Triple Point Technology Inc v PTT Public Company Ltd – Back to (Commercial) Reality for Liquidated Damages Post-Termination
The Supreme Court has handed down a decision which brings significant clarity to the question of how liquidated damages clauses operate after a contract has been terminated and where works are not completed by the original contractor ([2021] UKSC 29). The appeal also provides some guidance on the interpretation of the word “negligence” where the parties have agreed that damages for negligence are exempt from an overall cap on damages recoverable under the contract.
In summary, the Supreme Court found that:
- PTT were entitled to liquidated damages up to the date of termination of the contract with Triple Point, and general damages thereafter (Issue 1).
- The carve-out provision in the limitation of liability clause relating to “negligence” applied to breaches of PTT’s contractual obligations of skill and care. Damages for these breaches were therefore not subject to a cap (Issue 2).
- Sums payable by way of liquidated damages for delay fell within the overall liability cap under the contract (Issue 3).
Background
The Appellant (“PTT”) entered into a contract (“the CTRM Contract”) with the Respondent (“Triple Point”) by which Triple Point would design, install, maintain and license a software system that would allow PTT to carry out commodities trading. In respect of remedies under the CTRM Contract, the parties agreed that liquidated damages were available for delay (Art. 5.3) and that damages for breach of contract were subject to a cap of the fees paid for the relevant work (Art. 12.3). Art. 12.3 also contained an exception to the cap on damages for cases of “fraud, negligence, gross negligence or wilful misconduct” on the part of Triple Point. The CTRM was not a standard form contract and was tailored to the requirement of the specific project.
Phase 1 of the works under the CTRM Contract was delayed substantially and preparation for Phase 2 was never commenced by Triple Point. The parties entered into negotiations and Triple Point sought payment of certain invoices under Phase 1 but PTT refused, denying that any sums were owed under the CTRM Contract. Eventually, PTT gave notice that it was terminating the CTRM Contract, in accordance with its terms, on 23 March 2015.
Triple Point commenced proceedings to claim for unpaid software licence fees and PTT counterclaimed for damages for breach of contract. Jefford J heard the matter at first instance and dismissed Triple Point’s claim, while awarding PTT damages for wasted costs, the costs of procuring a replacement system, and liquidated damages for delays prior to termination. Her Ladyship held that the first two of these heads were subject to the cap in Art. 12.3 but that the liquidated damages were not.
Triple Point appealed the decision to the Court of Appeal, while PTT cross-appealed against the finding that any damages to be awarded were capped.
The Court of Appeal held that i) PTT was only entitled to liquidated damages for work which had been completed prior to termination of the CTRM Contract, ii) that the carve-out in respect of “negligence” in Art. 12.3 only applied to freestanding torts or deliberate wrongdoing, as opposed to contractual breaches of reasonable care and skill, and iii) that all damages were subject to the cap in Art. 12.3.
PTT appealed to the Supreme Court on all three issues.
Issue 1 – are liquidated damages payable where work is never completed?
Art. 5.3 of the Main Part of the CTRM Contract provided:
“If [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, [Triple Point] 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…” [Emphasis added]
The Court of Appeal considered a range of authorities and identified three different solutions to the question of what happens when a contractor fails to complete works and a second contractor steps in: i) the liquidated damages clause does not apply, ii) the clause applies only up to termination of the initial contract, iii) the clause applies until the second contractor achieves completion.
While acknowledging that ii) above represented the orthodox position, Rupert Jackson LJ set out in his judgment that this approach was not without difficulty. His Lordship held that if a construction contract were abandoned, the employer may find itself in territory for which the liquidated damages clause did not make provision. Instead, his Lordship stated that it was necessary to consider the wording of a liquidated damages clause in each case to determine the intended effect. In doing so, his Lordship reasoned that Art. 5.3 was similarly worded to the liquidated damages clause in British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143 where the House of Lords held:
“if the contractors have actually completed the works, but have been late in completing the works, then, and in that case only, the clause applied.” [27]
Therefore the Court of Appeal decided that under Art. 5.3, PTT were only entitled to liquidated damages in respect of works that they had actually completed prior to termination, albeit late (solution i)).
Lady Arden found that Rupert Jackson LJ’s approach was “inconsistent with commercial reality and the accepted function of liquidated damages.” [35]. Her Ladyship also disagreed with the suggestion that abandonment or termination of the contract would put the employer in “new territory”, finding that the parties could take as read, as a matter of law, that the right to liquidated damages would come to an end with the termination of the contract. Further, her Ladyship held:
“The function of the words on which the Court of Appeal relied [in Art. 5.3] was to provide an end date for liquidated damages on acceptance of the works by PTT to ensure that in that event there was no further claim for liquidated damages in respect of the relevant delay. But it did not follow that there were to be no liquidated damages if there was no such acceptance. To reach that conclusion would be to render the liquidated damages clause of little value in a commercial contract. To use an idiomatic phrase, the interpretation accepted by the Court of Appeal in effect threw out the baby with the bathwater.” [48]
Finally, her Ladyship disagreed that Glanzstoff was so significant as to merit the departure from the orthodox interpretation of the case law on liquidated damages, emphasising instead that the case should be confined to its facts.
Lord Leggatt (with whom Lord Sales agreed) agreed that termination of the contract should not deprive an employer of rights that have already accrued without express provision in the contract. His Lordship also reinforced the lack of commerciality in the Court of Appeal’s decision by stating that after the hearing, counsel for Triple Point had not been able to submit an example of any standard form contract with wording adopting the approach put forward by Rupert Jackson LJ.
Thus, the Supreme Court unanimously allowed PTT’s appeal on Issue 1.
Issue 2 – do the damages for negligent breach of contract fall within exception to the cap in Art. 12.3?
On this issue, the majority of the Supreme Court reversed the decision of the Court of Appeal and held that the concept of “negligence” in Art. 12.3 covered both tortious acts and breaches of a contractual requirement to exercise reasonable care and skill. In support of this interpretation, Lady Arden found that there was no coherent example of a freestanding tort to which the Art. 12.3 carve-out applied which was distinct from the contractual obligation of reasonable care and skill. Her Ladyship ultimately considered the whole of the clause and held:
“The matters referred to in the final sentence are all characteristics of conduct: fraud, wilful misconduct, gross negligence and negligence. These can apply to breaches of the CTRM Contract. Considering the sentence as a whole, it is clear that it includes an act which is a breach of contract and which possesses one of those characteristics.” [63]
Lord Sales (with whom Lord Hodge agreed) dissented on this point. His Lordship reasoned that the core obligation of Triple Point under Art. 12.1 of the CTRM Contract was to exercise reasonable care and skill and Art. 12.3, sitting under the same overarching article, must be read as limiting liability for any breach of this core obligation if it was to have its intended effect.
Issue 3 – do liquidated damages fall within the cap in Art. 12.3?
After reviewing the reasoning of Rupert Jackson LJ on the point, Lady Arden agreed that liquidated damages fell within the overall cap of Art. 12.3 and the Supreme Court dismissed the appeal on Issue 3.
Comment
Lady Arden and Lord Leggatt’s judgments on Issue 1 in the appeal represent a welcome return to orthodoxy in the area of liquidated damages for delay. Employers will be relieved to know that the Supreme Court had little time for arguments from Triple Point which ran contrary to commercial common sense, and which were derived from a reading of Art. 5.3 depriving it of all meaningful effect. The judgments also provide a useful reminder of the correct way to analyse accrued contractual rights prior to termination, with a common theme running throughout: such accrued rights apply up to termination and can only evaporate if the parties have clearly and expressly agreed that this should be the case.
While the decision on Issues 2 and 3 was specific to the wording of Art. 12.3 in the CTRM contract, the discussion of their Lordships, including the dissenting judgment of Lord Sales, will be of significant value to practitioners who are advising their clients on the effects of similar limitation of liability / carve-out provisions.
Written by Sahana Jayakumar.
