Singapore Appellate Court Confirms Validity of Delay Liquidated Damages on Termination

The Singapore Appellate Court has re-confirmed that delay liquidated damages stop accruing on the date a contract is terminated.

This is an important decision for parties to Singapore law-governed construction agreements.  The established Singapore position, which allows an employer to rely on liquidated damages provisions even when the contract is terminated, was called into question following the decision in Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230.  While that decision was overturned by the UK Supreme Court (see our analysis here), the Supreme Court did not explicitly affirm the correctness of the Singapore approach.  Diamond Glass now confirms that the positions under Singapore law and English law are aligned.

Diamond Glass also confirmed that a contractor who fails to request an extension to the contractual completion date can be liable for liquidated damages for delay, notwithstanding that the Employer may be responsible for such delay.

Background

The decision in Diamond Glass Enterprise Pte Ltd v Zhong Kai Construction Pte Ltd [2022] SGHC(A) 44 concerns a contract between Zhong Kai (contractor) and Diamond Glass (subcontractor) for the supply and associated works for certain buildings and facilities at Singapore Changi Airport.

Diamond Glass was required to complete certain works by 16 March 2018.  However, Diamond Glass terminated the contract before those works were completed.  Zhong Kai engaged third parties to carry out the remaining works which were completed on 30 September 2018.  Zhong Kai claimed for liquidated damages in respect of the entire period of delayed completion, including the period after termination of Diamond Glass's contract.

It was common ground that the subcontract works experienced delays leading up to termination, but the parties disagreed on what caused them.  Diamond Glass argued that the delays were caused by Zhong Kai and/or third parties, including delays in obtaining regulatory approvals, glass specification changes and delayed payment.  However, Diamond Glass had not requested an extension to the completion deadline.

The Singapore High Court, at first instance, found that Diamond Glass was responsible for the delayed works and allowed Zhong Kai's claim for liquidated damages for the entire period between the contractual completion date and the date of actual completion.  Diamond Glass appealed against the trial judge's decision.

Decision

The Appellate Division allowed Diamond Glass's appeal in part.  The Court 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. The Court reasoned that the primary obligations under a contract come to an end upon termination, following which the contractor cannot be culpable for delays to the work.  However, the Court noted that parties are free to agree a different position.

In this case, the Court considered that the general position on delay liquidated damages upon termination applied as there were no special contractual provisions to the contrary. Zhong Kai was therefore not entitled to liquidated damages in respect of delays occurring after termination.

The Court followed the general principle previously established in LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte Ltd [2011] SGHC 163, which also held that contract termination does not affect a party's right to liquidated damages which accrued before termination.  The correctness of this approach was called into question several years ago following the decision in Triple Point in which the Court of Appeal of England and Wales found that delay liquidated damages provisions fell away where the contract was terminated before actual completion. This decision was subsequently overturned by the UK Supreme Court in Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29.  However, the Singapore approach was not expressly discussed by the UK Supreme Court, and the correctness of the decision in LW Infrastructure could only be inferred on the basis that it followed the "orthodox" approach upheld by the UK Supreme Court.  Helpfully, the Appellate Court in Diamond Glass has now analysed the UK Supreme Court decision in Triple Point and confirmed that the Singapore and English positions are aligned.

The Appellate Court also rejected Diamond Glass's attempt to reduce the amount of liquidated damages on account of Zhong Kai's contribution to delays prior to termination.  While this was primarily on technical grounds, the Court clarified the need for contractors to timeously raise claims for extensions of time where there are competing causes of delay.

While Diamond Glass accepted that it had not sought to claim an extension of time while the contract remained in effect, it also tried to argue that Zhong Kai could not claim liquidated damages for delays it had caused.  Diamond Glass relied on the Australian case of Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 143, which stood for the proposition that if an employer is responsible for project delays, a contractor's failure to properly apply for an extension of time would set time at large and prevent an employer from claiming liquidated damages, subject to any specific provisions in the contract.

The Appellate Court strongly rejected the Gaymark approach and emphasised that, under Singapore law, a contractor's failure to apply for an extension of time, including non-compliance with formal notice requirements, will not set time at large nor would it prevent the employer from claiming liquidated damages.  Zhong Kai's liquidated damages entitlement was therefore not reduced on account of any alleged delay attributable to it.

Key Takeaways

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 incurs 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.  This should be taken into account when drafting and negotiating termination provisions, particularly those which contain limits on the nature and extent of post-termination losses that can be recovered.

This case is also an important reminder to contractors that they should strictly comply with contractual provisions for claiming extensions of time to avoid losing any entitlement to relief, especially where they believe there are competing causes of delays.

For further information, please contact Daniel Waldek, Lim Tse Wei, Calan Eskandar Shamsudin or your usual Herbert Smith Freehills contact.