03/08/2021
In Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29, the Supreme Court has helpfully confirmed the commercial position as previously understood with regard to liquidated damages: namely, that liquidated damages accrued for the supply of a software system that was never completed up to the date of termination.
Introduction
The term ‘liquidated damages’ refers to a fixed or determined sum that is payable by one party to another as damages for loss caused by a breach of contract. They are typically used in contracts (including construction and IT contracts) to provide certainty as to the remedy for a breach (for example, where there is delay in the contractor reaching completion of building works).
Facts
PTT and Triple Point entered into a contract in February 2013 for software and software implementation services to be provided to PTT by Triple Point. Under the contract, staged payments were to be made once key “milestones” had been achieved. The contract also provided for liquidated damages to be payable by Triple Point, in the event of delay to completion of milestones, under Article 5.3:
“If [supplier] fails to deliver work within the time specified and the delay has not been introduced by [customer], [SUPPLIER] 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 [customer] accepts such work . . . “
The contract also included a cap on the amount of damages that could be claimed under article 12.3 of the contract limited to the contract price, save that “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 works commenced but soon fell into delay. A dispute arose over payments allegedly due and Triple Point suspended work in May 2014. In March 2015, PTT terminated the contract due to lack of progress and instructed a new contractor to carry out the works.
Triple Point issued proceedings for payment on unpaid invoices. PTT counterclaimed for liquidated damages for delays up to the point of termination, as well as for its other losses arising from the termination.
Legal Proceedings
At first instance, the Technology & Construction Court held that Triple Point was responsible for the delay and that Triple Point had been in breach of contract to exercise reasonable skill and care. PTT was awarded $3,459,278.40 for liquidated damages for the delay up to termination; $630,000 as damages in respect of wasted costs of hardware purchases prior to termination; and $10,574,756.78 in respect of termination loss for the costs of procuring a replacement system from a new contractor.
The judge also held that Triple Point’s liability for damages in respect of wasted costs and termination loss was capped at $1,038,000 by reference to article 12.3 of the contract, being the amount paid by PTT under the contract prior to termination. The judge decided that PTT’s entitlement to liquidated damages was not subject to the cap.
Triple Point appealed.
The Court of Appeal held that PTT was entitled to liquidated damages but only in relation to works that had been completed and accepted, and not for works that remained outstanding, on the basis that there was no reference in article 5.3 to liquidated damages being payable if the works were not completed. The judgment noted that this went against the “orthodox analysis”, but stated that “the question whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/ abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss”.
The Court of Appeal also held PTT's claim for liquidated damages was subject to the cap under article 12.3 and that the exception to the cap in the contract was not invoked.
PTT appealed to the Supreme Court.
Supreme Court
Unanimously, the Supreme Court reversed the decision of the Court of Appeal regarding the liquidated damages. The leading judgement of Lady Arden confirmed that liquidated damages for delay apply up to the date of termination, with general damages available thereafter. Lady Arden confirmed that the Court of Appeal’s approach was “inconsistent with commercial reality and the accepted function of liquidated damages” which is to provide a “predictable and certain” remedy with accrued rights of liquidated damages surviving up to the date of termination.
The Supreme Court also held the wider meaning of the term 'negligence' meant that damages flowing from a breach of contractual duty to exercise reasonable skill and care are not subject to the cap, but that claims for liquidated damages are subject to that cap, given that the article 12.3 in this case expressly stated "Except for the specific remedies expressly identified as such in this contract".
Commentary
The Supreme Court decision provides clarity that liquidated damages provisions survive termination regardless of whether the contract is terminated and the works remain outstanding.
Whilst the judgment restores commercial reality, parties still need to ensure that these clauses are carefully drafted and consider the following:
- Clear wording as to the circumstances when the liquidated damages provision will apply;
- The method of calculation, to show the basis on which the damages were calculated. This is important to resist any argument that the clause is a penalty clause. The Supreme Court ruled in Cavendish v Makdessi; ParkingEye v Beavis [2015] UKSC 67 that a clause which imposes a detriment which is out of all proportion to the legitimate interest of the innocent party will be unenforceable; and
- What evidence can be produced, in the event of a subsequent challenge, to show that the clause was carefully negotiated between two parties of equal bargaining power.
