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In this post, Shona McCusker and Amy Roberts, who work within the construction disputes team at CMS, review the appeal decision published on 16 July 2021 by the UK Supreme Court in the matter of Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, which concerns liquidated damages for delayed works and limitations of liability.  

In March 2019, the Court of Appeal reviewed the law on liquidated damages for delay and held that a particular liquidated damages clause did not apply at termination. The decision was thought to have resolved more than a century of ambiguity. However, in November 2020, the Triple Point case found itself before the UK Supreme Court (“UKSC”), where questions around liquidated damages were again brought to the fore.

We reviewed the background, questions and parties’ submissions earlier this year. In this post, we review the decision from the UKSC, along with considering the ramifications covering the three issues dealt with in the decision.

(Issue 1) whether liquidated damages were payable in respect of work which has not been completed before the contract was terminated

The Decision

The UKSC unanimously allowed PTT’s appeal and Triple Point was liable to pay liquidated damages for incomplete sections of work.

The Court of Appeal had found that liquidated damages did not apply to incomplete works which, by definition, had not been accepted by the employer. The UKSC found difficulty with this interpretation as it was “inconsistent with commercial reality and the accepted function of liquidated damages”. In overturning the Court of Appeal’s decision, the UKSC criticised it for relying on British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143.

Orthodox Approach v Glanzstoff Approach

The UKSC favoured the orthodox approach which is long established: liquidated damages apply to delay up to the point of termination following which the employer is entitled to make a claim for general damages.

The Court of Appeal had found difficulty with the orthodox approach where the contract was terminated or abandoned. In these circumstances, the parties were in new territory for which the liquidated damages clause may not have made provision. It followed the Glanzstoff approach by finding that the liquidated damages clause had no application in a situation where the contractor never hands over completed work to the employer.

The UKSC flagged that the clauses in question in Glanzstoff were not market accepted wording, or even standard form. It was therefore difficult to accept the Court of Appeal’s approach in finding the wording of the liquidated damages similar to that in Glanzstoff. Each case turns on its own facts and so a decision in one case as to interpretation of a clause cannot be binding in a subsequent case as to the meaning and effect of even a similar clause. The Court of Appeal had erred in following the Glanzstoff approach which was merely a decision on the interpretation of a particular contract.

The UKSC found the liquidated damages clause kicked in if Triple Point did not discharge its obligations within the time fixed by the contract irrespective of whether PTT accepted any works which were completed late. By contrast, the Court of Appeal’s decision meant that there was no entitlement to liquidated damages if the employer did not accept the completed works. Such an interpretation was found to cut across the purpose of a liquidated damages clause rendering it of little value; it “threw out the baby with the bathwater”.

The UKSC challenged Triple Point to provide an example where liquidated damages would only be payable if the contractor actually completes the work. Triple Point referred to FIDIC however, the UKSC found it simply confirmed the validity of the orthodox approach and reinforced its view that such a clause would not make commercial common sense.

The UKSC’s decision takes us back to the two specific functions of a liquidated damages clauses: firstly, to avoid the time, cost and uncertainty involved in quantifying employer delay damages; and secondly, to limit the contractor’s exposure to what could otherwise be an unquantifiable obligation to remunerate the employer for delay damages. Liquidated damages clauses are therefore favoured for their certainty by de-risking delay to completion for both parties.

(Issue 2) whether a limitation of liability clause which excludes loss caused by “negligence” applies to acts amounting to a breach of a contractual duty to use reasonable care and skill, but which do not constitute negligence in tort

The UKSC allowed the appeal on Issue 2 by majority (3:2), with Lord Sales and Lord Hodge dissenting on the definition of negligence as applied to contractual obligations.

The contract provided carve-outs to the limitation of liability, one such carve-out being negligence. Lady Arden considered that the contract was not just for services but for the absolute obligations to provide software which conformed to specification. This differed from the Court of Appeal’s decision, as it did not relate solely to services.

“Negligence” should be given its ordinary meaning and therefore relates to both (i) failing to use due care in tort and (ii) the contractual duty to use reasonable care and skill. Lord Leggatt helpfully noted in his judgement that “in the absence of clear words the parties did not intend to derogate from the normal rights and obligations that a contract would give”.

Therefore, liability was uncapped in relation to “negligence” amounting to breaches under the contractual obligations, as liquidated damages are within the carve-out if they result from negligence.

(Issue 3) whether a limitation of liability clause which expressly excludes claims for which there are specific remedies expressly identified in the contract nonetheless applies to liquidated damages

The UKSC unanimously dismissed the appeal on Issue 3 since a reasonable assessment was capable of being made for the relevant part of the price. Lady Arden found that the contract was to be followed logically: (i) there was a limitation of liability and (ii) there is a limitation on the form of remedy. Part (ii) contained an exception for special remedies, including liquidated damages. The Court of Appeal was correct and liquidated damages counted towards the maximum recoverable damages under the limitation cap.

Conclusion

The implications of this decision are:

  1. Greater certainty for both employers and contractors in terms of liquidated damages. The return to status quo will be welcomed particularly in the construction sector where liquidated damages are a popular contractual mechanism.
  2. Parties can contract with confidence knowing their liquidated damages clause will kick in to both offer the employer a remedy and restrict a contractor’s exposure in respect of delay to completion.
  3. Limitation of liability clauses should be considered in detail prior to inclusion in contracts. In particular, any carve-outs – especially where this relates to negligence, which under English law covers both tort and contractual obligations.