A great many contracts make provision for the payment of liquidated damages in the event of delays in completion of works – but what happens if those works are never in fact finished? The Court of Appeal considered that important issue in the context of an IT contract that went seriously wrong.
An IT company (the seller) was engaged to provide a software package to a trading company (the buyer) at a price of $6.92 million. The first two phases of the project were completed, albeit late, and the IT company was paid over $1 million for that work. The buyer subsequently refused to pay anything further and the project remained unfinished when the seller ceased work and left the site.
After the seller launched proceedings in respect of unpaid invoices, a judge found that it had failed to adequately resource the project, which had been negligently planned and managed. The seller having failed properly to perform its duties under the contract, the buyer was entitled to terminate it and to withhold further payments.
In upholding the buyer’s counterclaim, the judge awarded it damages in respect of costs wasted on the project and the costs of procuring an alternative system. That award was capped by the terms of the contract at $1,038,000. However, the judge ruled that no such cap applied to liquidated damages for delay and awarded the buyer $3,459,278 under that head, making a total of $4,497,278.
In dismissing the seller’s appeal against the dismissal of its claim, the Court found that the buyer had been entitled to refuse to pay the invoices on the basis that various development milestones had not been reached. The seller had only been entitled to suspend work on the project in circumstances that amounted to force majeure. Non-payment did not amount to such circumstances.
However, in upholding the seller’s appeal against the amount of the award on the counterclaim, the Court found that the buyer was only entitled to liquidated damages in respect of the delay in completing the project’s first two phases. Losses arising from subsequent delays were irrecoverable because the seller had not in fact completed any further parts of the work.
The Court acknowledged that that ruling did not preclude the buyer from claiming damages in respect of the further delays in accordance with ordinary breach of contract principles. However, it found that the contractual cap applied to the seller’s total liability in respect of defects, delay or any other breaches. The buyer’s total award was therefore capped at $1,038,000.