Calm down LADs!

This article is from December’s edition of Aggregate, which featured a month-by-month review of 2021. This is July’s entry. To read the complete newsletter as a PDF, click here.

It’s been kicking off on the issue of liquidated damages for some years now, and this year saw two further cases of note.

July 2021 saw the Supreme Court hand down its judgment in Triple Point Technology v. PTT Public Company. Although this was a dispute concerning a software contract, the judgment is extremely important to those involved in the construction industry as it relates to liquidated damages.

Liquidated damages (also known as liquidated and ascertained damages – or LADs) clauses are commonplace in construction contracts. They allow the parties to a contract to pre-determine the damages suffered by one party because of the other party’s breach. In a construction context, LADs are often recoverable by an employer whereby the contractor has not completed the works by the agreed completion date. In that scenario, the contract will usually include a rate of LADs for each day/week/month the works are late, and the contractor will be required to pay to the employer the calculated amount of LADs up to the date completion actually takes place.

But what happens if the contract is terminated before completion of the works? It is this age-old question that the Supreme Court had to answer in the Triple Pointcase.

The relevant contract contained a clause which provided that if the supplier failed to deliver the work within the time specified, it would be required to pay the customer a penalty of 0.1% of undelivered work per day of delay “from the due date for delivery up to the date [the customer] accepts such work”. The contract was terminated before the work was completed, and as such was never accepted by the customer.

In those circumstances, was the customer entitled to LADs? The Court of Appeal said no on the basis that the clause did not apply as the work was never completed. Although the customer was entitled to general damages, it was not able to recover LADs at all – either for the period up to termination or afterwards.

However, the Supreme Court overturned this decision, stating that the Court of Appeal’s approach was “inconsistent with commercial reality and the accepted function of liquidated damages”. It said:

“Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract…After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law….”.

This common-sense approach from the Supreme Court has been welcomed by practitioners as it reflects commercial reality (not to mention the long-understood position). It does, however, remind us to ensure careful drafting around LADs clauses, to avoid disputes later down the line.

A month later, the courts were looking at LADs again, this time in in Eco World – Ballymore Embassy Gardens Co Ltd v. Dobler UK Ltd. This case related to work on a scheme at Nine Elms in London, with the argument relating to partial possession and LADs.

In a normal JCT contract, if a party takes possession of all or part of the works, the LADs for delay are reduced pro-rata by the value of the work over which possession is taken.  However, as with a lot of larger contracts, the contract was not a standard JCT – it was an extensively amended JCT 2011 Trade Contract. One of the provisions allowed the employer to take over part of the works prior to practical completion, but did not explain what the effect was on the level of LADs.

The High Court, perhaps surprisingly, decided that without a clause expressly saying that the LADs are reduced, there is no presumption that LADs will be reduced. This meant that the LADs remained at the stated level of £25,000 per week, even though the employer had taken possession of parts of the works. In a somewhat bizarre twist, this was the interpretation pleaded by the trade contractor, presumably because if general damages had applied it would have been a lot worse off. It will be interesting to see whether that case ends up in the appeal courts like Triple Point. Unsurprisingly, LADs are frequently the subject of disputes, given that they often involve huge sums of money. We truly were treated to have two notable decisions to entertain us over the summer months.