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In this post, Shona McCusker and Jennifer Wilson, who both work within the construction disputes team at CMS, preview the decision awaited from the UK Supreme Court in the matter of Triple Point Technology Inc v PTT Public Company Ltd, 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 offered some much-needed clarity when it 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. In November 2020, however, the Triple Point case found itself before the UK Supreme Court, where questions around liquidated damages were again brought to the fore.

In this post, we review the background, questions before the UK Supreme Court, and the parties’ submissions, before considering the potential ramifications of this case as we await the judgment being handed down.

Background

PTT entered into a contract with Triple Point for the purchase of software and related services.  The project ran into delay and milestones failed to reach completion. Triple Point asked PTT to pay invoices in respect of incomplete work, relying upon dates for payment stipulated in order forms. PTT, however, refused, relying on contractual provisions which specified that payments would be made when milestones were met. In response, Triple Point suspended work for non-payment and PTT then terminated the contract for Triple Point’s deemed default.

The contract included the following contentious clauses:

  1. ” If [Triple Point fail] to deliver work within the time specified…[Triple Point] 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 [PTT] accepts such work” (Article 5.3); and
  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…[except where liability results] from fraud, negligence, gross negligence or wilful misconduct” (Article 12.3).

The parties disagreed on the application of the above provisions and the case made its way through the Technology and Construction Court to the Court of Appeal which found that PTT was not entitled to recover liquidated damages for incomplete sections of work although ordinary damages for non-completion would be recoverable.

PTT was entitled to liquidated damages for completed sections of work however, the Article 12.3 liability  cap was found to apply, meaning that despite PTT being, in principle, entitled to damages for delay, anything exceeding this cap would not be recoverable.

The Court of Appeal’s decision offered much needed clarity as to the effect of liquidated damages clauses, suggesting that those referring expressly to damages for delay accruing until completion could fall away all together in the event of the contract’s termination.

Appeal to the Supreme Court

The appeal to the UK Supreme Court called the welcomed certainty into question. In summary, on 12 November 2020, the UK Supreme Court considered the following issues:

  1. Whether liquidated damages are payable only after completion or if such damages are still payable even if the employer terminates the contract before completion.

PTT submitted that liquidated damages can be claimed at any point in a contract (e.g. even after termination but before completion) and there is no need to wait until completion or acceptance of the work. At the hearing, Lady Arden flagged the principle of mutuality of obligations and that an employer ought to make it possible for a contractor to bring liability for liquidated damages to an end, otherwise the obligation is indefinite and infinite.

Triple Point submitted the right to liquidated damages had not accrued at the date of termination of the contract. Further, they submitted that the wording of Article 5.3 meant there had to be acceptance by PTT of Triple Point’s work before the right to liquidated damages could accrue. During the hearing, Lord Sales found some difficulty with this position as it is possible to assess delay earlier on in the contract, it is not necessary to wait until completion. Lady Arden also pointed out the importance of the right to liquidated damages accruing at an earlier date as it could otherwise effect accrual of interest. Noting these points, Triple Point maintained the position that this is the bargain the parties struck.

Indeed, while the principle of delay being capable of assessment prior to completion is tangible, its interaction with the entitlement to liquidated damages is more complex, particularly in this case where the wording of Article 5.3 requires PTT’s acceptance of Triple Point’s work. The UK Supreme Court will need to carefully consider how these issues interact on the specific facts.

  1. Whether the liability cap in the contract which excluded 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.

Triple Point argued that the liability cap worked in its favour and applied in present circumstances. It further submitted the clause was akin to an “avoidance of doubt” clause simply to clarify that the liability cap applies only to issues under the contract. The liability cap is only disapplied if the issue arises outside the run of ordinary contractual performance which was not the case here.

PTT submitted that the liability cap applies to an “ordinary” breach of contract and the cap is only disapplied if the breach of contract had any of the qualitative descriptors referred to in the exceptions detailed in the clause such as negligence, fraud, or gross negligence.

While this point was a cause of interesting debate, the UK Supreme Court decision will come down to the interpretation of the specific wording in the liability cap clause. The impact of the decision will therefore be limited to points of interpretation as opposed to any wider application.

  1. Whether a limitation of liability clause which expressly excludes claims for which there are “specific remedies expressly identified as such in this contract” nonetheless applies to liquidated damages under the contract.

PTT submitted that the cap is limited to the amount of money paid in respect of service and deliverables involved in the breach of contract in question. If the cap applied to liquidated damages, this would incentivise the contractor’s non-performance as the less good its performance, the lower its liability. Triple Point plainly disagreed with this interpretation of the clause noting it would require a “copy and paste” job on the limitation of liability clause. Triple Point maintained its position that liquidated damages fall within the scope of the total liability cap.

There was discussion between Counsel and the bench as to how much “work” needed to be done to properly read into the clause which suggests the drafting in the contract is not clear cut on this issue.

Potential Outcome

The majority of the more challenging questions from the UK Supreme Court bench during the oral hearing focused on the first point on entitlement to liquidated damages which is an indication of the complexity of the issues and the importance of the UK Supreme Court’s forthcoming decision. The decision will certainly impact the construction sector and commercial contracts more generally.

While the UK Supreme Court judgment is awaited, there are also indications that the construction industry has curried favour with the Court of Appeal’s decision, as the recent amendments to the NEC4 suite of contracts include wording to make clear that the Client’s entitlement to be paid delay damages ceases at termination.

The UK Supreme Court judgment is eagerly awaited in anticipation.