UK Supreme Court rules on correct approach to interpreting liquidated damages clauses

23 September 2021, Construction, Newsletter, by Stanley Lo,

In Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, the principal issue before the Court was the approach to be adopted when interpreting a liquidated damages clause in a contract i.e. a clause providing for a pre-determined sum agreed upon in the event of a specified breach by one of the parties. The liquidated damages clause in this case was in a common form, providing that liquidated damages were payable for each day of delay by the contractor from the due date for delivery up to the date the employer accepted such work. The question was whether liquidated damages were payable in respect of work which had not been completed or accepted before the contract was terminated. The UK Supreme Court held that they were.

Background

By a Contract, PTT Public Company Ltd (PTT) engaged Triple Point Technology Inc (Triple Point) to provide a software system. The work was to be carried out in two phases and payment for the work was to be made by specified milestone dates. Triple Point achieved completion of stages 1 and 2 of phase 1, 149 days late and PTT paid them for that work.  Triple Point requested payment of further invoices in respect of work not yet completed, which PPT refused. Triple Point suspended work and PTT terminated the contract, maintaining that Triple Point had wrongfully suspended work. Triple Point commenced proceedings against PTT, claiming sums due under its unpaid invoices. PTT counterclaimed for liquidated damages for delay prior to termination and for the cost of having to procure a replacement system from a new contractor.

Relevant contractual terms

The Contract contained the following relevant clauses:

Article 5.3: “If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by PTT, CONTRACTOR shall be liable to pay the penalty at the rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work …”

Article 12.1: “CONTRACTOR shall exercise all reasonable skill, care and diligence and efficiency in the performance of the Services under the Contract…

Article 12.3: “CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’s breach of contract….The total liability of CONTRACTOR to PTT under the Contract shall be limited to the Contract price received by the CONTRACTOR with respect to the services or deliverables involved under this Contract. Except for the specific remedies expressly identified as such in this Contract, PTT’s exclusive remedy for any claim arising out of this Contract will be for CONTRACTOR, upon written notice, to use best endeavour to cure the breach at its expense, or failing that, to return the fees paid to CONTRACTOR for the Services or Deliverables related to the breach. This limitation of liability shall not apply to CONTRACTOR’s liability resulting from fraud, negligence, gross negligence or wilful misconduct of CONTRACTOR or any of its officers, employees or agents.”

Issues before the courts

The issues before the Courts were:

  • Whether liquidated damages were payable under Article 5.3 in respect of work which had been delayed by Triple Point and not completed (and therefore not accepted) before the Contract was terminated.
  • Whether “negligence” in the exception in Article 12.3 meant the tort of negligence or also included breach of the contractual duty of skill and care.
  • Whether liquidated damages were subject to the cap referred to in Article 12.3.

Decisions of the courts below

Technology and Construction Court

The Technology and Construction Court (TCC) dismissed Triple Point’s claim. It held that PTT was entitled to damages of US$4.5 million, under the heads of: liquidated damages for delay (uncapped) and the costs of procuring an alternative system and wasted costs (both subject to the Article 12.3 cap). Triple Point appealed and PTT cross-appealed against the finding that any damages were capped.

Court of Appeal

The Court of Appeal set aside the TCC’s award of liquidated damages, holding that PTT was only entitled to liquidated damages for work which had been completed (and therefore accepted by the employer) prior to termination of the Contract, that all damages were subject to the cap and that the exception for “negligence” applied only to freestanding torts and not to breaches of the contractual obligation to exercise care and skill. PTT appealed to the Supreme Court.

Supreme Court decision

The Supreme Court held that:

  • PTT was entitled to liquidated damages up to the date the Contract was terminated and general damages after that – PTT’s appeal was unanimously allowed on this issue.
  • The limitation of liability in respect of “negligence” provided for in Article 12.3, applied to both tortious acts and to breach of the contractual duty of skill and care. Therefore, damages for the breaches were not capped-PTT’s appeal on this issue was allowed by majority.
  • The liquidated damages fell within the cap under Article 12.3-PTT’s appeal on this issue was unanimously dismissed.

The Supreme Court’s reasoning

Liquidated damages are payable in respect of work which had been delayed and not completed before the contract was terminated  

In concluding that the liquidated damages clause did not apply on termination, the Court of Appeal had departed from the generally understood position that, subject to the precise wording of the clause, liquidated damages would accrue until the contract was terminated, at which point the contractor becomes liable to pay damages for breach of contract. The Court of Appeal had held that in some cases, it might be inconsistent with the parties’ agreement to categorise the employer’s losses as subject to the liquidated damages clause until contractual termination and thereafter as damages.

However, the Supreme Court held that the Court of Appeal’s approach was inconsistent with commercial reality and the accepted function of liquidated damages, namely to provide a remedy that is predictable and certain for a particular event, the event often being delay in completion, as in this case. The employer does not then want to have to quantify its loss, which may be difficult and time-consuming for it to do. Termination of the contract should not eliminate rights that the employer has already accrued, without express provision for such in the contract.

The Supreme Court said that the 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 and after that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. It went on to say that this is well-understood and parties do not have to provide specifically for the effect of the termination of their contract. The Supreme Court disagreed with the Court of Appeal’s ruling that “If a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision.” The territory is well-trodden, the Supreme Court said, and the liquidated damages clause does not need to provide for it.

“Negligence” in Article 12.3 meant both the tort of negligence and breach of the contractual duty of skill and care.

The majority of the Supreme Court held that the Court of Appeal had been wrong to treat damages for breach of the contractual duty of skill and care as subject to the cap in Article 12.3. It said that “negligence” has an accepted meaning in English law (which was the governing law of the Contract) and covers both the separate tort of failing to use due care and also breach of a contractual provision to exercise skill and care. The Supreme Court said that matters referred to in the final sentence of Article 12.3 were all characteristics of conduct: fraud, wilful misconduct, gross negligence and negligence and these could apply to breaches of the Contract. Considering the sentence as a whole, it was clear that it included an act which was a breach of contract and which possessed one of those characteristics. Accordingly, the cap carve-out should be given its natural and ordinary meaning of removing from the cap all damages for negligence on Triple Point’s part, including damages for negligent breach of contract.

Liquidated damages were subject to the cap in Article 12.3

The Supreme Court held that the Court of Appeal was right to hold that (subject to the carve-out for negligence) liquidated damages fell within the cap and counted towards the maximum damages recoverable under the cap.

The Supreme Court said that the way in which the contract worked was that (i) Article 5.3 provided a formula for quantifying damages for delay; (ii) sentence 3 of Article 12.3 dealt with breaches of contract not involving delay and therefore necessarily included the words “Except for the specific remedies expressly identified as such in this contract”. That phrase referred to liquidated damages under Article 5.3. Sentence 3 of Article 12.3 imposed a cap on the recoverable damages for each individual breach of contract; (iii) Sentence 2 of Article 12.3 imposed an overall cap on the contractor’s total liability, meaning that it encompassed damages for defects, damages for delay and damages for any other breaches.