IS LIQUIDATED DAMAGES STILL CLAIMABLE AFTER TERMINATION OF CONTRACT?

Introduction

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In building contracts, liquidated damages for delay refers to damages which are imposed after the date of completion under a contract has passed.

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Liquidated damages after termination of contract

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With the termination of the contract, a question may legitimately be asked: will the imposition of liquidated damages which has been imposed prior to the termination be allowed to continue until the completion contract achieves practical completion?

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Lim Chong Fong, Law and Practice of Construction Law in Malaysia (Sweet & Maxwell, 2021 ed) at p.411 has succinctly set out the different approaches which is reproduced below.

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?Three possible approaches in answering this question are possible:

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(1)????????The right to impose liquidated damages is lost, including accrued damages (“First Approach”);

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(2)????????The liquidated damages will be allowed to be imposed until the date of termination of the construction contract, thereafter the right to continue such imposition ceases (“Second Approach”); and

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(3)????????The liquidated damages will be allowed to continue until the completion contract achieves practical completion (“Third Approach”).

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On July 16, 2021, the UK Supreme Court handed down its judgment in Triple Point Technology Inc v PTT Public Co Ltd [2021] AC 1148 and allowed the appeal on the question of post-termination imposition of liquidated damages. The Supreme Court held that in the event a contract is terminated before works are complete - i.e. liquidated damages accrue until the contract is terminated, after which the employer may be entitled to general damages arising from termination. Essentially, the Supreme Court was inclined to adopt the Second Approach.

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The rationale of the Supreme Court in Triple Point Technology is that this approach is consistent with commercial reality and accepted function of liquidated damages. It was held that parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract. After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. That is well-understood. Parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read[1].

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There is also a recent Singapore Court of Appeal case of Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Pte Ltd [2022] SGHC(A) 44 at paras [61] and [62] which followed the Second Approach and Triple Point Technology. This decision confirms that the position under Singapore and English law are aligned. It was held that the obligation to pay liquidated damages will survive the termination of a contract, but that liability for liquidated damages stops accruing on the termination date. Therefore, if an employer incur further losses due to delays to a project after the date of termination, the employer will need to claim its actual losses as general damages.

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In Malaysia, the Second Approach finds support in the High Court cases of KL Eco City Sdn Bhd v Tuck Sin Engineering & Construction Sdn Bhd & Anor [2020] MLJU 2457 and China Construction Pearl River (M) Sdn Bhd v Industrial and Commercial Bank of China (Malaysia) Sdn Bhd & Anor [2022] 7 CLJ 211.

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In KL Eco City, the High Court referred to Triple Point Technology and held that based on the Certificates of EOT No. 1 and 2 and the Certificate of Non-Completion, the Plaintiff’s (developer’s) imposition of LAD of RM1,050,000.00 on the Defendant (the contractor) for delayed completion from the extended completion date to the termination of the Contract is lawful.

In China Construction Pearl River, the main contractor’s (the plaintiff) employment had already been determined before the original contractual completion date expired. The main contractor’s contractual entitlement to extension of time under the construction contract has not been considered. The High Court held that the developer’s (the second defendant) concerns on project delay losses and liquidated ascertained damages of RM4 million plus due to late completion of the project caused by the main contractor is both premature and wholly speculative. Furthermore, even if the plaintiff is culpable for the eventual delayed completion of the project, the losses of the second defendant has to be proved and assessed by way of general damages because the contractual liquidated and ascertained damages provision in the?construction contract is probably inoperative by reason of the determination of the plaintiff's employment under the construction contract by reference to Triple Point Technology.

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Conclusion

The key takeaway is that employers should take note that, absent any special wording, the termination of a contract will generally not affect a claim for delay liquidated damages in respect of the period before termination. However, delay liquidated damages will usually cease accruing at the point of contractual termination. Therefore, if an employer incur further losses due to delays to a project after the date of termination, the employer will need to claim its actual losses as general damages.

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[1] Ibid at para [35] of the judgment?