Liquidated damages and termination
Triple Point Technology v PTT [2019]
Liquidated damages provisions are quite common as a way of compensating a customer for delay and providing some incentive to perform on time. This case featured the interaction between a liquidated damages provision and the termination of the Agreement
Facts:
PTT engaged Triple Point to develop a new commodity trading and risk management system. The contract provided that payment would be made by milestones and that Triple Point would be liable for liquidated damages in respect of work delivered late. The clause in question (Article 5.3) said “If Triple Point fails to deliver work within the time specified and the delay has not been introduced by PTT, Triple Point 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, provided, however, that if undelivered work has to be used in combination with or as an essential component for work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination”.
The contract went on to say in relation to liability (Article 12.3) “(1) Triple Point shall be liable to PTT for any damage suffered by PTT as a consequence of Triple Point's breach of contract. (2) The total liability of Triple Point to PTT under the Contract shall be limited to the Contract Price received by Triple Point with respect to the services or deliverables involved under this Contract. (3) 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 Triple Point, upon receipt of written notice, to use best endeavour to cure the breach at its expense, or failing that, to return the fees paid to Triple Point for the Services or Deliverables related to the breach. (4) This limitation of liability shall not apply to Triple Point's liability resulting from fraud, negligence, gross negligence or wilful misconduct of Triple Point or any of its officers, employees or agents”.
In the event, only the first milestone was completed, 149 days late and the relevant milestone payment of $ 1,038,000 was made. Triple Point then demanded subsequent milestone payments in respect of work not yet completed. In doing so it relied upon dates for payment specified in the relevant Order Forms. It suspended work when those demands were not met. PTT ultimately terminated the contract as a result.
Triple Point brought a claim before the High Court seeking the payments it had demanded. PTT counterclaimed for its losses and these included liquidated damages for delay, both in respect of the work completed prior to termination and the work that was never completed. Triple Point sought a ruling that the liquidated damages provision only applied to work which was delayed but then completed, and not in respect of the work which had never been completed or accepted by PTT.
The total value of the contract was $6.92 million.
Decision:
At first instance the High Court found in favour of PTT and held that it was entitled to recover (a) the costs of procuring an alternative system and (b) wasted costs, but subject to a cap of $1,038,000 pursuant to Article 12.3. Crucially, PTT was also found to be entitled to recover liquidated damages for delay pursuant to Article 5.3, totalling $3,459,278.40. These damages were not held to be subject to a cap under Article 12.3.
The Court of Appeal held that the liquidated damages clause did not apply in respect of work which was never completed by the contractor; the remedy instead being for general damages for delay.
The Court identified three possible options in relation to a liquidated damages provision under a terminated contract where the work is actually completed by a replacement contractor:
(i) The LD clause does not apply at all.
(ii) The LD clause only applies up to termination of the first contract.
(iii) The LD clause continues to apply until the second contractor achieves completion (which, incidentally was the decision in the very recent GPP Big Field v Solar EPC Solutions which we reported on in January). The judge expressed some concerns with this option because it means that the employer and the second contractor can control the period for which liquidated damages will run.
The court recognised that option ii is generally considered to be the orthodox position. In relation to work that was incomplete at the date of termination, rather than merely delayed, it said that it cannot be assumed that the parties would have intended for the liquidated damages provision to apply. It argued that it may be artificial to calculate the employer's loss on two different bases: liquidated damages until termination, and general damages thereafter. Instead, it was suggested, it might be more logical to apply general damages throughout.
The court emphasised that the position must depend upon the wording of the provision itself, and there was no blanket rule that could be applied in every case. In this instance, the court decided that the liquidated damages clause only applied to work completed by Triple Point and accepted prior to termination, and could not be applied in relation to work which Triple Point had never handed over completed to PTT.
The Court of Appeal then looked at the operation of the liability cap in Article 12.3. It analysed the clause sentence by sentence. It is sentence 2 which imposes the cap equal to the total amount that has been paid to the contractor for the services or deliverables involved under the contract. Sentence 3 was then described as imposing a separate cap in respect of individual breaches of contract, except where the contract provides "specific remedies". Sentence 4 then introduces exceptions to those caps.
The court firstly considered the reference to ‘negligence’ in sentence 4 which potentially drives a ‘coach and horses’ through the protection of the contractual caps on liability. It said that the term ‘negligence’ used in this context requires “unusual or extreme conduct, such that Triple Point should forfeit the protection of the cap. It is talking about breaches of contract which are also freestanding torts or deliberate wrongdoing. In my view, "negligence" in this context means the freestanding tort of negligence”. The judge clearly didn’t feel that the conduct of Triple Point met that test in this case which seems an interesting conclusion given their failures.
The judge then had to consider whether the liquidated damages for delay provision fell outside the Article 12.3 cap on liability. The Court decided that sentence 3 did not apply to delay but instead provided a subsidiary cap on the recoverable damages for every [other] individual breach of contract. That, of itself is an interesting conclusion which is difficult to justify on the facts. The reasoning for this seemed to be that a delay cannot be ‘cured’ and since this is what sentence 3 talks about the judge thought delay must be outside the contemplation of the clause.
Sentence 2 provided an all-encompassing overall cap on the contractor's total liability. It encompasses damages for defects, delay and for any other breaches. Since the cap had apparently been wholly used up by the award of general damages, PTT was prevented from recovering any liquidated damages for the elements which had not been accepted. This shows the importance of an all-encompassing cap on liability which was presumably the $1,038,000 that had been paid.
Points to Note:
The Court of Appeal judgment seems to raise many questions and leave many issues unclear which is unfortunate. Quite why, for example, the Court in this case (a contract between two sophisticated businesses) was quite so prepared to effectively ignore the express reference to ‘negligence’ contained in the sentence dealing with exclusions from the caps on liability is unclear. Why did the Court seemingly ignore the fact that sentence 1 of Article 12.3 seems inconsistent with the second and third sentences? Why was their no discussion as to why PTT was entitled to claim general damages when the third sentence of Article 12.3 clearly says the exclusive remedy is a return of fees paid?
What the case does emphasise is that great attention must be paid to the drafting. Drafters would be well advised to make it clear whether an LDs provision is inside or outside any cap on liability and whether LDs are payable only in circumstances where the deliverable in question is ultimately accepted or whether it applies to all cases of delay (including where the contract is ultimately terminated).
One of the interesting aspects of the judgment was the willingness of the Court of Appeal to dismiss any suggestion that the supplier had an implied right to suspend work if it did not receive payment. The leading judge said “If PTT failed to make payments on the due dates, Triple Point would have all the usual remedies for non-payment. These would include suing for the money due, applying for summary judgment, treating non-payment as a repudiation. There was no need for the contract to incorporate an implied provision that Triple Point could suspend work for non-payment, even though from [its] point of view such a term would have been nice to have. …even if the contract were to favour one party strongly, that is no reason for the court to redress the balance by implying terms”.
The High Court judge had not been concerned that the LD’s provision had been labelled a ‘penalty’ and the Court of Appeal was similarly unconcerned. This is entirely unsurprising. The label used is irrelevant, it is the substance which matters.
There was also a debate about possible ‘double recovery’ under both Article 5.3 and Article 12.3 but the Court of Appeal similarly gave this short shrift. However, it did make a somewhat surprising statement. It said “A liquidated damages clause (if valid) operates in substitution for a general assessment of the claimant's losses caused by delay. It does not enable the wronged party to recover compensation for the same losses twice over”. Whilst we agree with the second sentence, the first sentence would seem to be incorrect unless it is stated to be an exclusive remedy for delay (which this clause did not). Surely, the correct position is that any payments under an LDs clause have to be taken into account when considering any general damages claim so as to ensure that there is no double recovery? We would suggest that the Court of Appeal was perhaps going too far.