EWCA Civ 230
This was an appeal by the supplier of a software system against a TCC judgment dismissing its claim and ordering it to pay substantial damages on the counterclaim. The main issue of principle which arose was how to apply a clause imposing liquidated damages for delay in circumstances where the contractor or supplier never achieves completion.
In 2012, PTT decided to buy a new Commodity Trading & Risk Management (CTRM) system. There were two phases: Phase 1 would replace the existing system and Phase 2 would involve the development of the system to accommodate new types of trade. Triple Point completed the first two stages of Phase 1, 149 days late. Triple Point then submitted an invoice in respect of this work, which was paid. However, Triple Point went on, relying upon the calendar dates for payment stated in the order forms, and asked PTT to make further payment in respect of other work which was not yet completed. PTT refused saying that payment would be made by milestones. Triple Point had not achieved any of those milestones, apart from the completion of Phase 1. Triple Point suspended work and left the site. PTT terminated the contract.
Mrs Justice Jefford dismissed Triple Point’s claim, awarding US$4.5million to PTT on the counterclaim. The Judge said that there was an inconsistency between Article 18 of the CTRM contract (which required payment by milestones) and the payment dates stated in the order forms. Article 18 prevailed which meant that Triple Point was not entitled to receive any further payments under the contract. Further, the delay and ultimate failure of the contract was caused by Triple Point’s negligence. They were not entitled to suspend. PTT was entitled to recover (i) the costs of procuring an alternative system; (ii) wasted costs, but subject to a cap of US$1,038,000 pursuant to Article 12.3; and (iii) liquidated damages for delay pursuant to Article 5.3, totalling US$3,459,278.40, which were not subject to the cap.
Article 5.3 of the CTRM contract required Triple Point to pay damages for delay at the rate of 0.1% of undelivered work per day. The Judge held that, although Article 5.3 used the word “penalty”, it was not in fact a penalty clause. The CA agreed. The sums generated by the contractual formula were modest, when compared with the financial consequences of delay in installing the software.
Triple Point said that Article 5.3 was not engaged. It only applied when work was delayed, but subsequently completed and then accepted; it did not apply in respect of work which the employer never accepted. This led to Sir Rupert Jackson in the CA reviewing the general principles concerning the operation of liquidated damages clauses in termination or abandonment cases. He noted that where the contractor fails to complete and a second contractor steps in, three different approaches had emerged:
(i) The clause does not apply.
(ii) The clause only applies up to termination of the first contract.
(iii) The clause continues to apply until the second contractor achieves completion.
He noted that whilst the textbooks tend to treat category (ii) as the orthodox analysis, he considered that this approach was not “free from difficulty”. Ultimately, the question whether the liquidated damages clause ceases to apply or continues to apply up to termination, or even conceivably beyond that date, must depend upon the wording of the clause itself. There was no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.
Sir Rupert Jackson was attracted by the 1912 case of British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp Ltd. He thought that the clause here, like the clause in Glanzstoff, was focused specifically on delay between the contractual completion date and the date when Triple Point actually achieved completion. In the Judge’s view Article 5.3 here had no application in a situation where the contractor never hands over completed work to the employer.
The consequence of this analysis was that PTT was entitled to recover liquidated damages of US$154,662 in respect of Triple Point’s delay of 149 days in completing stages 1 and 2 of Phase 1. However, PTT was not entitled to recover liquidated damages for any of the other delays. This was because Triple Point did not complete any other sections of the work. The fact that PTT could not recover liquidated damages in respect of any other sections of the work did not mean that it was left without a remedy for non-completion. Such damages were at large, rather than fixed in advance, and PTT was entitled to recover damages for breach of other articles in the contract, assessed on ordinary principles.
This left the question as to whether PTT’s entitlement to damages was subject to the Article 12.3 cap. The Judge said this:
(i) Article 5.3 provides a formula for quantifying damages for delay.
(ii) Sentence 3 of Article 12.3 deals with breaches of contract not involving delay. Hence it necessarily includes the words “Except for the specific remedies expressly identified as such in this contract”. It was common ground that this phrase referred to liquidated damages under Article 5.3. Sentence 3 of Article 12.3 imposed a cap on the recoverable damages for each individual breach of contract.
(iii) Sentence 2 of Article 12.3 therefore imposed an overall cap on the contractor’s total liability. That cap on total liability meant what it says. It encompassed damages for defects, damages for delay and damages for any other breaches.