Post-termination liquidated damages: orthodoxy restored 

In a much-anticipated decision last week, the Supreme Court has overturned a Court of Appeal ruling on the application of liquidated damages for delay in termination scenarios. While ultimately the question will be one of interpretation of the clause in question, the Supreme Court has restored the “orthodox” position that the contractor should be liable for liquidated damages up to termination and thereafter general damages should apply. The Supreme Court also held that the term “negligence” in a limitation clause should be given its ordinary legal meaning of a breach of a contractual duty of care and concurrent duty of tort.

Triple Point Technology Inc v PTT Public Company Ltd: a recap

For a detailed review of the Court of Appeal’s decision in this litigation please see our earlier Law-Now here. In brief, the parties entered into a contact under which Triple Point was to design, install, maintain and licence software for PTT’s commodity trading business. The contract provided for milestone payments, as well as specific dates for payment. Work under the contract was delayed and Triple Point sought payment according to the specified payment dates in the contract, however PTT refused payment on the basis that the relevant milestones had not been achieved. PTT subsequently terminated the contract and, in response to Triple Point’s claim to payment, counterclaimed for liquidated damages for delay as well as termination losses more generally.

Liquidated Damages

The liquidated damages clause at Article 5.3 of the contract provided:

“If CONTRACTOR fails to deliver work within the time specified … CONTRACTOR 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”.

The first instance judge held that PTT was entitled to liquidated damages for delays prior to termination. The Court of Appeal disagreed, finding PTT was only entitled to delay liquidated damages for works that had actually been completed (albeit late) prior to termination.

In overturning the Court of Appeal’s judgment on this point, the Supreme Court held that the Court of Appeal erred in finding that the wording of Article 5.3 was sufficiently similar to that in British Glanzstoff, a previous House of Lords decision from 1912. The liquidated damages clause in British Glanzstoff, was not market-accepted wording or a standard form clause and therefore could not be authority for any legal principle, even if the contractual wording in a later case was similar. The case was one which turned on its particular facts and did not establish any general proposition of law.

The Supreme Court went on to state that clear words would be required to overturn what is understood to be the “orthodox approach”, being that liquidated damages would be payable for delays up to termination, and thereafter the contractor would be liable in general damages for the employer’s termination losses. Indeed, Triple Point was unable to provide the Supreme Court with any examples of where standard form contracts expressly provided that liquidated damages for delay would only be payable if the contractor actually completes the work; the only example cited was clause 15.4(c) of the 2017 FIDIC Yellow Book which reflects the “orthodox” approach.

The Supreme Court dismissed the Court of Appeal’s concern that the orthodox approach might result in the employer finding itself in “new territory” with an “artificial” categorisation of the employer’s losses as being a specific amount per day or week up to a certain date and then general damages thereafter. Instead, it considered that it is established law that the accrual of liquidated damages comes to an end on termination of the contract, after which the parties must seek general damages for breach of contract.

The Court of Appeal’s approach was also criticised for being inconsistent with commercial reality and the accepted function of liquidated damages, i.e., that they benefit each of the employer (in avoiding the need to prove actual loss flowing from the delay) and the contractor (in providing certainty as to its liability in the event of its culpable delay). As such, and applying established rules of interpretation to Article 5.3, the Supreme Court considered that it could be fairly and reasonably interpreted as meaning “up to the date (if any) PTT accepts such work”.

Exclusion for “negligence”

By a slim majority, the Supreme Court also overturned the Court of Appeal’s ruling on the application of the carve-out from the cap on liability for “negligence”. The contract provision in question was as follows:

“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 Court of Appeal had found that the reference to “negligence” here referred to “free standing tort of negligence” that did not include breach of contractual duty of care or a concurrent duty of care in tort. As such, damages that arose due to the contractor’s negligent breach of contract fell within the cap on liability.

The Supreme Court disagreed. It held that the provisions should be interpreted in the context of the preceding sentences of exclusion clause, which expressly referred to “breaches of contract” and liability “under” the contract, and the scope of services and deliverables Triple Point had agreed to provide under the contract. Applying established rules for interpreting contracts, “negligence” in this clause should be given its accepted meaning in English law, i.e. incorporating both a breach of contractual duty of care and the tort of failure to use due care.

Conclusions and implications

The Supreme Court’s ruling will be welcomed by employers and contractors alike who benefit from the certainty that delay liquidated damages provide. The judgment is particularly notable for its application of established rules for interpreting contract provisions by applying, in so far as objectively possible, and in the context of the contract, words used in their ordinary sense.

The Court of Appeal’s decision had raised difficult issues for employers considering termination of a construction contract with the potential for accrued rights to delay liquidated damages being replaced with a general right to damages only and the attendant difficulties of proof that a general damages claim can give rise to. The Supreme Court’s decision sweeps away this difficulty and considerably simplifies this area of the law. Absent clear wording to the contrary, liquidated damages for delay accruing prior to termination will remain intact, with a general claim for damages applying only in relation to post-termination losses.

Parties may still wish to deal expressly in their contracts with how liquidated damages for delay will be applied in termination scenarios – particularly if something other than the “orthodox” position upheld in this case is intended. The Supreme Court’s decision also gives further encouragement, if any were needed, to pay close attention to how caps on liability (and any exclusions from them) are drafted.

References:

Triple Point Technology, Inc (Respondent) v PTT Public Company Ltd (Appellant) [2021] UKSC 29

British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143