HM Insights

Getting to the point of liquidated damages clauses

Many in the construction sector are waiting with baited breath for a key judgment to be issued by the UK Supreme Court following its hearing at the end of 2020. The case is that of Triple Point Technology Inc v PTT Public Company Ltd. The judgment will consider the decision of Sir Rupert Jackson in the English Court of Appeal.

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Liquidated damages clauses are common in construction contracts and set out pre-agreed amounts of compensation which are to be paid by a party in the event that they breach certain conditions of the contract. These commonly apply to instances of delay by contractors operating in the construction sector.

The key questions before the Supreme Court were:

  1. Whether the employer only has a right to such damages if the contractor completes the works, or if they are payable even if the employer terminates the contract before completion.
  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 English version of delict).
  3. 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.

Facts of the case

Triple Point Technology Inc contracted to provide software and software services to PTT Public Company Limited. The contractual price was to be paid via instalments payable on reaching certain pre-defined milestones. In addition to the description of the work to be completed by these payment milestones specific dates for the payment instalments were also provided.

The contract required that Triple Point use its "best effort and professional abilities" to complete the milestones timeously. The contract did provide that the time scales could be extended if the reason for such delay was out of the control of the contractor however such extension required written approval from PTT. The contract stipulated that in the event that Triple Point's work fell behind schedule liquidated damages were to be applied from the date the work ought to have been carried out to the date it was performed. The contract did contain a cap on Triple Point's liability to PTT but there was an exemption to this where liability arose from "specific remedies expressly identified as such in [the] contract" or where the loss arose from "negligence" of Triple Point. Whilst Triple Point did begin work in terms of the contract it shortly encountered difficulties and was unable to meet the time limits imposed by the contract.

Approximately one year from the commencement of work by Triple Point a payment dispute broke out between the parties and Triple Point suspended work on the project. Triple Point demanded payment in accordance with the dates of the milestones despite the fact that the project had fallen into delay and the work narrated within those milestones had not yet been completed. A year after this PTT terminated the contract. At this stage only two of the payment milestones had been achieved. It was actually Triple Point who raised proceedings against PTT in respect of sums allegedly due as a result of software licence fees and at this stage Triple Point counterclaimed for the liquidated damages in terms of the relevant clause.

Decision of the Technology and Construction Court

The Technology and Construction Court (TCC) dismissed Triple Point's claim for payment of the outstanding invoices and ordered it to pay substantial damages in respect of PTT's counterclaim including the liquidated damages. In reaching this decision the TCC decided that the contractual clause narrating the works to be completed prior to each payment instalment being due took precedence over the specific dates for payment. The TCC decided that the delay was as a result of Triple Point's negligence and they ought not to benefit from such negligence. The TCC also decided that Triple Point were not entitled, in those circumstances, to suspend work and by doing so was in repudiatory breach of the contract. The TCC decided that PTT was entitled to certain damages subject to the contractual cap but that in addition the liquidated damages clause entitled PTT to such damages without cap.

Triple Point then appealed to the Court of Appeal.

Consideration of the Court of Appeal

In essence Triple Point contended that the cap should apply to liquidated damages and that payment was due on the specified dates regardless of whether the narrated works had been completed.

PTT cross appealed on the basis that there should be no cap on any of the damages claimed by them as such damages arose from the negligence of Triple Point and negligence ought to not only apply to the tort of negligence but also a breach of the contractual duty to carry out work with care and skill. The Court of Appeal did not accept this proposition.

The key questions before the Court of Appeal were how to apply a clause imposing liquidated damages for delay in circumstances where the contractor never achieves completion and work is actually completed by another contractor. This was of relevance as the contract in essence applied liquidated damages to the date of completion and did not specify whether this work was to be completed by the original contactor or an alternative contractor but merely from the original deadline "to the date PTT accepts such work".

The other issue was the interpretation of particular wording in the contract before the court.

Sir Rupert Jackson, in the English Court of Appeal, considered the history of competing authorities on this point and identified that there have been three different approaches adopted when considering liquidated damages clauses against a backdrop of the contractor failing to complete the work and an alternative contractor being needed to complete the work:

  1. The liquidated damages clause does not apply;
  2. The clause only applies up until the termination of the contract; or
  3. The clause continues to apply until the second contractor achieves completion of the work.

Each of these approaches were supported by competing authorities.

The Court was at pains to stress that such cases are incredibly fact specific not only upon the wording of the clause but also the actions of the parties. Sir Rupert Jackson stated that there was no "invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss".

The Court determined that the effect of the cap was that in addition to a cap on the recoverable damages for each individual breach of contract there was an overall cap on the contractor's total liability including liquidated damages arising from delay. The effect of this was that the cap was wholly used up by the award of general damages and there was nothing left for the liquidated damages arising from delay.

This rendered the whole debate as to the calculation of liquidated damages moot albeit the Court of Appeal, thankfully for those practising in this area, put much consideration into which of the three approaches ought to be adopted in such cases. In this case, the Court of Appeal interpreted the liquidated damages clause from "up to the date PTT accepts such work" to "up to the date when PTT accepts completed work from Triple Point" as meaning delay in the two portions of work which were eventually completed by Triple Point but not the later works completed by alternative contractors. In doing so they followed the Scottish case of British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd 1912 SC 591 (Court of Session) and 1913 SC (HL) 1 which  considered that liquidated damages do not apply where the work is not completed by the original contractor.

Issues appealed to the UK Supreme Court

Unsurprisingly PTT appealed to the UK Supreme Court. The case was heard on 12th November 2020 and can be viewed online at the Supreme Court's website. It is certainly worth watching if for no other reason than to see how such hearings are taking place with COVID restrictions.

PTT's appeal was based on their assertion that the Court of Appeal erred in law in deciding that the liquidated damages clause only applied to the works completed by Triple Point and not by the subsequent contractor. PTT also appealed that the Court of Appeal erred in law in restricting the application of the cap exemption to the tort of negligence rather that the contractual duty of taking care and skill which they submitted would be defined as negligence in ordinary legal parlance.

There are essentially two competing considerations here. On the one hand it would appear contrary to the interests of justice that a party be liable to pay damages for continued delay in circumstances where they are no longer in control of the works being delayed. On the other hand it is similarly inequitable that a party suffer delay and inconvenience as a result of a party's breach of contract but that their remedy of enforcing the liquidated damages clause is thwarted by the very act of them instructing alternative contractors to finish the work and mitigate their loss.

The Supreme Court will have a difficult challenge in balancing these two competing interests. The decision is expected later this year and it is hoped it will provide some finality to the competing lines of authority as to which of the three approaches, identified by the Court of Appeal, ought to be taken. In the meantime there is still a degree of uncertainty and much will depend on the wording and construction of the clause in question. It is possible that if specific wording was contained within the contract permitting that liquidated damages clauses would apply in the event of unfinished work, or work finished by another party, after termination then these may indeed still be recoverable.