Triple Point: Liquidated Damages can be claimed up to Termination

Background

The Supreme Court's decision in Triple Point, Inc v PTT Public Company Limited [2021] UKSC 29 has been released today (16 July 2021), following the hearing last November.

To briefly recap the facts, PTT Public Company Limited ("PTT") engaged Triple Point, Inc ("TP") to design and build a customised software system ("Project"). The Project was split into two phases, the first being the replacement of PTT's existing system and the second to develop the new one.

The first phase experienced delay, which meant the second phase did not even start. PTT paid the first milestone invoice of over $1 million on the basis TP would not suspend its performance on the Project.
  
However, an agreement was not reached in relation to other invoices, leading to TP refusing to carry out any further works and PTT notifying TP of termination of the contract.

 
The Litigation

The Technology & Construction Court ("TCC") held TP was responsible for the delay and that TP had been in breach of contract to exercise reasonable skill and care.

PTT was awarded $3,459,278.40 for LADs for the delay up to termination.

However, the contract included a cap on the amount of damages that could be claimed under article 12.3, which stated:

"CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’s breach of contract, including software defects or inability to perform ‘Fully Complies’ or ‘Partially Complies’ functionalities as illustrated in Section 24 of Part III Project and Services.

"The total liability of CONTRACTOR to PTT under the Contract shall be limited to the Contract Price received by CONTRACTOR with respect to the services or deliverables involved under this Contract. Except for the specific remedies expressly identified as such in this Contract, PTT’s exclusive remedy for any claim arising out of this Contract will be for CONTRACTOR, upon written notice, to use best endeavour to cure the breach at its expense, or failing that, to return the fees paid to CONTRACTOR for the Services or Deliverables related to the breach.

"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.”

As a result, the TCC held the extent of TP's liability was capped, which limited how much PTT could recover for the second and third heads of loss.

TP appealed the decision to the Court of Appeal, which held PTT was entitled to LADs but only insofar of works that had been completed and accepted.

The Court of Appeal also held PTT's claim for LADs was subject to the cap under article 12.3 and that the exception to the cap in relation to 'negligence' did not apply, meaning the cap was invoked.

PTT appealed to the Supreme Court.

The key issue

Construction lawyers and professionals alike have kept a watchful eye on the decision, because the Court of Appeal's judgment shed some uncertainty over the extent to which LADs could be recovered in circumstances in which a contract had been terminated before the works were complete.

Sir Rupert Jackson has spoken about the difficulties that would arise if agreed LADs do not apply at all in such circumstances, because that would potentially dis-incentivise contractors from fulfilling their contractual obligations where works were delayed.

On the other hand, if a LADs clause applied following termination and up until a substitute contractor completes the works, the damages the original contractor is liable for are placed in the hands of a third party, which does not seem to be a fair outcome.

Naturally, the precise language of the liquidated damages clause became critical. Article 5.3 of the contract provided (our emphasis):

"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% (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."

Persuaded by the House of Lords decision in Glanzstoff [1913] AC 143, an authority that had not been considered to such an extent previously, the Court of Appeal had decided LADs could be claimed until the point the works had been carried out and accepted.

The Supreme Court addressed this in today's judgment by deciding parties should be able to assume LADs provisions finish when the contract is terminated.

This does not depend on whether the works were accepted, with the Supreme Court decision suggesting that the Court of Appeal decision had amounted to a “radical re-interpretation of the case law on liquidated damages clauses”, which it has now reset.

The Supreme Court also held the wider meaning of the term 'negligence' meant damages flowing from a breach of contractual duty to exercise reasonable skill and care are not subject to the cap, but that claims for LADs are, given that the wording of article 12.3 in this case expressly stated "Except for the specific remedies expressly identified as such in this contract". 

Importance

The Supreme Court's decision places greater certainty over the operability of LADs provisions in termination cases, clarifying that LADs remain open to employers to claim up to the point of termination.

Thereafter, a claim for general damages for the period which follows termination remains open to employers to the extent those damages can be proven.

This article was authored by Alex Delin, construction associate at Fieldfisher.