Liquidated damages where a contractor fails to achieve completion

Most construction contracts will include a liquidated damages provision, payable if the contractor has caused delay. This removes the employer's ability to claim general damages for the actual loss it has suffered as a result of delay.

Whilst there may be dispute as to the cause of the delay, if practical completion is achieved and it is determined that the delay is the responsibility of the contractor the applicability of the liquidated damages clause will (normally) be straightforward.

Court of Appeal

More complicated is the scenario where a contractor is in delay but also never actually achieves practical completion.

The Court of Appeal considered this issue in Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230 and determined that the ultimate application of the clause will depend on the wording of the contract.

The liquidated damages will either cease to apply at all, or will apply up to the termination of the contract but not beyond.

Reasoning

The Court of Appeal's assessment of previous case law began with British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd 1912 SC 591 (Court of Session) and 1913 SC (HL) 1. A contractor was engaged to construct a factory, but became bankrupt before achieving practical completion.

The employer therefore engaged another contractor to complete the factory. The employer sought to recover its losses from the original contractor's bondsman.

The court held that the liquidated damages clause only applied where that contractor completed the works; a separate clause entitled the employer to engage a third party where the original contractor ceased working and this alternative remedy meant that liquidated damages could not be claimed.

The issues were then discussed by the Scottish courts in Chanthall Investments Ltd v F.G. Minter Ltd 1976 SC 73. The contractor was engaged to construct an office block in Glasgow; the contractor failed to achieve practical completion and a second contractor completed the job.

The employer brought a claim, including actual delay costs, against the first contractor; the contractor argued that delay costs were limited to the liquidated damages in the contract.

The court sided with the employer deciding that the liquidated damages clause had no application as the contractor did not achieve practical completion.

At paragraph 79 of the Inner House of the Court of Session's judgment, Lord Wheatley stated that a liquidated damages clause "does not supersede or exclude the right to obtain common law damages for delay occasioned by a breach of contract."

In subsequent cases, Glanzstoff was not cited; for example in Greenore Port Ltd v Technical & General Guarantee Company Ltd [2006] EWHC 3119 (TCC) the court decided the claimant was entitled to liquidated damages up to the date of termination and general damages thereafter.

Similarly, in Shaw v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC) the court decided that liquidated damages could be recovered up to the date the contract is terminated and general damages would apply after termination.

Further, Glanzstoff was referred to, but not fully considered, in LW Infrastructure PTE Ltd v Lim Chan San Contractors PTE Ltd [2011] SGHC 163 where the court also concluded that the liquidated damages clause only applied up to termination of the first contract.

Decision

Whilst there are also a few cases where it was held that a liquidated damages clause applied until a second contractor achieved completion, it seemed to be accepted that these cases were either wrongly decided or turn on their own facts. The general position is that liquidated damages clauses do not remain applicable until a second contractor achieves completion.

The Court of Appeal therefore concluded that, where practical completion is never achieved, liquidated damages clauses could either have no application, or apply up to termination of that contract, but not thereafter, depending on the wording of the clause.

Comment

This decision provides some much needed clarity on the position of liquidated damages vs general damages where practical completion is not achieved by a contractor.

This will provide comfort to employers that, should a contractor fail to complete works, it will be able to claim general damages for its actual loss for some, if not all, of the period of delay (although, whether this actually results in any return for an employer will of course be circumstance dependent – if a contractor fails to attain practical completion because it enters liquidation the employer may not obtain any recovery).

Contractors should, however, be aware that if it chooses to terminate (or takes action that enable the employer to terminate) a contract in delay, it could be responsible for general damages far in excess of the contractual liquidated damages clause.