Liquidated damages and delay: a victory for commercial common sense

In a unanimous decision, the Supreme Court held that absent clear words to the contrary, a party will be entitled to liquidated damages that have accrued prior to termination. In reaching its decision the Supreme Court has reverted to the decision at first instance, partially reversing what it described as the Court of Appeal's “radical re-interpretation” of the case law on liquidated damages clauses.

Background

The background to the case is set out in our previous article on the Court of Appeal’s decision. In brief, the Appellant, PTT Public Company Ltd ("PTT") entered into a software contract (the "CTRM Contract") with Triple Point Technology Inc. ("Triple Point").

The CTRM Contract provided for the contractor, Triple Point, to customise its proprietary software for PTT. The contract provided for work to be completed in phases with payment made in accordance with completion of various "milestones". Liquidated damages were payable for delay “from the due date for delivery up to the date PTT accepts such work”.

Unfortunately, work proceeded slowly and Phase 1 of the project was delivered late. Triple Point then submitted an invoice for the completed work, and PTT paid the sum requested. Triple Point then asked PTT to pay further invoices (the "Outstanding Invoices") for work that had not yet been completed, on the basis that the CTRM Contract specified payment dates. PTT refused to pay. PTT argued that the relevant milestones in the CTRM Contract had not been met, and so payment was not due. In May 2014, Triple Point suspended work pending receipt of further payment. In February 2015, PTT terminated for repudiatory breach of contract in light of Triple Point's suspension of work.

On 25 February 2015, Triple Point commenced proceedings to recover sums it alleged to be due pursuant to the Outstanding Invoices. PTT denied all of Triple Point's claims and counterclaimed for the following principle heads of loss:

• Damages for wasted costs prior to termination;
• Damages for the costs of procuring a replacement software system on termination; and
• Liquidated damages for the delays incurred up to the date of termination.

Triple Point denied liability, and without prejudice to this, relied on a limitation of liability comprised in the CTRM Contract¹ (the "Limitation of Liability") which capped the damages recoverable by PTT in certain circumstances (the "Liability Cap").

The decisions at first instance and in the Court of Appeal

At first instance², Jefford J dismissed Triple Point's claim in respect of the Outstanding Invoices. She found that the delay in performance of the CTRM Contract was caused by Triple Point's breach. As the contractual milestones had not been reached, Triple Point was not entitled to further payment, had not been entitled to suspend work in May 2014, and was in repudiatory breach of contract.

Jefford J also held that PTT was entitled:

• to terminate the CTRM Contract and/or to accept Triple Point's repudiatory breach;
• to recover its wasted costs and the costs of sourcing an alternative software system, subject to the Liability Cap; and
• to recover liquidated damages for delay up to the date of termination, which were not subject to the Liability Cap.

The Court of Appeal³ partially overturned the first instance decision finding that:

• Liquidated damages for delay were only available in respect of work ultimately completed and accepted by PTT, because that was what the express wording of the liquidated damages clause provided for. Such damages were not available where work had been delayed but ultimately not accepted because a decision had been taken to terminate the contract for that delay; and
• The liquidated damages were also subject to the Liability Cap.

Issues to be determined by the Supreme Court

The issues which fell to be determined by the Supreme Court were:

• Issue 1: Are liquidated damages payable where work is not completed or accepted by the paying party prior to termination?
• Issue 2: Did the Liability Cap limit PTT's ability to recover losses for breach of a contractual duty of skill and care?
• Issue 3: Were liquidated damages included within the Liability Cap?

Issue 1: Availability of liquidated damages

The Supreme Court unanimously allowed the appeal on Issue 1.

It held that the Court of Appeal, in interpreting the clause as extinguishing PTT’s right to liquidated damages where delayed work was neither completed nor accepted, had adopted an approach “inconsistent with commercial reality and the accepted function of liquidated damages clauses”. The orthodox approach, namely that a contractual liquidated damages clause applied up until termination (with general damages available thereafter), was a “well-trodden” one and there had been no reason for the Court of Appeal to depart from it. Requiring, in line with the Court of Appeal's decision, a contracting party to surrender accrued rights, and to prove its pre-completion losses in the event it wished to terminate a contract, would render the inclusion of a liquidated damages clause pointless, and deprive that party of the certainty and simplicity of calculation which it would otherwise permit.

The Court of Appeal’s reliance on British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corporation Ltd [1913] AC 143 had been misplaced. In Glanzstoff, the House of Lords had concluded that a liquidated damages clause only applied to work that had been delayed but ultimately completed. However, the Supreme Court felt that Glanzstoff turned on its own facts. The clause in Glanzstoff had been a bespoke clause, not a standard or commonly used one. The Supreme Court therefore held that the decision on the meaning of the relevant clause in Glanzstoff was not binding on decisions on meaning of other clauses, even where similar in nature. The Supreme Court also concluded that, in fact, it was more probable that the meaning of the clause in this case was that PTT's right to liquidated damages would cease on completion of the relevant phase, rather than completion of the relevant phase being a pre-condition for liability under the liquidated damages provision.    

Lord Leggatt (agreeing with Lady Arden's leading judgment) noted that finding to the contrary could create commercial difficulties. For example, if a contractor had overrun on time for completion, it would (if the Court of Appeal's analysis were followed) have reason not to complete the works at all, so as to avoid any liability for liquidated damages, payable upon acceptance of completion of the relevant task by their counterparty. There is, he found, "no reason – in law or in justice" why termination should deprive PTT of the right to recover liquidated damages.

The Supreme Court concluded that the Court of Appeal's reliance on Glanzstoff had led to a "radical re-interpretation" of the case law on liquidated damages, when the case was highly fact-specific. It did not create "some special rule applying to liquidated damages clauses" more generally. PTT's right to liquidated damages was in line with the "generally understood position" that such damages would accrue until the contract was terminated. 

Issues 2 and 3: Scope of the Limit of Liability

On Issue 2, the majority allowed the appeal⁴. Lady Arden analysed the Limitation of Liability as containing:

(i) a statement that Triple Point is liable to PTT for any damage in consequence of any breach of contract, including software defects or inability to meet the functionality criteria;

(ii) the Liability Cap: a global limit of liability for all breaches of contract;

(iii) a form of remedies sub-clause: for Triple Point to use best endeavours to cure the defect and, failing that, to return the attributable part of the fees paid; and

(iv) a Liability Cap carve out sub-clause (the "Carve Out"): for Triple Point's liability resulting from any fraud, negligence, gross negligence or wilful misconduct on their part would be unlimited.

According to Lady Arden, 'negligence' has an "accepted meaning in English law" (which governed the CTRM Contract), covering both the tort of failing to use due care, and also breach of a contractual provision to exercise skill and care. Consequently, unless a "strained meaning" was given to the Carve Out, its effect is that all damages resulting from negligence on Triple Point's part, including damages for negligent breach of contract, fell outside the Liability Cap. The Court of Appeal had erred in finding that the word "negligence" referred to any independent tort, as this would give the term a "convoluted meaning which the word cannot reasonably bear".

The Supreme Court dismissed the appeal on Issue 3, confirming that the Court of Appeal was right to find that the Liability Cap included liquidated damages, so that these counted towards the maximum damages recoverable by PTT.

The Limitation of Liability provided for a Liability Cap, and for a limitation on the form of remedies available. The latter contained an exception for special remedies under the CTRM Contract, of which the liquidated damages clause was one specified form special remedy. However, that did not mean that the same exception should be read into the Liability Cap. 

Comment

The Supreme Court's orthodox analysis of liquidated damages clauses, and reversal back to the first instance decision, will be welcomed. Such clauses are designed to provide contracting parties with "certainty, simplicity and efficiency".

Now, parties relying on such clauses can have some comfort that the provisions will apply until termination, regardless of whether this is expressly stated. Thereafter, a claim for general damages remains an option, to the extent damage can be proven. Of course, if parties do wish to contract on an alternative basis, the Supreme Court's decision makes it clear that they are entitled to do so, but express words will be required to this effect.

¹ "12.3    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 endeavor 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.”

² [2018] EWHC 45 (TCC).

³ [2019] EWCA Civ 230.

⁴ Lady Arden provided the Leading Judgment, and Lord Leggatt and Lord Burrows allowed the appeal, with Lord Sales and Lord Hodge dissenting.