The UK Supreme Court in its long awaited judgment in Triple Point Technology v PTT Public Company[1] has restored the orthodox approach to the interpretation of liquidated damages clauses.

In this FYI, we summarise the judgment and provide some key takeaways for drafting liquidated damages clauses and related caps on liability.

What you need to know

• Absent clear wording to the contrary, a liquidated damages clause will be applicable to calculate loss for delay in completing the work up to the date of termination of the contract. General damages will apply in respect of loss after the date of termination.
• It is important to carefully and clearly draft any limitation of liability clause to expressly state what is and what is not included within the limit of liability or “cap”.

Background

Triple Point was engaged to provide software services to PTT. The contract had been tailored to the particular project. It provided for milestone payments on achievement of certain deliverables and damages for delay. It also provided a cap on Triple Point’s total liability to PTT under the contract, but stated that the liability cap did not apply to liability resulting from fraud, negligence, gross negligence or wilful misconduct.

Work under the contract was delayed. PTT asserted that Triple Point was not entitled to payment as works had not been completed in accordance with the milestones. Triple Point disputed PTT’s position and stopped all work on the grounds of non-payment. PTT subsequently terminated the contract on the basis of wrongful suspension by Triple Point. Proceedings were brought by Triple Point against PTT for payment of the sums outstanding under its invoices.

The key issues under consideration were:

• Whether delay damages were payable for works that were never completed and therefore never accepted by PTT as at the date of termination;

• Did the exclusion of liability for “negligence” from the liability cap also include liability arising from a breach of a contractual duty of care?

• If PTT was entitled to delay damages, was this amount included in the liability cap?

The Court of Appeal’s unorthodox approach to liquidated damages

Somewhat controversially, the UK Court of Appeal found that PTT was only entitled to delay damages for works that had actually been completed and accepted by PTT. Accordingly, PTT was not able to recover delay damages for incomplete work, which by definition had not been accepted by PTT at the date of termination of the contract.

The Court of Appeal also found that Triple Point’s liability for delay damages arose from a breach of contract, not negligence, so that the delay damages were within, and counted towards, exhausting the liability cap.

Normality restored

The UK Supreme Court unanimously reversed the Court of Appeal’s decision in respect of the availability of liquidated (delay) damages. In particular, the Supreme Court affirmed the general principle that liquidated damages accrue up to termination of a contract, irrespective of whether or not the works have been completed and accepted by the employer.

Following termination, however, the innocent party is entitled to seek general damages for the breach. The Supreme Court held that clear words would be required to overturn this “orthodox approach”.

The Court of Appeal had erred in interpreting the delay damages clause as requiring work to be completed and accepted in order for that clause to apply. The Supreme Court found that such an interpretation was “inconsistent with commercial reality and the accepted function of liquidated damages”. This being that liquidated damages clauses benefit both the employer (who avoids having to prove actual loss flowing from delay) and the contractor (who has certainty as to its liability if delay occurs).

The Supreme Court also reversed the Court of Appeal’s finding that Triple Point’s liability for delay damages was included in the cap on liability. The majority held that the term “negligence” should be given its ordinary meaning, which incorporates both a breach of the contractual duty of care and failure to use due care. Delay damages were held to arise from negligence (ie breach of contractual duty), and were therefore excluded from the liability cap.

Comment

The UK Supreme Court has helpfully cleared up the uncertainty which was created by the Court of Appeal about the application of liquidated damages up to the date of contract termination.

However, as is too often the case, the courts at all levels needed to engage in an exercise of contract interpretation because the drafting of the contract was not as clear as it could have been.

The upside of this is that Triple Point provides us with some key takeaways as follows:

• Liquidated damages clauses should be carefully and clearly drafted to specify their application, both up to and after termination of the contract. Clause 14.2.5 of the NZS3910: 2013 General Conditions is a good example of such clear drafting. It provides that, where the Principal elects to terminate the contract for Contractor default, any liquidated damages specified for late completion of the Contract Works continue to apply “from the Due Date for Completion that would have applied if the Contract had not been terminated to the actual date of Practical Completion of the Contract Works”.

• The relationship between liquidated damages clauses and any limit of liability clause or (“cap”) in the contact should be clearly defined. Consider:

• Whether you intend for any liquidated damages that may be payable by the contractor (and which may themselves be subject to a sub-limit or “cap”) to be within or outside of the general liability cap; and

• Appropriate carve-outs from the liability cap, and clearly state what these are. For example, will the carve-outs only apply to claims that could be made under the contract or will they also apply to non-contractual (eg tortious) claims that are connected to the contract?

Special thanks to Kate Jones for her assistance in writing this article.