Articles

28 April 2022

A. Introduction

1. Liquidated damages clauses have long been a fixture in construction and engineering contracts, and form a core element of risk allocation in such contracts. These clauses serve two useful purposes¹. First, they avoid the often difficult and costly exercise of establishing the financial loss caused to the employer by reason of delays to the works. Second, they limit the contractor’s exposure to liability of an otherwise unknown and open-ended kind, while at the same time giving the employer certainty about the amount that it will be entitled to recover as compensation. Each party is therefore better able to manage the risk of delay in the completion of the project.
2. Despite their obvious utility, liquidated damages clauses continue to vex users and the Courts in their applicability.
3. Both the Singapore and English Courts have had the opportunity to expound upon issues relevant to such clauses in the past year. This article will therefore explore the principles that have emerged in the English cases of Triple Point Technology, Inc v PTT Public Company Ltd² (“Triple Point”) and Eco World – Ballymore Embassy Gardens Company Limited v Dobler UK Limited³ (“Eco World”), as well as the local cases Crescendas Bionics Pte Ltd v Jurong Primewide Pte Ltd⁴ (“Crescendas”) and Zhong Kai Construction Co Pte Ltd v Diamond Glass Enterprise Pte Ltd⁵ (“Zhong Kai”).

B. Liquidated Damages After Termination

4. Practitioners will be well aware of the controversial decision of the English Court of Appeal⁶ in Triple Point, which held that that liquidated damages for delay were not payable in respect of works which had not been completed at the point of termination. This dramatically challenged the widely accepted orthodox position that liquidated damages are payable up to the date a contract is terminated, and general damages are recoverable thereafter, and caused significant consternation among practitioners.
5. The UK Supreme Court’s overturn of this controversial decision in July 2021 signalled a welcome return to orthodoxy. In its judgment, the UK Supreme Court re-stated the generally accepted position that liquidated damages will be payable only up until the point of termination of the contract, and that if parties intend for liquidated damages to accrue after termination, this must be expressly provided for by clear wording in the contract.
6. There are good reasons for this position.
7. First, as the UK Supreme Court noted in Triple Point⁷, after the contract is terminated, the time taken to complete the work is entirely outside the control of the original contractor. Accordingly, unless the contract provides that the contractor’s liability for liquidated damages will only arise post-termination if the employer and/or any replacement contractors complete the works in a timely, efficient and cost-effective manner, it would be unlikely that any contractor would put itself at the mercy of the employer by agreeing that liquidated damages should continue to run after the termination of the contract.
8. Second, the inability of an upstream party to recover liquidated damages for delay after termination would make such parties think twice before terminating a contract.
9. The judgment in Triple Point was, until December 2021, in line with the position taken by the Singapore Courts. Indeed, the Singapore High Court noted in LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd⁸ (“LW Infrastructure”) that it was a “well-established principle that no liquidated damages accrue once a contract has been terminated, in the absence of express contractual provision to the contrary”⁹ .
10. However, the recent decision of the Singapore High Court in Zhong Kai represents a curious anomaly in the jurisprudence, and raises questions as to whether it represents a departure from the orthodox position.
11. In Zhong Kai, the Court allowed a claim for liquidated damages calculated from the contractual date of completion (16 March 2018) to the actual date of completion (30 September 2018). No reasons were given by the Court as to why the contractor was entitled, as a matter of principle, to recover liquidated damages from its subcontractor even after the subcontract was terminated by reason of the subcontractor’s abandonment of works on 29 June 2018.
12. It is posited, however, that the case of Zhong Kai must be viewed with circumspection. It does not appear that the Court had the benefit of any arguments on the issue, and neither Triple Point nor LW Infrastructure were cited as authorities to the Court. In arriving at its decision, the Court had ostensibly undertaken a straightforward, arithmetical approach towards the calculation of liquidated damages payable by multiplying the liquidated damages rate by the number of days that the subcontractor was in delay, without any consideration as to whether liquidated damages should, as a matter of principle, be imposed after the termination of the subcontract on 29 June 2018. In light of these matters, it is doubtful as to whether this case can be viewed as a considered departure from the orthodox position.\
13. Zhong Kai nevertheless remains binding precedent in local jurisprudence, and further clarity on this issue would be much welcomed.

C. Liquidated Damages as a Cap on General Damages Claimable

14. Another issue that came up for consideration by the Courts was whether, in the event that a liquidated damages clause is inoperable, unenforceable or invalid, the general damages recoverable by the upstream party should be capped by the amount of liquidated damages that it would have been entitled to.
15. This issue was answered by the Singapore High Court in the negative, in the case of Crescendas¹⁰ . In arriving at its decision, the Court considered that general damages and liquidated damages are underpinned by different considerations – general damages are intended to compensate the innocent party for actual losses suffered as a result of the breach, while liquidated damages are intended to be a genuine pre-estimate of the likely losses that would be suffered in the event of a breach¹¹.
16. It further rejected the argument that to allow the employer to recover general damages in excess of the amount of liquidated damages that it would have been entitled to would allow the employer to benefit from its own breach of contract which rendered the liquidated damages clause unenforceable in the first place. In this regard, it reasoned that the consequence of the employer’s breach of contract was that the contractor would be given a reasonable time to complete the works. Having failed to complete the works in a reasonable time, it does not lie in the mouth of the contractor to argue that it would be inequitable for the employer to recover whatever he can prove to be his actual loss.
17. A contrary decision was reached by the Technology and Construction Court (“TCC”) in Eco World, where the Court considered that, on a proper construction of the contract, the objective understanding of the parties in the commercial context was that the cap on liquidated damages served two purposes – first, to provide for, and quantify, automatic liability of damages in the event of delay, and second, to limit the defendant’s overall liability for late completion to a specific percentage of the final contract sum¹². In arriving at its decision, it considered the texts of Keating on Construction Contracts (11th Edition)¹³ and Hudson’s Building and Engineering Contracts (14th Edition)¹⁴, which note that there is merit in treating the liquidated damages cap as an agreed limitation on damages for the benefit of the contractor.
18. It would, however, be highlighted that the Court in Eco World had not purported to lay down a general principle of law that the cap on liquidated damages would automatically apply as a cap on the defendant’s overall liability. Indeed, it noted that the UK Supreme Court’s decision in Cavendish Square Holding CV v Makdessi¹⁵ provides “persuasive support for the view that if a liquidated damages provision is void for uncertainty or as a penalty, it is wholly unenforceable and the employer’s entitlement to general damages will not be subject to a cap.” It however considered that, on a proper construction of the liquidated damages clause in question, it operated as a limitation of liability provision.
19. This author therefore posits that the cases of Cresendas and Eco World are therefore not, in essence, at odds with each other, even if they may appear so at first glance. Read together, the cases show that there is no general principle that a liquidated damages provision automatically operates as a cap on general damages. However, properly drafted, a liquidated damages may operate to limit the contractor’s liability in general damages.

D. Conclusion

20. The increasing prevalence of liquidated damages clause in commercial contracts, particularly construction and engineering contracts, will no doubt continue to raise new issues in their application and interpretation.
21. Nevertheless, a central theme that emerges from a review of the decisions above is the importance of clear, unambiguous drafting of contracts that accurately reflects the parties’ understanding of their respective rights and obligations. This finds expression in the case of Triple Point, where the UK Supreme Court considered that clear wording is required if a party intends for liquidated damages to accrue after termination, and in Eco World where the Court held that the liquidated damages clause, properly construed, would serve to limit the contractor’s liability for general damages. A party therefore proceeds at its own peril if it simply incorporates a boilerplate liquidated damages clause in its contract which does not accurately reflect the bargain it seeks to strike.

Contributed by:

Joanna Seetoh - Partner, Harry Elias Partnership LLP