Articles

A Lack of Agreement? Approaches to liquidated damages in Singapore and the UK following Seraya v. Denka¹ and Triple Point v. Ptt²

Kelvin Teo³ and David Johnson⁴

Introduction

1. For all but a very fortunate few, delays are an unfortunate inevitability in construction projects. The principles underpinning the application and enforceability of liquidated and ascertained damages – pre-agreed sums to compensate the employer in the event of delay to the works – are therefore of importance to all players in the construction industry.
2. Due to the close historical relationship between Singapore law and English law, in Singapore we always pay close attention to developments in construction law in England. The Singapore Courts have in recent years had to consider the extent to which it should be guided by major developments that have arisen in English law, in areas such as contractual remoteness⁵, illegality and restitution⁶. The Singapore Courts have also deviated from trite principles of English law in areas such as when there can be implied terms of due diligence and expedition in construction contracts⁷.
3. Several fairly recent decisions from Singapore and England provide helpful guidance as to how Singapore courts and tribunals are likely to approach key issues relating to liquidated damages, such as:
   1. The effect of the law on penalty clauses; and
   2. Post-termination enforceability of liquidated damages provisions.
4. This article brings together a "double act" consisting of a Singapore specialist construction lawyer and an English barrister specialising in construction and international arbitration in order to consider those cases and the issues they raise.

Background - the ‘genuine pre-estimate of loss’ test in English law

5. Traditionally, for a liquidated damages provision in a contract to be enforceable it must be shown that it amounted to a 'genuine pre-estimate of loss'; that is, the clause could not be a predominantly punitive one, nor could it provide for an award of damages out of all proportion to the losses sustained by the innocent party⁸ . However, in 2015 the UK Supreme Court heard the conjoined appeals of Beavis v. ParkingEye; Cavendish v. El Makdessi Holdings [2015] UKSC 67, in which this issue was reconsidered.
6. The hearing was of considerable public interest: one appeal concerned the damages payable following breach of a share sale agreement; the other concerned a challenge by Mr Beavis to a parking ‘fine’ that had been levied by a private company when he had exceeded a two-hour stay by 56 minutes. Mr Beavis contended that the ‘fine’ was unlawful since it did not reflect the loss sustained by the car park owner. Remarkably, the cases were considered to raise the same issues of law and were therefore heard together.
7. In upholding the clauses in both cases, the test articulated by the Supreme Court mitigated the previous position by holding that, provided there was a 'commercial justification' for the figure in question, and it was not out of all proportion to the legitimate interest of the innocent party, it would be open for that party to rely on the clause. In some circumstances, that legitimate interest for enforcing performance might go beyond simple compensation for losses.

The English approach not followed in Singapore

8. Although Cavendish has been referred to subsequently in a number of decisions of the Singapore courts⁹ , it has not been fully approved as a statement of Singapore law. That has recently been confirmed by the High Court of Singapore in Seraya Energy Pte Ltd v. Denka Advantech Pte Ltd [2019] SGHC 02, in which the Court was asked to consider comparable liquidated damages provisions in three separate power purchase agreements. Those provisions rendered the contractor liable for liquidated damages, among other things, following termination of the relevant contract.
9. The Court held that the clauses amounted to penalties and declined to enforce them. In doing so, it concluded that the 'genuine pre estimate of loss' test was the correct approach to be followed¹⁰ . Applying that test, the liquidated damages provision amounted to a penalty for the following reasons:
   • The Court noted that there was no evidence to suggest that the clauses had been calculated on that basis;
   • This was bolstered by the fact that the formula for calculating the liquidated damages was exactly the same in each agreement, notwithstanding the significant differences in value, duration and terms of each agreement; and
   • The clauses allowed for the imposition of liquidated damages even after the termination of the power purchase agreement, whether for breach or (in one case) in the case of termination for convenience.
10. The Court therefore concluded that the liquidated damages provisions were unenforceable¹¹ .
11. This appears to show a divergence in approach between English and Singapore law. Even if they sometimes lead to the same result, there is no guarantee they will do so.

Post-termination LDs

12. As the final bullet point above indicates, Seraya also raised another difficult issue: to what extent and for what period does the liquidated damages provision in question allow for liquidated damages to be imposed in the event that the contract was terminated prematurely? Do they apply until the works are completed by a replacement contractor? What about when the works are never completed at all?
13. Case law from Singapore, England and Hong Kong reveal an array of approaches. In short, there are three main possibilities in the event that works are left incomplete and a replacement contractor is engaged:
    • The liquidated damages clause is inapplicable;
    • The liquidated damages clause applies only up to the point of termination or abandonment; or
    • The clause applies until completion is achieved by the follow-on contractor.
14. The last of these approaches has received some recent support in England¹² and Hong Kong¹³ . However, as the Court noted in Seraya, it would have led to a particularly harsh approach in one of the contracts, which stated that the liquidated damages would be applicable in the event of termination "for any reason whatsoever"^`14 . The High Court was clearly influenced by this result in concluding that the liquidated damages provisions were penalties – and thus refusing to uphold them. In doing so, the Court appeared to reject the approach whereby liquidated damages could be awarded after termination of the contractor's employment. This appears to follow the earlier decision J in LW Infrastructure Pte Ltd v. Lim Chan San Contractors Pte Ltd [2011] SGHC 163, in which Prakash J reversed an arbitrator's award and held that liquidated damages were recoverable from the contractual completion date until the point of termination of the contract.
15. In 2018, in GPP Big Field LLP v. Solar EPC Solutions SL [2018] EWHC 2866 (Comm) ("GPP v Solar"), contractors may have been alarmed to see that the English High Court upheld the employer's claim for delay liquidated damages ("LDs") which continued to run for a period after the termination of a construction contract. This decision revived an earlier decision to the same effect in Hall and another v. Van Der Heiden (No 2) [2010] EWHC 586 (TCC). In short, the LDs provisions were considered to be justified in safeguarding the employer’s legitimate commercial interest in ensuring timely completion and commissioning.
16. This went against the orthodox understanding, in various textbooks¹⁶ and decisions, that delay LDs are applicable post-termination, although LDs stop running at termination. Thereafter, an employer must prove its claim for general damages.
17. If GPP is correct, contractors remain exposed to employer claims for delay liquidated damages for the period up to the time that a replacement contractor completes the project. This means potential exposure to enormous claims for delay liquidated damages, even after the contractor has left the project and the fate of the project is no longer under his control.

Reconsideration in the English Court of Appeal: Triple Point Technology v. PTT

18. In the latest case in England on the issue, Triple Point Technology v. PTT [2019] EWCA Civ 230 ("Triple Point"), PTT sought to obtain a new software system to operate its commodities business, Triple Point fell behind in relation to the project milestones. A dispute as to Triple Point’s entitlement having arisen, it suspended works and claimed entitlement to the sums it had invoiced. PTT sought to terminate the contract under its contractual provisions on the basis that Triple Point had no entitlement to suspend as it had done. PTT’s counterclaim included a claim for liquidated damages for delay.
19. At first instance, the liquidated damages claim was upheld by the Judge. Finding that the delays were caused by breaches on the part of Triple Point, it was not entitled to suspend works and was in repudiatory breach of contract. PTT was not only entitled to recover the costs of a replacement contractor, it was also entitled to recover liquidated damages for delay. That was significant since, unlike the other damages, the liquidated damages for delay were not subject to the same contractual cap.
20. On appeal, the Court of Appeal (Sir Rupert Jackson giving the lead judgment, having been brought out of retirement to do so!) reviewed the past cases across various jurisdictions and identified 3 possible scenarios:
    • Scenario 1) The liquidated damages clause is inapplicable where there is termination or abandonment before completion. In other words, the Employer has to prove general damages for all delay.
    • Scenario 2) The liquidated damages clause applies only up to termination, i.e. the orthodox "textbook" position.
    • Scenario 3) The clause continues to apply until the replacement contractor achieves completion. The Court expressed doubts that Scenario 3 was correct as it would mean that the employer or the replacement contractor could control the period for which delay liquidated damages will run.
21. The Court concluded that much would turn in each case on the wording of the particular clause in question.
22. However, based on the wording of the liquidated damages clause in the present case, it would apply to sections that were completed late, but did not apply to sections where the contractor failed to complete. Accordingly, the employer was entitled to liquidated damages up until termination, and would need to prove entitlement to general damages thereafter.
23. The Court saw much force in Category 1, and urged a return to the principle set out in House of Lords decision in British Glanzstoff Manufacturing Co. Ltd v. General Accident, Fire and Life Assurance Co. Ltd 1913 SC (HL) 1. That case held that, based on the wording of the LD clause in question, it only applied to a situation where the contractor completed its works late. It did not apply where the engagement of the contractor in question was terminated and the works were then completed by an alternative contractor.

Analysis

24. So, where does that leave us in Singapore?
    1. On penalties, the weight of authority, at least for now until the point is reconsidered by the Court of Appeal, suggests sticking to the well-trodden principles in Dunlop Pneumatic¹⁷.
    2. On liquidated damages post-termination:
       1. One can rely on the orthodox "textbook" position in LW Infrastructure Pte Ltd v. Lim Chan San Contractors Pte Ltd [2011] SGHC 163;
       2. Or we can argue that the English position in Triple Point/GPP v. Solar/Glanzstoff position ought to apply.
25. Certainly, it would be unwise to regard the law on post-termination LDs as settled. The Court in Triple Point was at pains to turn out that the result in each case will turn on the wording, and thus the interpretation, of the particular clause in question. This is important, since:
    • The liquidated damages clause may expressly state the period they are to apply for, or may be silent;
    • The clause may be linked to a specific definition of completion in the contract, or else make general reference to, for example, practical completion. While ‘practical completion’ itself has a meaning at law, problems arise if the works to be completed under the follow-on contract are different to the original one;
    • The contract may stipulate that certain rights are accrued rights that survive termination. It may be necessary to consider whether the liquidated damages remedy is such a clause
    • The contract may provide that liquidated damages are an exclusive remedy, or it may not.
26. There are also potentially different factual circumstances to take into account. On one hand, a contractor may simply abandon a project itself. That may require a different approach to a case where the contractor’s employment is terminated based on a contractual right to do so, and a delay ensues before the employer engages a follow-on contractor.
27. Moreover, it is our understanding that permission to appeal from the Court of Appeal’s decision has been successfully obtained by Triple Point, meaning the Supreme Court will again be required to look at the issue of LDs in 2020.
28. Parties should not assume that the same approach will be taken in relation to each of the above permutations. For that reason, they should ensure that their liquidated damages provisions are carefully drafted, and make clear the situations in which they will or will not apply.
29. So, when was the last time that you checked the liquidated damages provision in your contract?

Contributed by:

Kelvin Teo – Cavenagh Law LLP/Clifford Chance Asia; David Johnson – Atkin Chambers