Applicability Analysis of LD Clause under Early Termination of International Works

    Delayed damages are a key clause in international engineering contracts, which stipulate the remedies for breach of contract available to the Owner in the event that the Contractor postpones completion.In international engineering contracts, it is generally agreed that the Contractor shall compensate the Owner for a certain amount of default (the amount has been agreed in the contract) for each day of delay until the completion of the project without having to prove his actual loss, i.e. the liquidated damages clause (hereinafter referred to as the LD clause).However, the Owner may not be able to effectively motivate the Contractor to perform on time if the contract stipulates inadequately definite and complete terms for compensation for delay damages;Alternatively, in the event of a default of the construction period, the Owner may not be able to obtain adequate damages.In international engineering, a situation rarely considered by both parties is how to apply the LD clause if the project is terminated early.The Triple Point Technology Inc V PTT Public Company Ltd case, handed down by the British Court of Appeals in 2019, provides a reference solution to this problem.

case analysis

    In this case, Triple Point Technology acted as a contractor to provide PTT Public Company Ltd (i.e. the Owner) with a software system.The project is divided into two stages: the first stage is to replace the existing system with a contract duration of 460 days;The second stage involves the development of the system to adapt it to the new business type of the owner.There are several milestones under each stage and payment is made by milestone method.The contract also stipulates that if the Contractor fails to deliver on schedule, it shall pay 0.1% of the value of the Owner's outstanding work every day from the due date until the date of receipt of the project by the Owner (Sub-Clause 5.3).
The project started in February 2013 but was not on schedule.The first phase of the project was delayed by 149 days due to poor management by the contractor and was accepted by the Owner who also paid for the part of the project.However, there were further delays in the overall construction period and contractors also paid certain software licensing fees in accordance with the time requirements specified in the project plan.In the Owner's opinion, these payments were not yet made to the milestone payment nodes because they were bound by the milestone nodes and the Contractor refused to pay because he had not completed the other phases of work.In May 2014, the contractor suspended work and evacuated the site after stating that he was not prepared to continue work without further payment.The Owner considered the Contractor to have suspended the Works incorrectly and terminated the Contract in advance in accordance with the termination clause and re-employed a third party to complete the Works.Subsequently, the Contractor brought a lawsuit concerning the payment of his sums, while the Owner countered by requiring the Contractor to pay late damages and losses arising from termination (primarily additional losses arising from the completion of the Works by a third party).
At first instance, the judge held that:
(1) The payment mechanism for milestone payment is agreed in the contract, and the contractor has not reached the milestone node, so the contractor is not entitled to payment of software license fee and other payments;
(2) The Contractor shall not have the right to suspend the Works in May 2014. This suspension constitutes a repudiatory breach and the Owner shall have the right to terminate the Contract and claim damages;
(3) The Owner shall have the right to obtain additional expenses and losses incurred as a result of the completion of the Works by a third party;
(4) The Owner shall be entitled to receive compensation for delay damages in accordance with the amount specified in the LD clause, i.e. USD 154,662 calculated for 149 days of delay in the first stage and USD 3,204,616 for delays in other parts (calculated to the completion date of the third party), totalling USD 3,459,278 for delay damages.
The Contractor disagrees with the judgement that the LD clause applies only to the case where the work was delayed and subsequently completed and received by the Owner, and not to the case where the contract was terminated early and the Owner was unable to accept it."If applicable, this applies only to part of the work completed by the Contractor in the first stage and accepted by the Owner, not to part of the work terminated."The contractor then appealed.
The Court of Appeals reviewed relevant cases for the calculation of damages for delay in the event of early termination of the contract and held that there were three different approaches:
(1) The LD clause no longer applies and the general damages principle is adopted to calculate the compensation for damages due to delay;
(2) The LD clause only applies to the date of termination of the contract and is no longer applicable thereafter, but is calculated according to the general principle of compensation for damages;
(3) The LD clause may be applied until the completion of the work by a third party.For Mode 3, this is clearly not reasonable, as the Owner and the third party can control the time for completion and thus be detrimental to the Contractor;This treatment should not be adopted unless there is a clear language in the contract that agrees to do so.
As for the choice between Mode 1 and Mode 2, the Court of Appeal held that it should depend on the specific wording of the L D clause.In this case, clause L D specifically focuses on the delay between the date of completion agreed in the contract and the actual date of completion by the Contractor.The L D clause in this case does not apply if the actual completion by the Contractor has never occurred due to early termination of the Contract.Therefore, the Court of Appeal ruled that in the event of early termination of the contract, the LD clause in this case applies only to the part of the work that was delayed before termination;The LD clause does not apply to parts not transferred before termination.Therefore, in this case, for the 149 days of delay in the first stage, the Owner may calculate the amount of damages for delay in the amount of USD 154,662 on the basis of the LD clause;For the other part of the work not completed by the Contractor, L D clause can not be applied to the calculation of late damages. The Owner can only assess and calculate the late damages compensated by the Contractor according to the general principles of damages.

Enlightenment to International Engineering Contract Management

   The above case shows that in the event of early termination of the contract, the calculation of damages for delay under the LD clause depends on the specific wording of the clause.F IDIC 1999 edition of contract conditions and even many international engineering contracts generally stipulate that the calculation time of compensation for damages due for delay is the number of days between the date of completion of the contract and the actual date of completion.It is highly likely that the LD clause will not apply in the event of early termination (at least under English law) if the conditions of the above contract are met.It may seem counter-intuitive, but this is the literal interpretation of the contract wording.Of course, this does not mean that the Owner is unable to obtain the Contractor's remedies for time-limit default.In such cases the Owner may still make general damages for the Contractor's default of the construction period, i.e. claim all his foreseeable losses in accordance with the general principle of recovery.However, asserting general damages undoubtedly increases the proof difficulty for the owner and costs considerable litigation costs and time.

   For the Owner, in the event of serious delay by the Contractor, the decision to terminate the Contract shall take into account the effect of termination on damages for delay.Termination of the contract in such circumstances may mean that the Owner is unable to claim damages for delay in accordance with the amount set out in Clause L D and has to prove his actual loss as a result of the Contractor's delay.Actual losses may be higher or lower than the level set out in Clause L D, but the difficulty of proof of actual losses may result in these losses not being compensated.Of course, if the actual loss of the Owner exceeds the amount calculated in accordance with Clause L D and the proof is relatively simple, the Owner may strategically choose to terminate the contract on his own initiative.

   It is also a double-edged sword for contractors.On the one hand, since the initiative to terminate the contract in such cases rests with the Owner, if the Owner considers that the actual loss caused by the Contractor's delay exceeds the amount of damages for the delay calculated in accordance with the LD clause, it is likely that the Owner will take early termination measures to obtain higher compensation rather than waiting for the Contractor to complete the work that has been delayed.
On the other hand, the contractor may gain a strategic advantage by utilizing the difficulty of the owner in proving actual losses.The contractor may weigh the risk of damages that he may face under the LD clause (particularly in cases where the LD agreed to be too high for significant damages) against the difficulty of the Owner in proving general damages and, after weighing, choose whether to slow down the process to compel the Owner to terminate the contract early, thereby avoiding compensation under the LD clause.Compensation is based on general damages.In particular, it may be more advantageous for the contractor if compensation for loss of profits and indirect losses is excluded from the contract.

   Therefore, in drafting the contract, the Contracting Party shall specify how to calculate late damages in the event of early termination and whether and how the LD clause will continue to apply.In fact, Section 15.4 (C) of the Conditions of Contract in FIDIC2017 stipulates that, in the event of early termination of the contract, L D may be calculated to the date of termination of the contract for the unfinished work or section.In addition, following this judgment, in order to remedy the deficiency in the above-mentioned provisions, the Option X7 section of the NEC4 contract conditions in October 2020 was amended to provide that if the contract was terminated early, the LD would be calculated to the date of termination of the contract and would not be applicable thereafter;Additional losses resulting from the Contractor's delay in the construction period after termination form part of the general damages after termination of the contract.