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Liquidated Damages Post-Termination: Supreme Court Returns to Orthodox Position

In our previous article here, we discussed the Court of Appeal decision in the case of Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230. The judgment was significant because the Court of Appeal decided that where a contractor’s employment had been terminated before the works had been completed, a contractual provision for liquidated damages (being damages at a pre-agreed rate where actual loss need not be proven) did not apply. The Court of Appeal decided that this was even the case in respect of the period of delay prior to termination, going against the generally perceived understanding that liquidated damages accrued up until termination would still be payable by the contractor. Instead, the Court of Appeal effectively said that the terminating client must establish the actual losses arising from delay, regardless of when it arose, and claim these as general damages. The clause in question in this case provided for liquidated damages to be payable “per day of delay from the due date for delivery up to the date PTT accepts such work,” and the Court of Appeal held that this meant that the employer was not entitled to liquidated damages for work which the contractor never completed and which was, therefore, never accepted by the employer.

This interpretation was of concern to terminating parties, who would potentially be forfeiting their right to claim accrued liquidated damages if they terminated before completion of the works.

However, the Supreme Court has now overturned the Court of Appeal’s judgment on this point in its ruling issued on 16 July 2021 (Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29). The case relates to a software contract, but the Supreme Court’s judgment has wider application and is of particular interest in the construction industry, where liquidated damages clauses are commonplace.

Facts of the case

The case concerned PTT Public Company Limited’s (“PTT”) engagement of Triple Point Technology Inc. (“Triple Point”) to develop and install a software system to replace an existing one. The project was divided into two phases (Phase 1 – replacement and Phase 2 – development of the system to facilitate new types of trade) and Triple Point’s entitlement to payment was based on milestone payments.

Phase 1 was significantly delayed and work on the preparation of the scope of works for Phase 2 did not commence at all. PTT refused to pay various invoices submitted by Triple Point and the parties fell into dispute. Triple Point maintained that further payments were due to it and eventually purported to suspend work for non-payment. PTT terminated the contract, leading to Triple Point commencing proceedings to recover sums considered due and, in turn, to PTT counterclaiming for liquidated damages for delay and losses arising from the termination.

At first instance, the Judge held that Triple Point was not entitled to further payment and, instead, awarded PTT liquidated damages for delay in the region of $3.4million, together with the costs of procuring an alternative system and other wasted costs (which were subject to a contractual cap), resulting in judgment in favour of PTT in the region of $4.5m. The Judge at first instance applied the contractual rate of liquidated damages from the original completion date to the date of termination of Triple Point’s engagement.

On appeal, the Court of Appeal held that liquidated damages only applied where Triple Point had actually completed the works. This meant that the liquidated damages were restricted to the delay for certain milestones completed for the Phase 1 Works. Given that none of the Phase 2 works were completed by Triple Point before the date of termination, PTT could not claim any further liquidated damages for delays. PTT had, instead, to set out its claim for general damages for any delays connected with the Phase 2 works. Amongst other things, PTT appealed to the Supreme Court for a final ruling on whether the liquidated damages clause applied in respect of work which was not completed at the time of termination.

Supreme Court Judgment

After careful analysis of the Court of Appeal decision, the Supreme Court reasoned that where the parties have provided for the right to claim liquidated damages to cease upon completion and acceptance of the works (as is the norm under most building contracts to remove any question of them being payable thereafter), it is “unrealistic to interpret the clause as meaning that if that event does not occur the contractor is free from all liability for liquidated damages, and that the employer’s accrued right to liquidated damages simply disappears.”. The Supreme Court stated that it “is much more probable that they will have intended the provision for liquidated damages to cease on completion and acceptance of the works to stand in addition to and not in substitution for the right to liquidated damages down to termination”.

In essence, unless expressly worded to the contrary, a clause like the one in this case should be interpreted such that liquidated damages apply up to the date of termination (being an accrued right up to termination) with general damages applying thereafter. The Supreme Court considered this approach to meet commercial common sense and prevent the (unlikely intended) elimination of accrued rights.

Practical Implications

The decision of the Supreme Court restores the “orthodox” position whereby, in the absence of clear words to the contrary, liquidated damages will apply up to (but not beyond) termination of the contract. However, it remains the case that liquidated damages clauses need careful review in practice, as some contracts may well provide expressly for the unlikely consequence that liquidated damages no longer apply at all in a termination scenario.

Another key element of the judgment

Alongside the liquidated damages issue, the Supreme Court also considered the scope of a carve-out from an cap on liability relating to negligence.

The contract contained a cap on Triple Point’s liability but with an exception or carve-out for the contractor’s “liability resulting from fraud, negligence, gross negligence or wilful misconduct” which would fall outside the cap. A further issue before the Supreme Court was what was meant in this context by “negligence”. The Court of Appeal took the view that “negligence” in this context meant only independent tortious acts, not breaches of the contractual obligation to exercise reasonable skill and care. The Court of Appeal considered that “there would be little point in imposing a cap on liability for breach of the contractual duty of skill and care in a contract which was wholly or substantially for services, which had to be provided with skill and care, only to remove the cap in the final sentence.” The Court of Appeal held that to interpret negligence here as including breaches of the contractual obligation to use reasonable skill and care would essentially mean that the cap was “emasculated”. 

However, the Supreme Court noted that the contract did not solely concern the provision of services and Triple Point had other obligations which were not subject to the reasonable skill and care standard, i.e. absolute obligations (including meeting the agreed level of functionality, provision of “Deliverables” and obligations, amongst others, relating to the use of intellectual property, confidential information and maintenance of records).

Furthermore the Supreme Court noted that no-one had been able to provide a realistic example of the type of independent tort that the Court of Appeal considered was caught by the cap.

Ultimately, albeit by a slim majority, the Supreme Court overturned the Court of Appeal’s decision on this point and held that the reference to negligence in the carve-out included both independent torts and breaches of the contractual obligation to exercise skill and care. It was only the absolute obligations which fell within the cap . However, in concluding, Lady Arden (delivering the leading judgment) noted that “The important obligations about meeting the specifications for functionality and other absolute obligations in the CTRM Contract meant that liability for negligent breach of contact was not the core obligation of Triple Point under the CTRM Contract. Had the position been otherwise, that would have supported reading the reference to negligence in the cap carve-out as limited to the independent tort of negligence”.

As a concluding comment on this element of the judgment, parties should be alive to the importance of scrutinising the precise wording of caps on liability, and any exceptions to them, at contract formation stage.

If you have any questions, or want more information about the article above, please contact Patrick Blake or Lianne Edwards from our Construction & Infrastructure team

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