Liquidated damages and the ticking clock

Time to get back to the drawing-board, perhaps, if you’re a construction contractor. Suppose you you agree to do work and include this liquidated damages term:

“If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by EMPLOYER, CONTRACTOR shall be liable to pay the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date EMPLOYER accepts such work. …”

Things drag on: there’s some work you never actually do at all, and in the end the employer terminates the contract. Can the employer claim liquidated damages for the period between the due date and termination, on the basis that the meter started ticking when you should have finished the work and only ground to a halt when he walked away and put an end to the whole arrangement? Or is he limited to proving his loss in the ordinary fashion, on the argument that if work is never accepted (ex hypothesi the case where it was never done in the first place), the clause makes no sense and therefore has to fall away?

In Triple Point Technology, Inc v PTT Public Co Ltd [2021] UKSC 2 the Supremes, reversing the Court of Appeal, chose the former solution. It was, it said, more commercial that once the meter had begun to tick the accrued rights to payment that arose de die in diem as a result should be preserved, and would not be liable to disappear in a puff of legal smoke if at some time in the future it became clear that the work would never be done. Furthermore, said the court, the opposite answer would create a perverse incentive: assuming the liquidated damages clause was more profitable to the employer that his right to damages, it might be in the interests of the contractor not to tender performance at all.

This is arguably right, though not incontrovertibly so (one could equally well contend that if the parties had intended that the clause should apply in the case of non-performance it would not have been difficult for them to say “up to the date EMPLOYER accepts such work, or the Contract is terminated by EMPLOYER, whichever shall be the sooner”.) But for future contracts this does not matter to much, since the ball is in the court of contract draftsmen.

Nevertheless, one thing might be worth contemplating for contractors. Having shied away from creating a perverse incentive in the contractor to drag his feet, the UKSC has arguably created an equal and opposite one in the employer. What if, after relations have de facto broken down without the work being done, such that there is now no practical chance of their completion and acceptance, the employer smugly writes to the contractor saying he continues to hold the contract open? True, the courts would no doubt find a way to prevent the clock potentially ticking on until the last trump (see MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789, noted here in this blog). But a couple of months or so of foot-dragging at 0.1% per day would be distinctly profitable if they led to a windfall claim for 6.1% of the relevant price with no questions asked. Indeed a lawyer who didn’t raise this possibility with his clients might face some awkward questions later.

There is, however, a possible straightforward answer. There is much to be said for contractors arguing for the insertion of a bespoke provision applying whenever a right to terminate had arisen in the employer, allowing the contractor to put him to his election and in the absence of an election to terminate to put an end to the running of liquidated damages for delay.

Two other issues arose in the case about the drafting of the damages limitation clause. But these turned very much on the interpretation of the wording used, and are of little general interest. Meanwhile, however, if they don’t like the result in PTT lawyers are on notice to get out their word-processors and go over their precedents.

Penalties, banks and such-like Down Under

Contract law enthusiasts might take heart from today’s long-awaited decision of the High Court of Australia on penalties, Paciocco v ANZ Group Ltd [2016] HCA 28. Essentially four of their Honours (French CJ, Kiefel, Keane and Nettle JJ) say things consistent with Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, decided last November in the UKSC and noted here on this blog: namely, that the test for a penalty is now whether the agreed sum fulfils some legitimate interest in the victim in obtaining performance.  There is agreement to differ on another point (ie whether the penalties doctrine goes beyond breach of contract — the Aussies say it does, we say it doesn’t): but that issue wasn’t raised in Paciocco, and in mentioning it French CJ was merely pointing out that the common law isn’t necessarily one-size-fits-all. This point aside, London and Canberra are singing from a broadly similar hymn-sheet.

The question at stake was late payment fees on credit card accounts — in this case a straight charge of $20. By a majority (Nettle J dissenting) it was held not penal. Advantage banks.

Penalty clauses revamped

The law on penalty clauses, a bugbear to commercial lawyers for some time, has been re-written by the Supreme Court. The court declined to abolish the doctrine — mainly for the rather unconvincing reason that other European jurisdictions all had restrictions on liquidated damages stipulations, that English lawyers shouldn’t be bad Europeans, and that the Council of Europe thought them a Good Thing.

But the court did rationalise the law, saying that essentially the question is whether the amount stipulated for is wholly disproportionate to the interest of the claimant in protecting his right to performance. If it isn’t, then the clause has the green light. This should be a relief to commercial lawyers, who provided they don’t go completely bananas in setting the amount payable now have some guarantee that the courts won’t allow the other party to come snivelling that the provision is a technical penalty.

Hence in one case a seller of a business can validly forfeit a goodly proportion of the selling price if he breaks a noncompete agreement; and in the other (more homely) case a parking operator can set a substantial charge for overstaying. Neither is an objectionable penalty.

See Cavendish Square Holding BV v Talal El Makdessi (Rev 3) [2015] UKSC 67 (4 November 2015), available on BAILII.