The question of whether an employer is entitled to levy Liquidated Ascertained Damages (LADs) after the employment of the contractor has been terminated has received some welcome clarification from the Court of Appeal.
Previous Court Decisions
The decision in Hall v Van der Heiden (No. 2) [March 2010] concerned a contractor in delay and defective work. The contractor’s employment was terminated under the JCT default provisions and the employer engaged a replacement contractor to finish the works.
The Court decided that the employer was entitled to levy LADs, even after the contractor’s employment had been terminated. This decision was justified on the basis that otherwise the contractor would appear to benefit from its own default if the costs of delay were shifted to the employer.
Four months later, the more orthodox view was set out in Shaw v MFP Foundations [July 2010] where the Court said:
“So far as liquidated damages are concerned, in respect of any period of culpable delay up to the date when the contract is terminated the employer is entitled to recover liquidated damages at the contractual rate… However, after the date of termination the parties are no longer required to perform their primary obligations under the contract and so the contractor’s obligation to complete by the completion date no longer remains and the provision for liquidated damages therefore becomes irrelevant.”
More recently, the Hall decision was followed in GPP Big Field v Solar EPC [2018].
However, Hall and GPP appeared to be contrary to generally accepted contract principles, i.e. as per Shaw v MFP that certain obligations come to an end once a contractor’s employment has been terminated, including the contractor’s obligation to carry out and complete the works by the contract completion date.
Therefore, making the contractor liable for LADs in relation to a non-existent obligation was seen to stretch the principle too far.
Triple Point Technology v PTT Public Co [2019]
In Triple Point, the Court of Appeal reviewed the previous decisions. Although the dispute concerned an IT dispute, it has equal application to construction and engineering disputes.
In summary, the IT contract contained an LADs clause entitling the employer to deduct 0.1% of the contract sum per day of delay.
Triple Point Technology’s (TPT) works were in delay, but TPT claimed that payments for its invoices were still due. PTT refused to make any further payments. TPT therefore suspended its works.
PTT argued that TPT wrongfully suspended its works and subsequently terminated TPT’s employment under the contract.
TPT then commenced court proceedings for payment of its invoices; PTT’s counterclaim included LADs for the delayed completion.
In the High Court, it was decided that:
- TPT was not entitled to payment as the relevant milestones had not been achieved
- PTT was entitled to the cost of an alternative IT systems and damages for wasted costs
- PTT was also entitled to LADs
TPT appealed, arguing that LADs would only be recoverable in relation to delay where TPT itself ultimately completed the works.
On the LADs point, the Court of Appeal considered three possible outcomes:
- The LADs clause did not apply
- The LADs clause applied but only up to the date of termination (i.e. Shaw v MFP)
- The LADs clause continued to apply until the replacement contractor completed the works (i.e. Hall and GPP)
The Court of Appeal made it clear that the starting point would always depend on the wording of the relevant clauses and that no one rule governed the situation. However, in this case, the LADs provision clearly concerned any delay to completion of the works by TPT. On that basis, LADs applied only to the period of delay up to the point TPT’s employment was terminated but did not apply to any works not completed by TPT.
The second of the listed options considered was therefore the correct one in this case.
Comment
This decision offers some helpful clarification and, whilst each case will be decided on its own facts, the prevailing judicial view is that LADs will generally not apply post-termination. This does not mean that an employer is deprived of any remedy as it will be open to the employer to claim general damages for losses incurred post-termination, albeit they would be subject to proving breach and loss.
