Liquidated damages and the impact of termination
Triple Point Technology v PTT (Supreme Court) [2021]
This case concerned the impact of validly terminating a contract for delay in circumstances where there is an active LDs provision under which LDs are accruing in respect of the delay. The Court of Appeal came to a conclusion that seemed to potentially limit the ambit and effectiveness of LD provisions in circumstances where the customer ultimately terminates. The case also looked at the relationship between LD provisions and caps on liability as well as a potential carve out from the liability cap for negligence.
Facts:
The facts are as previously reported (see http://www.trglaw.com/news279.html).
The principal issue appealed to the Supreme Court was whether PTT was entitled to liquidated damages for delay in respect of work which had not been completed before the contract was terminated. The second and third issues arose from article 12.3 which imposed a cap on the damages which PTT could claim for Triple Point’s breach of contract. The second issue (“the cap carve-out for negligence issue”) is whether a negligence exception from the cap in article 12.3 excluded from the cap losses caused by Triple Point’s negligent breach of contract or only losses for the commission of some independent tort. The third issue (“capping of liquidated damages issue”) is whether the liquidated damages fell within the cap on Triple Point’s liability imposed by article 12.3.
Article 12.3 contained the liquidated damages provision “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”.
12.3 then went on to say “CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’s breach of contract. 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 negligence or gross negligence”.
Decision:
The Supreme Court decided that the Court of Appeal had been wrong on the first two issues but correctly decided the third issue.
Issue 1: Are liquidated damages payable under article 5.3 where Triple Point never completes the work and PTT never accepts it? The Supreme Court answered this in the affirmative. The Supreme Court said “The approach of the Court of Appeal is inconsistent with commercial reality and the accepted function of liquidated damages. Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a delay in completion. The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract. After that, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. Parties do not have to provide specifically for the effect of the termination of their contract. [That] territory is well-trodden, and the liquidated damages clause does not need to provide for it”.
Issue 2: Are damages for Triple Point’s negligent breach of the Contract within the liability-limitation exception in the final sentence of article 12.3?
The leading judge said that the word “negligence” has an accepted meaning in English law. It covers both the tort of failing to use due care and also breach of a contractual provision to exercise [reasonable] skill and care. The cap carve-out in the final sentence of article 12.3 should be given its natural and ordinary meaning of removing from the cap all damages for negligence on Triple Point’s part, including damages for negligent breach of contract.
Issue 3: The capping of liquidated damages issue - Are liquidated damages subject to the cap in article 12.3?
The Supreme Court agreed with the Court of Appeal. The exception for [specific] remedies in the third sentence did not extend to the second sentence dealing with the global cap. The second and third sentences of article 12.3 were said to serve separate functions and are in logical order. First there is a limitation on liability and, second, there is a limitation on the form of remedy. “The limitation on the form of remedy contains an exception for special remedies under the contract, of which the liquidated damages clause would be one. But that does not mean to say that the same exception should be written into the [overall] limitation on liability. Accordingly, I would reject PTT’s appeal on this point”. The Court of Appeal were, according to the Supreme Court, right to say that the overall cap embraced liquidated damages so that they counted towards the maximum damages recoverable under the cap.
Points to Note:
- On the question of the impact of termination upon liquidated damages, this decision seems much more consistent with commercial common sense.
- Again, on the question of the negligence carve out, the Supreme Court do seem to have come to a common-sense decision. Including ‘negligence’ as a generally applicable exclusion from the liability caps in Article 12.3 is extremely dangerous from a supplier’s perspective and, arguably, renders the exclusion clause almost worthless from their perspective.
- If liquidated damages for delay (and, indeed, service credits for poor performance) are not to be subject to general caps on liability this will need to be explicitly stated but it always has to make sense to be clear on the position.