On 16 July 2021, the UK Supreme Court handed down a judgment in Triple Point Technology Inc v PTT Public Company Ltd that will provide welcome clarity in relation to the drafting and interpretation of liquidated damages clauses in construction, commercial and technology contracts. The judgment also deals with the relationship between liquidated damages clauses and caps on liability.
In this briefing, we summarise the decision and suggest some approaches to drafting liquidated damages clauses (and related caps on liability), with a view to avoiding the kind of dispute that arose in the case.
The case concerned a dispute between Triple Point (a designer and developer of software) and PTT (a commodities trader). PTT had appointed Triple Point under a staged milestone payment contract to (1) replace its existing trading system (Phase 1 of the works) and (2) develop the system to accommodate new types of trade (Phase 2 of the works).
The project ran into delay, with PTT asserting that:
- Triple Point were not entitled to payment for incomplete works; and
- it was only once Triple Point had met contractual milestones that it would be entitled to receive such payment.
Triple Point disputed this view, and ceased all work on the grounds of non-payment. PTT then terminated the contract on the basis that Triple Point had wrongfully suspended work under the contract.
In the Technology and Construction Court, Triple Point sought to recover outstanding sums on unpaid invoices and PTT counterclaimed for damages for wasted costs prior to termination, liquidated damages up to the date of termination, and termination loss for the costs of procuring a replacement system.
The contract included a liquidated damages provision for delay to the works:
“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 of the contract required Triple Point to exercise “all reasonable skill, care and diligence and efficiency in the performance of the Services under the Contract”.
The contract also contained a limitation of liability clause (Article 12.3), a provision of which provided:
“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.”
The key issues
The main issues in the case were:
- Do liquidated damages accrue? Were liquidated damages due up to the date of termination, or (because termination had occurred before PTT had accepted the delayed work) had no right to liquidated damages accrued?
- Are liquidated damages capped? If PPT had accrued a right to liquidated damages, were the liquidated sums capped? Article 12.3 of the contract provided that limits on Triple Point’s liability would not apply in the case of “negligence”. The obligation in Article 12.1 required Triple Point to avoid contractual negligence (that is, a requirement to use all reasonable care etc). If only tortious negligence was covered by the negligence carve-out in Article 12.3, then Triple Point’s liability to pay liquidated damages would be capped. If the carve-out covered contractual negligence too, then there would be no cap on Triple Point’s liability to pay liquidated damages (the right to liquidated damages arose from breach of the Article 12.1 requirement to use all reasonable care etc).
- Do liquidated damages count towards exhausting the cap? Article 12.3 of the contract limited Triple Point’s total liability under the contract to the contact price received by Triple Point. Should the liquidated damages count towards that cap, reducing the amount of other damages for which Triple Point might otherwise be liable for under the contract?
Decisions in the lower courts
The resolution of the issues above had significant impact on what could be recovered. At first instance, Jefford J dismissed Triple Point’s claim. Jefford J found that:
- Delay in performing the contract was caused by Triple Point’s breach of Article 12.1 (to exercise reasonable skill, care and diligence).
- PTT’s entitlement to liquidated damages was not capped by Article 12.3, entitling PTT to US$3.5m by reference to the total period of delay up to the date of termination.
- Triple Point’s liability for other damages (wasted costs, replacement system etc) was capped by the Article 12.3 provisions.
The Court of Appeal took a different approach, holding that:
- PTT had no entitlement to the liquidated damages attributable to Phase 2 works, since no work in that phase had been completed or accepted by PTT. PTT was therefore only entitled to recover liquidated damages of US$154,662 for Triple Point’s delay in the completion of works that were accepted by PTT under Phase I, but was not entitled to recover for any further delay up to termination (as such work had not been accepted by it). Prior to this decision, it had generally been assumed in the construction and IT industries that, where a contract is terminated, liquidated damages would accrue up until termination (even if delayed works had not been completed/accepted), and that general damages could be claimed thereafter.
- “Negligence” within the Article 12.3 liability carve-out was restricted to tortious negligence, meaning that Triple Point’s liability for liquidated damages would be capped.
- Liquidated damages were to be counted in exhausting the cap.
The Court of Appeal decision created significant uncertainty within the construction and IT industries, as it suggested that liquidated damages in clauses that refer to liquidated damages for delay accruing up until completion/acceptance might not be available at all, where the contract is terminated at a time when completion/acceptance has not occurred. It was therefore perhaps unsurprising that PTT appealed to the Supreme Court.
The Supreme Court Decision
A majority of the Supreme Court held that PTT was entitled to recover damages assessed by the judge at first instance at just over US$14.5m, without limitation of liability on the recovery. The Supreme Court held that:
- Liquidated damages were to be calculated up to the date of termination, even though the works had not been accepted by PPT at that point, for the following reasons:
- The wording in the liquidated damages clause “up to the date PTT accepts such work” was not a condition for the award of liquidated damages, but rather simply made clear the point at which liquidated damages would cease to continue accumulating on a delay. To limit the liquidated damages clause to where the work is completed/accepted “is inconsistent with commercial reality and the accepted function of liquidated damages” (Lady Arden).
- Lord Leggatt observed that a liquidated damages clause which only applied on completion of works “would give a contractor who badly overruns the time specified for completion an incentive not to complete the work in order to avoid paying liquidated damages for the delay which its breach of contract has caused. It makes no sense to create such an incentive.” In addition, such a position would force upon the claimant the burden of demonstrating its loss and facing arguments as to mitigation in a claim for general damages, rather than being able to rely on the pre-determined rates.
- The correct interpretation of Article 5.3 was therefore that the clause provided for liquidated damages where the contractual completion date overran, whether or not had PTT accepted such work.
- In relation to the second issue, the interpretation of the cap carve-out for negligence, a majority of the Supreme Court reversed the decision of the Court of Appeal and decided that including the word negligence in the exclusion to the contractual cap had the effect of excluding all breaches of the duty of contractual skill and care from the cap. Breach of the contractual obligation to use reasonable care and skill should be equated with contractual negligence, within the meaning of the carve-out for “negligence” within the liability cap. To restrict negligence to tortious negligence would give the word a meaning other than its ordinary and natural meaning. Accordingly, Triple Point’s liability to pay liquidated damages was not capped.
- Although the liquidated damages were not capped, as they resulted from contractual negligence and fell within the carve-out to the cap, sums payable as liquidated damages should still count towards the exhaustion of Triple Point’s general cap that applied to the claim for wasted costs, other damages etc.
The parties in this case were not operating under a standard form construction contract. The liquidated damages clause was bespoke and unique to this particular case. Each clause will need to be assessed on a case by case basis. However, the decision confirms that, subject to the particular drafting, the courts are likely to interpret such clauses on the basis that liquidated damages do not need to provide specifically for the effects of termination.
The case also underscores the need to spell out the relationship between liability to pay liquidated damages, and the limitation/exclusion clause of a contract. The contract at issue did not do that overtly, and it may be desirable to provide for that in the drafting in order to avoid disputes like this in the future.
Set out below are some drafting considerations to be taken into account when drafting liquidated damages provisions. Not all of these are necessitated by the Triple Point case, but they may help reduce the risk of the kind of dispute arising seen in that case (we do not deal with penalty issues). The approach taken to them will also depend on whether the drafting is intended to be employer or employee centric.
- Liquidated damages clause
It may be preferable to spell out overtly that accrual of liquidated damages for delay is not dependent on the work having been completed/accepted, and that they accrue up to termination even where completion/acceptance has not occurred. In fact, late last year, the NEC amended its NEC4 engineering and construction contract to clarify that delay damages end on the date on which the project manager issues a termination certificate (and, following termination, further delay costs are to be considered as part of the general costs/damages due as a result of the termination of the contract). By introducing the amendment, the NEC have stated what the position is under the NEC standard forms. However, care needs to be exercised; the NEC’s amendment introduces another layer of complexity by requiring the parties to determine when the termination certificate has been validly issued.
- Limits / exclusions of liability
- Make clear in the cap on liability whether or not it caps liability to pay liquidated damages under the liquidated damages clause.
- Make clear in the cap on liability whether sums payable by the delaying party under the liquidated damages clause count as “claims” (or sums paid) under the liability cap, therefore helping to use up (or exhaust) that cap, or whether such sums fall outside that cap. It is not unusual to have a separate liability cap specific to liquidated damages.
- When carving out particular acts/omissions/causes of action from a cap on liability, decide whether what you are intending is a carve-out of contractual claims or something else, and make that clear. Generally, the contract’s limitation/exclusion of liability clause should be drafted so as to apply in relation to both contractual and non-contractual claims (that is, “under or in connection with this Agreement”).
- Survival clause
Specify that the right to recover accrued liquidated damages under the liquidated damages survives termination of the agreement.