Enforceability of penalties for late delivery in the UK: UK Supreme Court confirms the law of liquidated damages

For some time the position under English law relating to the recovery of liquidated damages from a contractor as penalty for late delivery has been unclear where the contract terminates before the contractor completes the work. Welcome clarity has now been provided by the Supreme Court in the case of Triple Point Technology Inc v PTT Public Company Ltd. The decision means that unless the liquidated damages clause “clearly” provides otherwise, liquidated damages for any work not completed by the date provided for in the agreement can be claimed for the period up to the date of termination.

Background and Court of Appeal decision

In the Triple Point case, Triple Point (“Contractor”) was engaged by PTT Public Company Ltd (“PTT”) for the design, installation, maintenance and licencing of a new software system. The contract provided for payments to be made upon achievement of defined milestones and included a completion date for the first phase of the project.

The contract also included the following liquidated damages clause:

“If Contractor fails to deliver work within the time specified and the delay has not been introduced by PTT, Contractor shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work…”

Triple Point achieved completion of a portion of the work and was paid for that work, however, aspects of the work remained outstanding, meaning that Triple Point did not complete the work and PTT did not accept it. PTT later terminated the contract and appointed a new contractor to complete the work.

PTT sought to recover liquidated damages from the period between the contractual date for delivery and the date of termination of the contract. Triple Point argued that the termination of the contract extinguished any liquidated damages claim. The Court of Appeal initially sided with Triple Point and found that the liquidated damages clause fell away on termination in respect of the incomplete work.

The UK Supreme Court judgment

The UK Supreme Court has now unanimously reversed the decision from the Court of Appeal, reverting the position back to industry ‘normal’; if a liquidated damages clause such as the above is included in a contract, and the contractor fails to meet its obligations resulting in the eventual termination of the contract, the contractor will generally be liable for liquidated damages between the contractual due date for the work and the date of termination (with general damages available for the post-termination period).

The UK Supreme Court also clarified that liquidated damages can also accrue after the termination of the contract, but in order to do so this will need to be expressly provided for in the wording of the relevant clause in clear and unambiguous terms.

A note of caution….

Contracts for critical IT projects often contain penalties for late delivery. Parties to such contracts are well advised to check that the liquidated damages clauses in their contracts convey the position taken by the UK Supreme Court and do so clearly. If a customer wishes to provide for liquidated damages to continue after termination (and thus avoid having to prove general damages by evidence), the liquidated damages clause should say so in the most clear and unambiguous terms.