Supreme Court clarifies the operation of liquidated damages clauses in commercial contracts

The judgment of the UK Supreme Court in Triple Point Technology Inc v PTT Public Company Limited [2021] UKSC 29 clarifies important points of law relating to the drafting and proper interpretation of liquidated damages clauses.

Background

In 2013, PTT appointed Triple Point under a staged milestone payment contract for the provision of software implementation services. Triple Point was to: (i) replace PTT’s existing trading system during Phase 1 of the contract; and (ii) enhance PTT’s system to accommodate new categories of trade during Phase 2. 

The works commenced but ran into delay during Phase 1: Triple Point completed some of Phase 1 but none of Phase 2 prior to PTT terminating the contract. 

Triple Point claimed outstanding monies from PTT following the termination. 

PTT counterclaimed for damages for wasted costs incurred prior to termination, for liquidated damages up to the date of termination and for the costs of a replacement system from a new contractor.

The contract’s clause for liquidated damages for delay stated:

“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…”

The contract also included a cap on damages i.e. a limitation of liability provision, which limited the damages that could be claimed. However, this limitation was not applicable if Triple Point’s liability resulted “from fraud, negligence, gross negligence or wilful misconduct of CONTRACTOR” (Article 12.3).

A further contractual provision required Triple Point to exercise “all reasonable skill, care and diligence and efficiency in the performance of the Services”. (Article 12.1)

In pursuit of its claim, PTT argued that the limitation was not applicable in this case, as they had suffered loss as a result of Triple Point’s negligence, that is a breach of its obligation of reasonable skill and care in negligently planning and managing the works.

The fundamental issues to be determined by the Court were how the liquidated damages clause would operate when the contract was terminated after the works were delayed but before they were completed or accepted, and whether the limitation of liability was applicable.

Court of Appeal Decision

In 2019, the Court of Appeal held that although PTT was entitled to recover liquidated damages of USD 154,662 for delay in completing stages 1 and 2 of Phase 1 of the project, it could not rely on the liquidated damages clause for delay in Phase 2. 

Citing the decision in British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corp Ltd [1912] S.C. 1 (HL), Sir Rupert Jackson held that the clause was not applicable as Triple Point never completed any other sections of the work. Instead, PTT was entitled to claim general damages, subject to any exclusions or limitations in the contract. 

The Court of Appeal also held that PTT’s claim for liquidated damages was subject to the limitation of liability as the exception for negligence which would lift the cap (Article 12.3) only referred to the tort of negligence and not to situations amounting to breach of contract. 

Supreme Court Decision

The Supreme Court overturned the Court of Appeal’s decision and rejected Triple Point’s claim that liquidated damages for delay were not payable in respect of the incomplete works. 

The Supreme Court endorsed the orthodox position that liquidated damages would apply to any period of culpable delay up to the date of termination (subject to any contrary clear and express wording) and that general damages may be recoverable after termination, subject to any exclusions or limitations.

In making its decision, the Supreme Court recognised the commercial benefits of such provisions and the certainty it provides in terms of each party’s risks. 

Further, the Supreme Court recognised that the Court of Appeal’s decision was "inconsistent with the commercial reality" and "the accepted function of liquidated damages". If the Court of Appeal's decision was upheld, Contractors would delay the works or not complete them entirely to avoid liquidated damages liability. 

The Supreme Court clarified that liquidated damages apply up to the date of termination and no specific wording of the clause is required to produce that result. 

The Supreme Court also clarified that the authority the Court of Appeal had relied on was confined to the circumstances of the Glanzstoffcase referred to above and did not establish a particular rule of law for liquidated damages provisions generally. 

Regarding the limitation of liability, it was held that PTT’s claim for damages was not limited because the exception for negligence in the limitation clause (Article 12.3) extended to breach of contract and therefore applied. 

Here, breach of the contractual obligation to exercise reasonable care and skill corresponded to contractual negligence covered under the term “negligence” in Article 12.1. The term “negligence” was not to be restricted to tortious negligence only.  “Negligence” has an accepted meaning under English law, which covers both the tort of failing to use due care and also a breach of a contractual provision to exercise skill and care.   

The Supreme Court emphasised the importance of contextual analysis when construing these clauses. Further, Lord Leggatt explained that courts are no longer construing limitation clauses narrowly in contracts between sophisticated parties and that ordinary principles of interpretation will be used.

Comment

This decision provides clarity on how liquidated damages clauses operate in the event of termination. If parties wish to derogate from this position, clear and express wording to the contrary will be required. 

The Supreme Court’s analysis of the limitation of liability clause is indicative of the advancement of English law. Courts are becoming increasingly reluctant to derogate from contractual clauses which have been negotiated between sophisticated equals. 

As such, we encourage our clients to draft their contracts extremely carefully to ensure the operation of the liquidated damages clause and the corresponding limitation of liability provision are closely aligned with their intentions and expressed, as far as possible, in a clear and unequivocal manner.   

It should be made clear within the contract whether (a) any liquidated damages are included in the cap on liability, therefore operating to exhaust, or “use-up” the cap; and (b) if any acts, omissions or causes of action are to be carved-out from the limitation of liability (that is excluded from the cap on liability). It should be clear whether this is carving-out contractual claims only or also non-contractual claims.