Liquidated Damages After Termination of Contract?

United Kingdom

Following Coulson J’s recent decision in Hall & Shivers v Van der Heiden in the Technology & Construction Court, contractors and employers need to take particular care to ensure that contracts expressly deal with post-termination damages.   Until now case law has strongly suggested that an employer’s right to liquidated and ascertained damages (“LADs”) from a contractor ends upon termination of the contract between them.  However, in Hall & Shivers v Van der Heiden Coulson J adamantly rejected this principle, leaving it open for an employer to claim LADs after termination of the contract.   In his judgment handed down in March 2010, Coulson J awarded the employer liquidated damages beyond termination through to completion of the project several months later by a replacement contractor.

Coulson J rejected the argument ‘as a matter of principle’ that liability to pay LADs ended when employment was terminated. To explain his reasoning, he gave the example of a Machiavellian contractor who, rather than attempting to complete the work, would benefit by not coming back on site at all, thereby triggering termination and ending his obligation to pay liquidated damages. That result would, according to Coulson J, not be a ‘commonsense’ interpretation of any construction contract.

However, Coulson J’s view runs counter to previously settled case law on the point.  It has been long established that a contractor is not liable for any LADs accruing after termination (provided that the contract itself does not specify otherwise).  Keating on Construction Contracts is unequivocal on this point:

If the contract is brought to an end by determination or otherwise, then prima facie all future obligations cease and no claim can be made for liquidated damages accruing after determination.”

A bar on post-termination LADs does not deprive the employer of a remedy altogether.  Unliquidated damages for the post-termination period, based on a contractor’s breach of contract and reflecting actual loss, may still be recovered.  In cases where actual loss exceeds the agreed LADs, termination could ultimately work to the employer’s financial advantage. The employer’s remedy in the case of the manipulative contractor postulated by Coulson J would more logically lie in general damages than with the artificial extension of liquidated damages clauses beyond the termination of a contract without provision for post-termination liquidated damages.

The standard forms of construction contract include terms relating to termination of contracts, but do not explicitly address the survival or otherwise of liquidated damages beyond termination. 

JCT 2005

The JCT 2005 form allows termination of the contract by the employer in the event of default (clause 8.4) or insolvency (clause 8.5) of the contractor.  Clause 8.7.3 states: ‘… clauses 8.7.4, 8.7.5 and 8.8 shall thereupon apply and the other provisions of this Contract which require any further payment or release of Retention to the Contractor shall cease to apply’. The provisions cited call for a statement to be prepared on expenses properly incurred by the employer together with the direct loss and/or damage caused to the employer for which the contractor is liable, ‘whether arising as a result of the termination or otherwise’. Where a net sum is owed to the employer, this is to be paid by the contractor but if the calculations show a net amount due to the contractor, the employer must pay this. The inference to be drawn from the fact that an account of direct expenses and losses is to be compiled and settled, whilst other provisions requiring further payment are to cease to apply, is that liquidated damages do not survive termination.

NEC3

Wording varies between the numerous different contracts and options, but the essence is that ‘delay damages’ are payable at the rate stated in the contract for each day from the scheduled Completion to the actual Completion Date. If the Employer terminates because of either the insolvency of the Contractor or the Contractor’s substantial failure to comply with his obligations, the Employer is entitled to deduct from the termination payment a sum representing a forecast of the additional cost to the Employer of completing the whole of the services. Since this deduction is an estimate of actual damage to the Employer resulting from the need to replace the Contractor, post-termination liquidated damages would represent double recovery and cannot be intended.

ICE

The position under the ICE standard form appears to be different. Clause 47(1) (b) (7th edition) sets out the obligation to pay damages for delay: ‘if the Contractor fails to achieve substantial completion of the whole of the Works within the time prescribed he shall pay to the Employer the said sum for every week or day (as the case may be) which shall elapse between the date on which the prescribed time expired and the date the whole of the Works is substantially completed’. Clause 65 includes the provision that where a contract is terminated through a default of the Contractor, the Employer (after serving the correct notice) may enter the site and expel the Contractor ‘without thereby avoiding the Contract or releasing the Contractor from any of his obligations or liabilities under the Contract’. If the liabilities under the contract are to continue despite the expulsion of the Contractor, this would suggest that liquidated damages still apply even though the Contractor is no longer able to continue with the work.

FIDIC (1999 Red Book)

As far as the FIDIC conditions of contract are concerned, clause 8.7 specifies the payment of liquidated damages for delay in completion, going on to state: ‘these delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Works.’ This is ambiguous – it acknowledges the possibility of unliquidated damages post-termination, without specifically ruling out continuation of liquidated damages.

Comment

It remains to be seen whether Coulson J’s ruling on the issue of whether an employer can claim LADs after termination of the contract will be followed in future cases.  However, parties to the construction contract should expressly deal with the issue to avoid ambiguity, because the court’s decision will take as its starting point the exact wording of the contract.  If the contract wording specifies that LAD provisions are to continue even after termination, that is likely to be upheld.   Conversely, if LADs liability is to cease upon termination, the contract should say so.  Particular care needs to be taken with the wording of relevant clauses to ensure that they properly reflect the parties’ intentions.

Further reading: Hall v Van der Heiden (No 2) [2010] EWHC 586 (TCC)