Liquidated damages

PBS Energo AS v Bester Generacion UK Ltd & Anor [2020] EWHC 223 (TCC)

Facts

A contractor and its sub-contractor fell out over the development of a biomass plant for the employer. The works were incomplete, the biomass plant was never built.

Both contractor and sub-contractor claimed to have terminated the contract. The main task before the court was to decide which, if either, was entitled to (and had) terminated the sub-contract.

One of the subsidiary tasks was to consider the financial consequence of that termination. The contractor claimed liquidated damages (“LDs”). However, the sub-contractor argued that LDs were not available because:

• the LDs were expressed as applying where the sub-contractor’s work was late, not where it was never completed, and so the mechanism had not been triggered; and
• there was another clause in the sub-contract, the Actual Net Loss clause which represented “a complete code for compensation in the event of termination”.

Triple Point

The judge inevitably referred back to the 2019 Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230 decision, now under appeal at the Supreme Court. As is the case with all decisions about the interpretation of LDs provisions, the interpretation of that mechanism was driven by the drafting in question which stated that LDs would accrue:

“…per day of delay from the due date for delivery up to the date PTT [the customer] accepts such work…”.

In Triple Point, the stage two work (which comprised most of the claim) had never been accepted by the customer because the work had been abandoned. The court held that this meant that the LDs mechanism did not even apply; the facts of the case did not fit into the scenario anticipated by its drafting.

A more technically difficult aspect of Triple Point was whether the LDs would have stopped accruing at contract termination or continued to accrue (until a replacement contractor delivered work which achieved the acceptance anticipated by the mechanism). The orthodox approach is accrual of LDs until termination but in Triple Point the court found that case law also supported accrual past termination.

As Cotterill J put it in PBS v Bester:

"That case (which is under appeal) is authority for the proposition that when considering damages for delay which are included in contracts it is necessary to consider the drafting of the contract carefully to assess whether the clause allows that any Liquidated Damages will survive termination and particularly whether they will survive termination in circumstances where the contract is terminated with the works incomplete."

You can read our 2019 note of the Court of Appeal decision here.

PBS v Bester

Turning back to the 2020 dispute, the court held that the sub-contractor had wrongfully terminated the contract. The contractor had been, therefore, able to terminate the contract for the sub-contractor’s abandonment and could claim damages.

The sub-contract’s LDs mechanism then turned to be assessed. The court found that they operated quite differently from those in Triple Point. Unlike Triple Point, actual acceptance of the work in the PBS/Bester project was not a condition of accrual of LDs – in its mechanism the key date was that at which the works should have been completed. LDs started accruing from that date.

As to the compensation due under the Actual Net Loss clause, the court held that nothing in the clause purported to override the LDs mechanism, it operated as an additional right.

Comment

We wait to see what the Supreme Court decides in the case of Triple Point.

Both disputes illustrate the importance of identifying the possible default scenarios and ensuring that, where parties agree LDs should be triggered, the events are clearly captured in the LDs mechanism.

If the agreement makes clear whether or not LDs continue to accrue post-termination, interpretation becomes much easier.