Are liquidated damages payable even when the contractor does not complete the works?
Published by Thomson Reuters Practice Law Construction Blog.
Following Sir Rupert Jackson’s judgment in Triple Point Technology Inc v PTT Public Co. Ltd, the short but hardly definitive answer to the question I’ve posed is, it all depends on the precise wording of the liquidated damages (LDs) clause.
Triple Point Technology Inc v PTT Public Company Ltd
Triple Point was a supplier of software used in commodities trading. PTT was, among other things, a commodities trader. In 2012, PTT sought a new trading, risk and management system. PTT invited bids to replace its existing system (Phase 1) and then develop the new system to handle new types of trade (Phase 2). Triple Point’s bid included completing Phase 1 for $6.92 million. Eventually a contract for Phase 1 was signed in February 2013, and the contract provided a table of payment milestones.
The contract included a provision that Triple Point would:
“… use its best effort and professional abilities to complete Phase 1…within 460 calendar days after [10 January 2013].”
Article 5 of the contract provided that where the works had been delayed other than by PTT, Triple Point would 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, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by [PTT], the penalty shall be calculated in full on the cost of the combination.”
Article 12 of the contract limited Triple Point’s liability:
- The second sentence of article 12.3 limited its total liability to the fees PTT had “received”.
- The third sentence of article 12.3 provided that:
“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 [Triple Point]…to use best endeavours to cure the breach at its expense, or failing that, to return the fees paid to [Triple Point] for the [works] related to the breach.”
- The fourth sentence provided that the limitation of liability did not apply to Triple Point’s fraud, negligence, gross negligence or wilful misconduct.
Triple Point worked slowly. The new system was not properly integrated. Triple Point was 149 days late with the first two stages of Phase 1, but PTT paid an invoice of $1.08 million. Triple Point then submitted invoices for incomplete work according to order forms lower down the contractual hierarchy than the contract’s own payment milestones. PTT refused to pay, citing the payment milestones and the fact that no further milestones had been reached. Triple Point did not dispute that the milestones had not been reached, but suspended work in May 2013. In February 2015, PTT sought to terminate. Triple Point claimed for its unpaid invoices and PTT counterclaimed for LDs for delay and damages on termination.
At first instance, Jefford J dismissed the claim and awarded PTT damages of $4.49 million. She held that the contract’s milestones prevailed, that Triple Point had breached its performance obligations, that its delay was not down to PTT and that PTT could recover the costs of procuring an alternative system subject to the liability cap of fees paid to P – those damages were capped at the $1.08 million PTT had paid.
Jefford J went on to rule that article 5 was not a penalty and that LDs were not subject to the liability cap: she awarded a further $3.45 million by way of LDs.
In the Court of Appeal, Sir Rupert Jackson, with whom Lewison and Floyd LJJ agreed, agreed with Jefford J that the contract’s payment provisions took precedence. He also held, rejecting Triple Point’s fallback position, that because Triple Point did not achieve any further milestones than those PTT had paid for, Triple Point was not entitled to further payment. And, though it became irrelevant after the above rulings, he held that Triple Point had no right to suspend.
Triple Point challenged the award of LDs on the basis that Phase 1 had not been completed, let alone accepted. Perhaps surprisingly, no authorities had been cited at first instance on this point, so Sir Rupert reviewed them. He identified three categories of cases on LDs where the contractor’s works were unfinished and others had been employed to complete them:
- Firstly, the LDs clause does not apply. Following the House of Lords’ decision in British Glanzstoff Manufacturing v General Accident Fire and Life Assurance, where Lord Haldane LC held that:
“… if the contractors have actually completed the works, then, and in that case only, the [LDs] clause applies.”
- Secondly, the LDs clause applies until the contract is terminated. This followed a line of more recent cases including Greenore Port v Technical & General Guarantee Co  EWHC 3119 (TCC), Shaw v MFP Foundations and Pilings Ltdand Bluewater Energy v Mercon Steel Structures, where Glanzstoff was not cited (or only very partially considered).
- Thirdly, the LDs clause applies until the delayed works are in fact completed by whoever the employer gets in to complete them. This followed Hall v van der Heiden (No. 2), Crestdream v Potter (2013) HCCT 32/2013and GPP Big Field LLP v Solar EPC Solutions SL (Formerly Prosolia Siglio XXI).
Sir Rupert said he saw “much force” in the reasoning in Glanzstoff, and recognised that it was authority of the highest level untouched for a century. He thought the second category was “not free from difficulty” because it may well be artificial to say that an employer’s loss stops being the LD rate as soon as a contract is terminated. And he doubted the third category, rightly pointing out that an employer in such a case could control the LDs period, effectively holding a contractor to ransom (see paragraphs 107-110 of the judgment).
Nevertheless, at paragraph 110 he said:
“… whether the [LDs] clause (a) ceases to apply or (b) continues to apply up to termination/ abandonment, or even conceivably beyond that date, must depend on the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.”
On the facts of the appeal, Sir Rupert thought that article 5 meant that LDs would apply only “up to the date when [PTT] accepts completed work from [Triple Point]”. In that respect, only the first 149 days of delay were compensable by LDs. Damages for the rest of Triple Point’s non-completion were at large, and they would have to be calculated on ordinary principles, subject to the liability cap.
The liability cap
At first instance, Jefford J had ruled that “negligence” in the fourth sentence of article 12.3 meant free-standing “tort-negligence”, not a breach of a contractual duty of skill and care. Sir Rupert agreed. Negligence in this context meant the free-standing tort-negligence, like carelessly leaving electrical wires exposed so as to cause personal injury (see paragraph 119).
As for whether LDs fell outside the liability cap, Sir Rupert overturned Jefford J. He held that the third sentence of article 12.3 provided “individual mini-cap[s]” on breaches that had no other specific remedy in the contract. Delay did have such a remedy in the form of LDs. However, the second sentence of article 12.3 applied a total cap, and that did encompass LDs. As Sir Rupert noted, it would have made more sense for the second and third sentence to be swapped, but the net result was that the cap “has been wholly used up by the award of general damages”, which prevented PTT from recovering even for the 149-day delay.
There is no doubt that the dust has been shaken off Glanzstoff, which had not been cited fully for a generation. Sir Rupert recognised that his own decision in Greenore Port may have been different had Glanzstoff been cited to him. So Triple Point v PTT may well be a push of the pendulum towards the reasoning in the first category.
Indeed, though Triple Point v PTT has not necessarily answered the question of what happens if no-one finishes a project, following the resurrection of Glanzstoff it seems unlikely that LDs clauses would apply to unknown future periods of delay, including, possibly, periods down to a trial date.
However, if nothing else, the emphasis in Triple Point v PTT on the wording of LDs clauses and the effect of the liability cap will together be (yet) another reminder to those drafting contracts, on both the employers’ and contractors’ sides, to be as crystal clear as possible about what each side agrees about the impact of delay and the allocation of risk.