Ruling offers guidance on liquidated damages clauses for delay

Out-Law News | 13 Mar 2019 | 2:14 pm | 3 min. read

A ruling by the Court of Appeal earlier this month has highlighted the importance of ensuring IT contracts are clear about how liquidated damages apply in cases where technology suppliers are late in delivering a project, an expert in IT disputes has said.

Liquidated damages clauses are common features of commercial contracts, providing a means of redress to customers when projects they have contracted are delayed as a result of failings by the supplier.

In its judgment, the Court of Appeal held that a commodities trader was not entitled to an amount of liquidated damages from a software supplier because the contract agreed between them only provided for liquidated damages to be payable if the work envisaged under the contract was eventually completed.

US-based software business Triple Point Technology sued Thailand-based commodities trader PTT Public Company over non-payment of invoices for work set out in their contract, which was for the supply of a new software system.

While PTT paid Triple Point for work the supplier had completed despite delay in completion, it refused to pay Triple Point in advance for further work due. It said the contract between them required it to make payment to Triple Point only once the supplier had met milestones set out in the contract and that Triple Point had not done so. When Triple Point refused to continue work on the software project until it was paid the further instalments, PTT terminated the contract.

This prompted Triple Point to sue PTT in a bid to recover the outstanding sums claimed in its invoices, but PTT counter-claimed, seeking damages, including liquidated damages for delay.

In an earlier ruling, the High Court found that Triple Point was in repudiatory breach of the contract and awarded damages to PTT. One party is said to have 'repudiated' a contract if they act in a way so completely against the terms of the contract that their actions mean that the other party is deprived of the benefits of the contract.

The High Court held that PTT could claim liquidated damages for delay and in this respect awarded $154,662 for the delay to phase one of the project, for which milestones had been achieved and a further $3,304,616 in respect of all other elements of the work up until the date of termination which concerned incomplete milestones.

The Court of Appeal considered case law relevant to interpretations of liquidated damages clauses. It expressed reservations in finding either for the application of liquidated damages to delay beyond termination or for the application of liquidated damages to delay up to the date of termination where the language of the liquidated damages clause specifically referred to the completion of works.

Unlike the High Court, however, the Court of Appeal concluded that because of the way the liquidated damages clause in this case was constructed, it only applied when work was delayed but subsequently completed and accepted. As a result, PTT were held to be entitled to claim liquidated damages for phase one of the works which Triple Point had completed, but were late in completing. The Court of Appeal, though, rejected PTT's claim for liquidated damages in respect of the period of delay between the outstanding milestones and termination of the contract as Triple Point had not subsequently completed the work.

Sir Rupert Jackson said that while PTT is entitled to recover liquidated damages of $154,662 in respect of Triple Point's delay of 149 days in completing stages one and two of phase one of the contract, it is "not entitled to recover liquidated damages for any of the other delays"

"That is because Triple Point did not complete any other sections of the work," he said.

Anna Conquest of Pinsent Masons, the law firm behind Out-Law.com, said:

"Ultimately, the assessment of a liquidated damages clause and whether the provision ceases or continues to apply up to termination and beyond will turn on the precise wording of the clause itself. What this judgement does is to provide some helpful clarity as to the effect of termination on liquidated damages provisions in relation to delay where the language of the provision is focused on the period of delay between the contractual completion date and the date when the supplier actually achieves completion."

"Therefore, when considering terminating a contract in circumstances where there has been delay and the deliverables have not been achieved, close consideration to the precise wording of the liquated damages provision should be had, as, termination of the contract could cause the liquidated damages provision to fall away and the customer's entitlement to liquidated damages to be lost, The customer would then be required to prove a claim for general damages and delay," she said.