Liquidated damages

London, July 19, 2021. In Triple Point v PTT, the UK Supreme Court holds that delay liquidated damages accrue up to termination of the contract and remain payable after it; beyond that point, the employer falls back on general damages. Six years earlier, in Cavendish v Makdessi (November 4, 2015), the same court had replaced the old "genuine pre-estimate of loss" test: a clause is an unenforceable penalty only if it is out of all proportion to the legitimate interest of the party relying on it. In an EPC contract, liquidated damages are the price of time. The contract sets an amount per day or week of delay past the completion date, usually capped at a percentage of the contract price, and sometimes performance LDs if the plant falls short of guaranteed output or efficiency. The 1999 FIDIC Red Book deals with them in Sub-Clause 8.7 (Delay Damages). Under French law they are a penalty clause under Article 1231-5 of the Civil Code, which a judge may reduce if manifestly excessive, or increase if derisory. Insurance does not follow. CAR and EAR cover physical damage to the works, and a penalty is not physical damage: it is a debt created by the contract. ALOP compensates the owner for its own lost revenue when insured physical damage delays start-up; it does not pay the contractor's debt, and a delay without damage triggers nothing at all. LDs therefore stay on the contractor's balance sheet, which prices them in and in the cap it negotiates. That leaves the interplay between the two. An owner that collects LDs and an ALOP indemnity for the same delay can end up with more than its loss; some ALOP wordings deduct sums received from the contractor, others leave them with the owner to fund the deductible measured in days. The point is settled in the policy, and is often discovered at claim time.

• Cavendish Square Holding BV v Makdessi [2015] UKSC 67, UK Supreme Court
• Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, UK Supreme Court