Supreme Court gives clarity on liquidated damages clause

In Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 (16 July 2021), the Supreme Court overturned the Court of Appeal to hold that liquidated damages for delay accrue from the due date for performance to the date the contract is terminated.

Background

In brief, PTT and Triple Point entered into a contract under which Triple Point would design, supply, install and maintain a software system for PTT, with the contract price to be paid in instalments aligned to the completion of milestones. 

TPP’s delivery did not meet the contractual timetable. PTT paid some invoices for late work but refused to pay invoices for incomplete work. Triple Point suspended work over disputed invoices and PTT terminated. Triple Point brought an action for unpaid invoices and PTT counterclaimed for liquidated damages and damages arising for breach of contract on termination in respect of wasted costs and the cost of procuring a replacement system.

Article 5.3 stated:

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% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work….”

Article 12 stated:

The total liability of [Triple Point] to PTT under the Contract shall be limited to the Contract Price received by [Triple Point] with respect to the services or deliverables involved under this Contract…….This limitation of liability shall not apply to [Triple Point]’s liability resulting from fraud, negligence, gross negligence or wilful misconduct of [Triple Point] or any of its officers, employees or agents.

A first instance, the judge held that Triple Point was in breach of its contractual duty to exercise reasonable skill and care so PTT was entitled to terminate and claim damages (for the cost of procuring an alternative system and wasted costs) as well as liquidated damages. The general damages were subject to the liability cap but the liquidated damages were not.

Triple Point appealed to the Court of Appeal which held that:

Issue1: The liquidated damages clause focussed specifically on delay between the contractual completion date and the date upon which completion was actually achieved, it did not apply in relation to work which had not been completed before the contract was terminated.

Issue 2: The meaning of ‘negligence’ in the liability cap had to be narrowly construed and meant the freestanding tort of negligence. As such, the exception to the cap on liability for negligence did not apply to breach of a contractual duty to exercise reasonable skill and care.

Issue 3: Liquidated damages also fell within the limitation cap.

Our insight on the Court of Appeal decision can be found here.

The Supreme Court judgment

As explained below, the Supreme Court overturned the Court of Appeal in relation to issues 1 and 2 but upheld the Court of Appeal’s decision in relation to issue 3.

Issue 1: Are liquidated damages payable in relation to work not completed and not accepted by PTT?

Clause 5.3 stated that liquidated damages were to be payable from the due date for delivery up to the date PTT accepted the work. The Court of Appeal held that as PTT did not accept the work (as it was not completed), liquidated damages were not payable.

The Supreme Court considered that the difficulty of the Court of Appeal’s analysis on this point was that it was inconsistent with the “commercial reality and the accepted function of liquidated damages”. The Supreme Court ruled that the purpose of the clause was to provide for liquidated damages if Triple Point did not discharge its contractual obligations on time, regardless of whether PTT accepted the work. The meaning of the reference to acceptance was to provide an end date for liquidated damages, it did not follow that there were no liquidated damages if acceptance did not occur.

The decision on this point clarifies that the orthodox position in relation to liquidated damages applies: subject to clear expression to the contrary, liquidated damages apply up to the date the contract is terminated, with general damages recoverable from then onwards. As this is established law, there is no need for liquidated damages clauses to be drafted to expressly provide for this.

Issue 2: Are damages for negligent breach within the exception to the liability cap?

Overruling the Court of Appeal on this point, the Supreme Court held that the reference to negligence in the liability cap carve out in Article 12 should be given its natural and ordinary meaning of removing from the cap all damages for Triple Point’s negligence, including those for negligent breach of contract. As such, liability for breaches by Triple Point of its contractual obligations of skill and care were uncapped.

Issue 3: Are liquidated damages capped?

Concurring with the Court of Appeal, the Supreme Court interpreted the particular drafting of the contract to mean that liquidated damages fell within the cap.

Comment

The case addresses important issues regarding the application of liquidated damages. It is now clear that the orthodox position in relation to liquidated damages is the correct approach: liquidated damages for delay accrue from the due date for performance to the date the contract is terminated, unless expressly drafted otherwise. The case is a reminder to avoid uncertainty by drafting liability caps with a careful regard for each potential element of liability and to take particular care when drafting exclusions from any cap.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.