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Liquidated damages available post termination … depending on your contract wording

In the recent case of PBS Energo A.S v Bester Generacion UK Ltd & Anor [2020] EWHC 223 (TCC) the court dealt with, amongst other things, whether liquidated damages could be claimed following a termination for repudiatory breach before the works had been completed. 

Background

The parties entered into a contract for the construction of a biomass energy plant and associated works in May 2016. The Claimant, PBS, was the sub-contractor and the Defendant, Bester, the main contractor.  The contract was based on an amended form of the FIDIC 1999 Silver Book (“the Contract”).  The project began but ultimately the plant was never built.

Throughout the project various disagreements arose and both parties claimed to have terminated the contract. PBS gave notice of its intention to terminate the Contract in May 2017 on the basis of (1) Bester’s failure to pay the fifth milestone payment instalment by the due date and (2) substantial failures by Bester to fulfil its contractual obligations.  Bester sought to affirm the contract and requested that PBS retract its termination.  Subsequently Bester gave notice of termination based on a failure by PBS to comply with a “Notice to Correct” leading to a material breach of contract which adversely affected the carrying out of the works and PBS’s abandonment of the works. PBS disputed the validity of that termination.

A number of adjudications took place between the parties throughout the project. One of the adjudications related to whether PBS (the Responding Party in the adjudication) had unlawfully terminated the Contract. The adjudicator decided that PBS had lawfully terminated the Contract and awarded damages to PBS. Bester failed to pay the sums due which led to enforcement proceedings.

Subsequently PBS issued court proceedings seeking to finally determine the issues between the parties. The principal task of the Court was to decide which (if either) of the parties were entitled to and did terminate the Contract and any financial consequences flowing from the termination. In respect of the financial consequences, PBS sought to recover losses consequential upon its lawful termination (being a multi-million pound sum) and Bester sought a variety of amounts including delay liquidated damages (LDs) in the sum of circa £500,000 on the basis of its termination being lawful.

What did the Court decide

The Court held that PBS was not entitled to terminate on the basis of Bester’s failure to pay the fifth milestone payment as milestone had not been achieved and thus the date for payment had not expired by the date of PBS’s purported termination. The Court found in favour of Bester and agreed that Bester’s termination was effective on the basis that PBS had abandoned the works and failed to comply with the Notice to Correct.

When considering the quantum of Bester’s losses, an issue arose as to the impact of the actual net loss clause (bespoke clause 15.7 of the Contract) in relation to claims for liquidated damages (“LDs”). PBS argued that the Contract provided a complete code for compensation in the event of termination. PBS also advanced arguments that whilst clause 15.6 would have given Bester a right to claim delay damages if it had elected to continue the Contract, clause 15.7 did not specifically give that right and in effect, prevented Bester from claiming LDs where the Contract was terminated.

PBS disputed Bester’s ability to claim LDs relying on the case of Triple Point Technology, Inc. -v- PTT Public Company Ltd [2019] EWCA Civ 230 (which was concerned with whether a LDs clause will survive termination in circumstances where the works are incomplete – see our article here.)

Triple Point is the current authority (albeit currently subject to an appeal to the Supreme Court in respect of which judgment is awaited) for considering damages for delay post termination and is a reminder that it is necessary to carefully consider the drafting of a contract to assess whether a particular clause allows any LDs to survive termination. In Triple Point the Court held that the LDs mechanism did not apply as the Contractor’s employment had been terminated before the works were complete and the LDs clause specifically referred to LDs applying up to the date the Contractor completed the works, which was no longer possible as a result of the termination.

However, in the PBS case, the wording of the Contract was different. The LDs provision was termed a “first spark discount” and specifically related to the first spark required for the Renewable Obligations Certification not being achieved by the specified date, it was not tied to the works eventual completion, merely the missed date only. In essence it was looking at the time for completion not the actual completion and thus was distinguishable from the decision in Triple Point. Further, this clause survived termination given the express wording that any accrued rights remained notwithstanding any termination.  

In summary the Court held that Bester remained entitled to LDs for delay following termination and awarded damages accordingly.

What does this mean for you?

This case is a good example of the importance of getting termination right and is a valuable reminder that the impact of incorrect termination can be significant. What is also interesting is the further confirmation from the Court that LDs may still be in play post-termination depending on the contractual wording. Triple Point does not operate to prevent any LDs in a termination scenario. That said, with both this case and Triple Point turning on contract wording, it remains best practice to carefully consider the potential position in respect of entitlement to LDs before seeking to terminate.

The Supreme Court decision in Triple Point is eagerly awaited to give further clarity in relation to liquidated damages, particularly when works are left incomplete.

For more information on the article above contact Lianne Edwards and Chloe Wood.

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