The Supreme Court (“SC”) has today handed down a significant judgment for the construction industry in relation to claims for liquidated damages (“LDs”). The central question in the case related to a party’s ability to claim liquidated damages in circumstances where the contract was terminated prior to completion being achieved.

On the first issue, the court confirmed that LDs clauses should be interpreted in a commercial context. Based on the facts of this case, even though the LDs clause said they were payable “up to the date PTT accepts the work” this did not have the effect of excluding the payment of LDs up until the point of termination. The SC confirmed that the accrual of LDs comes to an end on termination of the contract with general damages claimed thereafter.

On the second issue, the SC found that negligence in a contract should be given its natural meaning – this includes both the tort of negligence and breaching a contractual duty of skill and care. As a result any cap on liability that carves out negligence includes all meanings of the word negligence.

The Details

Background to the case

PTT Public Company Ltd (“PTT”) had contracted Triple Point Technology (“Triple Point”) to provide a software system. The work was split into 2 phases and Triple Point was delayed in providing the Phase 1 works. Triple Point completed the Phase 1 works but did not complete the Phase 2 works. There was a payment dispute between the parties and in May 2014, Triple Point suspended the works under the contract. In May 2015, PTT terminated the contract.

At first instance (TCC)

Triple Point brought a claim in the Technology and Construction Court (“TCC”) for the outstanding software licencing fees it said were due from PTT. PTT responded by way of a counter-claim for costs arising from the termination and LDs under the contract up to the date of termination.

The TCC dismissed Triple Point’s claim as the sums had not yet become due under the contractual payment mechanism.

On the counter-claim, the TCC found that that PTT was entitled to LDs up to the date of termination, and that these were not subject to the liability cap in the contract as they were negligently caused by Triple Point, and negligence was carved-out of the liability cap. Triple Point were ordered to pay PTT damages of US$4,497,278.

Unsurprisingly, Triple Point appealed.

Court of Appeal

The Court of Appeal, concurred with the TCC and dismissed Triple Point’s appeal for payment. However, Triple Point’s appeal on its liability for LDs was permitted.

The Court of Appeal found that PTT was entitled to LDs only in respect of the works that had been completed (i.e. for the Phase 1 works only and not for any Phase 2 works). It was held that PTT was not entitled to LDs up to the date of termination of the contract for incomplete works or sections.

The Court of Appeal also disagreed with the TCC and concluded that the LDs were subject to the cap on liability, because the exclusion for negligence was only for cases of freestanding torts of negligence, not where a party had breached their contractual duty of exercising reasonable care and skill.

This time, PTT appealed, and the construction industry waited with interest and anticipation.

Supreme Court Judgment

The three issues to be decided by the SC were as follows:

1. Were the LDs payable in respect of work that was delayed but incomplete as at termination?

2. Is the exception to the cap on liability for negligence applicable to negligent breaches of contract or only for losses which are caused by an independent tort of negligence?

3. Did the LDs fall within the cap on damages at all?

The judgment overturned the Court of Appeal judgment on issues 1 and 2 but agreed with it on issue 3.

In distinguishing the Court of Appeal judgment on issue 1, the SC case found that the Glanzstoff judgment (upon which the Court of Appeal relied) was specific to its facts and not good authority. The SC held that LD clauses should be interpreted in their commercial context. In this case, it was held that LDs are payable up to the point of termination.

On issue 2, the SC found, by a majority decision (3:2), that the term “negligence” has an accepted meaning in English law and includes both the independent tort of negligence and also the breach of a contractual provision to exercise skill and care. Therefore, it was held that the LDs were not subject to the cap on liability.

On issue 3, the SC agreed with the Court of Appeal, namely that the LDs did fall within the cap on damages.

Significance

One should remember that general damages would likely still apply where LDs would not; however, a claim for LDs is usually more desirable. The SC judgment holds that in the absence of clear language in a contract, LDs will apply and can be claimed up to termination (but not beyond) even where those works are not completed at that stage.

It is also important to note that this contract had a bespoke LDs clause that you will not find in a standard form construction contract. To that extent, the case will not have parties using standard forms scrabbling around to determine if their position has changed. It remains that each clause will be interpreted on its own meaning.

We hope this will provide some long awaited certainty for construction professionals, and parties and contract makers alike will need to consider carefully how to exclude liquidated damages for incomplete work as at termination, if that is its intention.