s employment under the contract is terminated —

  • LADs do not apply and the employer can seek damages at large/common law damages, for example British Glanzstoff Manufacturing Company, Limited v. General Accident, Fire, and Life Assurance Corporation Limited [1912]
  • LADs apply only to the date of termination — Shaw & Anor v MFP Foundations and Pilings Ltd [2010]

The rationale behind the decision in Shaw appears to be that, once its employment is terminated the contractor has no obligation or right to complete the contract works but, on the flip side, as the contractor has no control over the appointment of an alternative contractor or completion of the remaining works they do not apply thereafter.

The majority of cases to that date appeared to favour a balance: LADs to the point of termination and common law damages/damages at large (which would have to be proved and also meet the legal tests for recovery of damages) thereafter.

  • LADs apply until the alternative contractor achieves completion — Hall and another v Van Der Heiden (No 2) [2010]

As a result of the departure from what is seen as the orthodox approach in Hall, namely that LADs do not apply after termination, the position was in a state of flux with the most recent cases appearing to support the conclusion that these clauses were applicable post-termination.

They were at odds with long-established precedent in both Shaw and the House of Lords case, British Glanzstoff. More importantly, the defendant in Hallwas unrepresented and the court had not been referred to relevant text book and case authorities.

Triple Point case

Triple Point Technology v PTT came before the Court of Appeal in 2019 and the decision has helped clarify the position on all three interpretations of how LADs apply post-termination.

It may come as a surprise that the court said that there was nothing stopping a court from applying any of those three interpretations (although was doubtful about the third – the Hall approach).

What the court did say is that it all comes down to the wording of the clause in each case.

In Triple Point, the court concluded the drafting of the LAD clause, being focused on delay between the contractual completion date and the date when completion was actually achieved, meant that the LAD clause had no application in a situation where the contractor is not the contractor to complete the works (like British Glanzstoff).

So, the lesson here is that the devil is, very much, in the detail, something those of us drafting these clauses need to be especially mindful of.

Sarah Stuart

Sarah has a litigation background and works within the commercial team, advising clients on matters related to commercial contracts. This includes supply and framework agreements, development agreements, collateral warranties and performance guarantees.

Posted, 26 July 2019 by Sarah Stuart
Categories: Commercial contracts | Insights | Litigation