Articles

Liquidated damages after contract termination

This article first appeared in the May 2019 issue of Construction Law www.constructionlaw.uk.com and is reproduced with permission.

This question has been considered in two recent cases.  In GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm) there was a dispute arising under five EPC contracts for the construction of solar energy plants in the UK. The contractor, Prosolia, failed to commission the solar plants and became insolvent. The employer, GPP, had terminated one of the EPC contracts and pursued a liquidated damages claim for late commissioning of the works against the contractor's parent company, Solar, which had guaranteed the contactor's obligations.

Solar argued the contractor could not continue to be responsible for liquidated damages after termination of the contract because it was no longer in control of the works. Mr Richard Salter QC sitting as a High Court Judge rejected that argument and followed the reasoning of Mr Justice Coulson (as he then was) in Hall v Van Den Heiden (No. 2) Limited that to permit such an argument would reward the contractor for its own default and make a contractor better off for not coming to site and waiting to be terminated to end its liability for liquidated damages.

The same question was considered in March 2019 by the Court of Appeal in Triple Point Technology, Inc. v PTT Public Company Ltd [2019] EWCA Civ 230. The case concerned a contract between TPT (a software supplier) and PTT (a Thai company) for the provision of a new software system.

The project fell into delay and the parties disagreed over the sums payable to TPT. TPT suspended work and PTT terminated the contract on the basis of TPT's wrongful suspension with a significant amount of work outstanding. TPT brought a claim for unpaid invoices and PTT counterclaimed liquidated damages from the contract completion date up to the date of termination (but not beyond) for works not completed by TPT. TPT argued liquidated damages were not recoverable because the work had not been completed and signed off before termination.

Sir Rupert Jackson, giving the judgment of the Court of Appeal, favoured the House of Lords decision in British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co (1912) andheld the relevant liquidated damages clause only applied where there was delay in completion by the contractor itself. If works were completed by others, the employer could not continue to recover liquidated damages and must instead prove the actual financial loss suffered. Sir Rupert Jackson questioned whether Hall and GPP had been decided correctly because, if correct, they meant the employer and second contractor could control the period for which liquidated damages run.

Sir Rupert Jackson held that whether a liquidated damages clause ceases to apply, or continues to apply up to or even beyond termination, depends on the wording of the clause and "there can be no invariable rule that liquidated damages must be used as a formula for compensation". The Court of Appeal's interpretation of the clause in question was that it only applied to work completed by the original contractor.

The Triple Point judgment clarifies that an employer's entitlement to claim liquidated damages whether up to termination, or beyond termination is not an invariable outcome. The Court of Appeal has made clear that an employer's ability to continue to claim liquidated damages post termination will largely depend on the wording of the liquidated damages clause in question, rather than any other principles.

The decision highlights the importance of parties giving careful consideration to the wording of the liquidated damages and termination provisions to ensure the outcome reflects what the parties intended.  A contractor will want to ensure, for example, it does not continue to be liable for liquidated damages after contract termination. 

Is an oral variation to a contract enforceable if the contract specifically states the parties must agree variations in writing?

Before the Supreme Court's decision in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24,the law was considered relatively settled that, despite the existence of a 'no oral modification' (NOM) clause stating any variations to the contract must be agreed in writing and signed, parties could still validly agree oral variations to the contract.

The rationale was that an orally agreed change to a contract was in itself an agreement. Provided the oral agreement was made by persons with authority to bind the parties, those parties always had the autonomy to orally agree a change to the underlying contract notwithstanding any specific formalities required by the contract.

In Rock Advertising, the claimant had entered into a contractual licence with MWB to occupy office space. The licence agreement contained a NOM clause that required any variations to the contract to be in writing and signed. Rock Advertising fell into rent arrears and its director claimed that during a telephone conversation MWB had agreed to vary the terms of the licence agreement to accept a payment schedule for the rent arrears and future payments of rent.  MWB denied agreement was reached, terminated the licence and sued for rent arrears.  Rock Advertising counterclaimed damages for wrongful exclusion on the basis there were no rent arrears because the parties had agreed its proposed payment schedule.

Judge Moloney QC in the High Court found that whilst there was an oral agreement to vary the payment terms, the variation was invalid because it was not in writing and signed by the parties in accordance with the requirements of the NOM clause.

The Court of Appeal overturned that decision and decided the variation was effective because the oral agreement was itself an agreement to dispense with the requirements of the NOM clause. Accordingly MWB was bound by the variation.

The case went to the Supreme Court who disagreed with the Court of Appeal and held the oral variation was invalid because it was not in accordance with the NOM clause. Lord Sumption stated "the concept of party autonomy was a fallacy" and operated only up to the point a contract is entered into: once the contract was signed, party autonomy only existed to the extent the contract terms permitted. In other words, parties were required to comply with the specific terms of the contract entered into.

As acknowledged by Lord Sumption in his judgment, there are sound commercial reasons for NOM clauses. They prevent, for example, disputes over what has actually been agreed between parties. They also prevent unauthorised personnel inadvertently making changes to a contract.

One view is the decision should be welcomed as it brings more certainty by reinforcing the expectation that parties comply with the terms of contracts they enter into. On the other hand, the decision increases the importance of employers and contractors understanding the requirements of contracts entered into and complying with those terms especially when agreeing changes to a contract.

Life After Grove Developments

Like Brexit, you probably couldn't have avoided the column inches dedicated to Mr Justice Coulson's swan song decision in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) before being elevated to the Court of Appeal. Before Grove, if a payer failed to serve a valid interim payment notice or pay less notice, they had to pay the notified sum regardless of whether it reflected the true value of the works.  An exception to that position was created by the courts for final (rather than interim) payments a paying party could commence a second adjudication on "true" value of the final payment certificate. The interim payment position led to what the industry commonly termed "smash and grab" adjudications as payees became entitled to payment of over-valued interim applications which they could retain until the next interim payment stage or final account.
In Grove, Mr Justice Coulson decided a payer was entitled to refer the "true" value of an interim payment to a second adjudication, even if it had failed to serve the correct contractual notices. This effectively aligned the position between interim and final payment applications. However, Mr Justice Coulson made clear that before the payer could start a true value adjudication they must first pay the notified sum.  His judgment was then upheld by the Court of Appeal in Grove Developments Ltd v S&T (UK) Ltd [2018] EWCA 2448.

Grove was applied for the first time in M Davenport Builder v Greer & Anor [2019] EWHC 318 (TCC). The case concerned a claimant who had obtained an adjudication award on a final account and had applied to enforce the decision. Without paying the adjudicator's award the defendant had commenced a "true" value adjudication which had decided nothing was payable to the claimant. The defendant sought to rely on the "true" value adjudication by way off set-off or counterclaim against the first adjudicator's decision at the enforcement hearing.

Mr Justice Stuart-Smith considered Mr Justice Coulson's decision in Grove and held the employer must first pay the sums awarded in the first adjudication before they could rely on the decision of the true value adjudication. The judge nevertheless seemed content that the adjudicator in the true value adjudication had jurisdiction and the employer was entitled to run a "true" value adjudication without first paying the notified sum, and accordingly payment only needs to be made before the "true" value decision can be relied upon. This aspect of M Davenport Builder is a little difficult to reconcile with Grove.

What do the decisions in Grove and M Davenport Builder mean for tactical "smash and grab" adjudications? Well, it seems "smash and grab" adjudications may potentially be less worthwhile because, following M Davenport Builder, the payer can immediately commence an adjudication to challenge the true value of the interim or final payment. However, the payer will (at least) have to pay the "smash and grab" sum awarded before they can rely on any second "true" value adjudication decision.

Another view is that contractors will continue to pursue "smash and grab" adjudications because they offer cash flow and negotiating power, while the burden remains on the employer to show the original notified sum was overvalued.

We may see parties employing different tactics to avoid paying an overstated notified sum. An option could be to start a "true" value adjudication pre-emptively, or simultaneously with "smash and grab" adjudications, or immediately afterwards, and to resist paying the original adjudicator's award until shortly before any enforcement hearing.

For more information please contact:

Chris Philpot
Senior Associate
T +44 (0)20 7264 8336
E chris.philpot@hfw.com