In the long-awaited decision of Triple Point Technology, Inc. v PTT Public Company Ltd [2021] UKSC 29, the Supreme Court has overturned the Court of Appeal's "radical re-interpretation of the case law on liquidated damages clauses" and has restored the orthodox interpretation of liquidated damages ("LDs") clauses in the event that a contract is terminated before works are complete – i.e. LDs accrue until the contract is terminated, after which the employer may be entitled to general damages arising from termination.

We have previously written about the Court of Appeal decision here in our Litigation Notes blog and its potential implications for construction and engineering contracts in our Construction Notes blog here.

Background

In 2013, Triple Point Technology ("Triple Point", a US company which specialises in developing and implementing software for commodities trading) entered into a contract (the "Contract") with PTT Public Company Ltd ("PTT", a Thai company engaged in commodities trading). Under the Contract, Triple Point was engaged to replace a software system and to develop it to accommodate new types of trade. The work was split into various phases linked to corresponding payment milestones, with each phase subdivided into nine stages. Triple Point was required to complete the work for each stage by a certain date and was entitled to payment of an agreed portion of the Contract price as it completed the successive stages.

Due to Triple Point's failure to properly plan, resource and manage the Contract, the project progressed slowly. Triple Point completed stages 1 and 2 of Phase 1 with a delay of 149 days and submitted an invoice for US$1,038,000 in respect of these stages, which PTT duly paid. Triple Point then submitted invoices for work it had not completed, on the basis that the payment dates for this work had passed as stated in certain work order forms. PTT refused to pay these invoices as, under the Contract, payment was to be made by milestones (which had only been achieved for stages 1 and 2 of Phase 1). Triple Point then suspended work, following which PTT terminated the Contract.

Triple Point commenced proceedings against PTT to recover the outstanding sums on its invoices. PTT defended Triple Point's claims and counterclaimed LDs for delay and general damages arising from termination of the Contract.

High Court Decision

At first instance (see here for the decision), the High Court dismissed Triple Point's claims and awarded US$4,497,278.40 (approximately £3.51 million at the time of the judgment) to PTT in respect of its counterclaims. Specifically, the judge (Jefford J) held that:

  • the provisions for payment by milestones in the Contract superseded the dates for payment in the work order forms. Hence, Triple Point was not entitled to any further payment;
  • Triple Point was not entitled to suspend work. By doing so, it had committed a repudiatory breach, meaning that PTT was entitled to terminate the Contract and claim damages;
  • subject to a cap of US$1,038,000 pursuant to the second sentence of Article 12.3 of the Contract (the "Cap"), PTT was entitled to recover general damages for (a) the cost of procuring an alternative software system and (b) wasted costs; and
  • PTT was entitled to recover US$3,459,278.40 in LDs for delay, which were excluded from the Cap. The LDs comprised US$154,662 for delay to stages 1 and 2 of Phase 1 and $3,304,616.40 for delay to other parts of the work until the Contract was terminated.

Triple Point appealed this decision, while PTT cross-appealed against the decision that the Cap applied to its general damages.

Court of Appeal Decision

The Court of Appeal dismissed the majority of Triple Point's grounds of appeal, but allowed its appeal in respect of LDs and rejected PTT's cross-appeal (see here for the decision).

The Court of Appeal (comprising Lewison and Floyd LJJ and Sir Rupert Jackson) agreed with the High Court that the clause providing for payment by milestones took precedence over the dates for payment given in the work order forms. Moreover, the court rejected Triple Point's arguments that the Contract contained an implied term allowing it to suspend work if it did not receive payment in accordance with the order forms. Such a term was not necessary to make the Contract commercially workable, given that Triple Point would have had all the usual remedies in the event of non-payment.

The Court of Appeal judgment, however, chiefly focused on Triple Point's ground of appeal that LDs for delay were irrecoverable under the LDs clause (Article 5.3) of the Contract, which was drafted as follows:

If [Triple Point] fails to deliver work within the time specified and the delay has not been introduced by PTT, [Triple Point] shall be liable to pay the penalty at the rate of 0.1% (zero point one percent) of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.” (emphasis added)

The Court of Appeal rejected Triple Point's first argument that Article 5.3 was an unenforceable penalty clause as it imposed a detriment 'out of all proportion to any legitimate interest of the innocent party' under the Makdessi1 test. In this regard, it highlighted that the sums generated by the contractual formula were modest when compared with the potential losses flowing from the late delivery of the software and the impact on PTT's business. Hence, whilst the contractual formula was not perfect, the court concluded that it was a genuine pre-estimate of the losses likely to result from the delay.

Triple Point also submitted that Article 5.3 was not engaged on the basis that it only applied to work which was delayed and subsequently completed and accepted, not work which PTT never accepted.2 The Court of Appeal viewed this as a "formidable argument" and proceeded to examine the authorities. Most of the authorities dealt with scenarios where a second contractor stepped in after the first contractor failed to complete the works. The court identified three different approaches to delay LDs in such cases:

(i) That the LDs clause did not apply at all, following the House of Lords decision in Glanzstoff3 ("Approach 1");

(ii) That the clause applied but only to provide LDs up to the termination of the contract ("Approach 2"); and

(iii) That the clause provided LDs until the replacement contractor achieved completion ("Approach 3").

In relation to the three approaches, the Court of Appeal commented that:

  • there was "much force" in the reasoning adopted in Glanzstoff and that, in some cases, a LDs clause may be worded so similarly to the clause considered in Glanzstoff that the decision is binding;
  • although textbooks have treated Approach 2 as the "orthodox analysis," it may "sometimes be artificial and inconsistent with the parties' agreement" to categorise the employer's losses at the pre-agreed LDs rate up to a certain date (i.e., until termination) and subsequently apply general damages. Notably, the court stated that "[I]f a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision"; and
  • it had considerable doubts over Approach 3, as these cases would allow the employer and replacement contractor to control the period for which LDs will run.

Whilst the Court of Appeal emphasised that whichever approach applies will depend on the wording of the LDs clause in question, it observed that Article 5.3 was very similar to the clause in Glanzstoff, as it specifically focused on delay between the contractual completion date and the date of actual completion (see text in bold above). As a result, it held that Article 5.3 did not apply to work which Triple Point never completed. This meant that PTT was only entitled to recover US$154,662 in LDs for the 149 days of delay to stages 1 and 2 of Phase 1 which had been completed. In relation to the incomplete phases, however, PTT was limited to claiming general damages.

In any event, the Court of Appeal held that the Cap imposed a limit on Triple Point's total liability, including any LDs for delay. As the Cap had been used up by the award of general damages, PTT could not recover any LDs.

Response to the Court of Appeal's judgment

The Court of Appeal's judgment has received significant attention from the construction industry and has been the subject matter of much legal commentary. In particular, the court's finding that LDs provisions may fall away in cases where the contract is terminated before completion has been widely debated, given that many parties have adopted similar LDs provisions in their contracts on the assumption that LDs would be payable until termination (after which they would be replaced by general damages to cover the actual losses arising from termination).

Further, the lack of certainty resulting from the possibility that LDs provisions may be rendered ineffective in the event of early termination has been a point of concern for both contractors and employers. On the one hand, a contractor could be exposed to greater liability in respect of unliquidated damages for delay prior to termination. On the other hand, an employer would face the additional burden of proving its losses in order to claim unliquidated damages. Moreover, as the Supreme Court noted in its judgment (for which see below), "a clause which [has] this effect would give a contractor who badly overruns the time specified for completion an incentive not to complete the work in order to avoid paying liquidated damages for the delay which its breach of contract has caused".

As we previously discussed here, prior to the Court of Appeal's decision, the termination provisions in two of the key standard form contracts – the NEC4 Engineering and Construction Contract and JCT Design and Build Contract 2016 – did not expressly provide for the effect of termination on the LDs provisions (unlike, for example, Clause 15.4(c) of the FIDIC Silver Book)4, although the NEC and JCT have subsequently taken different approaches in light of the Court of Appeal's decision. The NEC, for example, opted to amend the optional LDs clause (Option X7) in the NEC4 form, which originally provided that the contractor is liable to pay damages for each day from the completion date to the earlier of: (i) actual completion; and (ii) the date on which the employer takes over the work, but was otherwise silent as to the effect of termination. After the Court of Appeal's decision, the NEC issued amendments in October 2020, following which Option X7 now expressly provides that delay LDs are payable until termination. In contrast, the JCT chose not to amend Clause 2.29 of the Design and Build Contract 2016, which only provides that the employer may issue a notice requiring the contractor to pay LDs "for the period between the Completion Date and the date of practical completion," and still lacks wording as to the effect of termination.5

Supreme Court Decision

Three issues were before the Supreme Court, namely whether:

(i) LDs were payable under Article 5.3 where Triple Point never completed the work and PTT never accepted it before the Contract was terminated ("Issue 1");

(ii) damages for Triple Point's negligent breach of contract fell within the carve-out for negligence from the Cap, or whether only losses arising from an independent tort were caught by the carve-out ("Issue 2"); and

(iii) LDs were subject to the Cap ("Issue 3").

The Supreme Court unanimously allowed PTT's appeal on Issue 1, although PTT's arguments were dismissed in relation to Issue 3. Opinion was more divided on Issue 2, with the court allowing PTT's appeal by a 3-2 majority.

Issue 1

In the leading judgment, Lady Arden (with whom Lord Leggatt and Lord Burrows agreed) held that Approach 1, which was adopted by the Court of Appeal, was "inconsistent with commercial reality and the accepted function of [LDs]" (i.e. to provide a certain and predictable remedy, which relieves the employer from the potentially onerous task of quantifying its loss). She held that the parties must be taken to know that LDs accrue until termination and therefore disagreed with the Court of Appeal's view that where a construction contract is terminated or abandoned, an employer may find itself in a situation which is not covered by the LDs clause.

She emphasised that a LDs clause which lacks express wording as to the effect of termination should not be interpreted as relieving the contractor from all liability for LDs where the works are not completed (and accepted). Rather, it should be read with respect to the parties' likely intention that "the provision for [LDs] to cease on completion and acceptance of the works" should stand alongside the right to LDs until termination. Following this reasoning, the wording of the LDs clause quoted in bold above was interpreted as meaning "up to the date (if any) PTT accepts such work" (emphasis added).

Lady Arden further noted that the Court of Appeal erred in applying the decision in Glanzstoff. She observed that, in general, a decision on a clause's effect and meaning would not be binding unless that decision concerns wording which is accepted in the market or provisions in a standard form. As neither applied to the relevant clauses in Glanzstoff, she concluded that Glanzstoff concerned the "interpretation of a particular contract" and did not establish a "special rule" on the interpretation of LDs clauses. Thus, she rejected the Court of Appeal's observation that Glanzstoff could be binding in respect of a similarly worded LDs clause.

Lord Leggatt (with whom Lord Burrows agreed) similarly concluded that a LDs clause will apply to any delay which accrues before termination unless it "clearly provides otherwise." In particular, he noted that following Approach 1 would provide a contractor which experiences significant delay in completing the works with an incentive to leave the works incomplete, in order to avoid liability for delay LDs.

Issue 2

The High Court – with which the Court of Appeal agreed – had held that the carve-out for negligence from the Cap applied to independent torts or deliberate wrongdoing, but not to Triple Point's contractual duty to exercise skill and care. Central to the High Court's reasoning in this regard (with which the Court of Appeal agreed) was that, as Triple Point's "principal obligation" under the Contract was exercising reasonable skill and care, the parties could not have intended to exclude it from the Cap.

Lady Arden rejected this reasoning and held that negligent breach of contract was covered by the carve-out. First, she emphasised that, in English law, it is accepted that 'negligence' covers both the tort of failing to exercise due care and breach of a contractual duty of skill and care. Hence, the lower courts' decision relied on a "strained meaning" of the word. Moreover, she noted that the Contract contained a number of absolute obligations in addition to the provision of services, meaning that the exclusion of damages for negligent breach of contract would not "emasculate" the Cap (i.e. deprive it of its practical effect, as suggested by the Court of Appeal). She also observed that no "realistic example" of an independent tort which may apply in the circumstances had been proffered and that, in any event, the Cap only limited Triple Point's damages under the Contract. Consequently, the carve-out from the Cap could not be interpreted as applying (only) to torts which were independent of the Contract.

While Lord Leggatt agreed with Lady Arden's conclusions, he further added that:

  • the interpretation that the term 'negligence' excluded the contractual duty of skill and care gave the word "a convoluted meaning which [it could not] reasonably bear"; and
  • clear words are required for the court to rule that a contract has excluded "valuable rights or remedies" which one of the parties would otherwise have had at common law or under statute (in this case, PTT's right to claim for Triple Point's negligent breach of contract).

As mentioned above, however, Issue 2 proved divisive, with Lord Sales (with whom Lord Hodge agreed) providing a dissenting judgment. He agreed with the lower courts and held that exercising reasonable care and skill was Triple Point's core obligation under Article 12.1 of the Contract. The Cap (and carve-out) should be read in that context and, accordingly, he found that the reference to 'negligence' in the carve-out was only to freestanding liability in tort. It is noted, however, that Lord Sales emphasised at the outset that Issue 2 involved "a one-off provision and the question of law to which it gives rise has no wider significance than this case."

Issue 3

Lady Arden approved the Court of Appeal's reasoning and confirmed that the Cap extended to LDs under Article 5.3 of the Contract. Therefore, although PTT was entitled to recover LDs for Triple Point's delay in respect of incomplete work up to the date when the Contract was terminated, the amount of such LDs was subject to the Cap.

Concluding Comments

Although the Supreme Court's judgment in Triple Point contains useful clarification as to the interpretation of the term 'negligence' in the context of a limitation clause, its decision on the availability of LDs in the event of termination will be a particularly welcome one for the construction industry and parties whose existing contracts contain similar LDs provisions.

Notably, the Supreme Court was unequivocal in stating that the Court of Appeal "fell into error" on the LDs issue and its decision was inconsistent with the "commercial reality and the accepted function of liquidated damages". Whilst the Supreme Court did not make explicit reference to this point, it may well have had in mind common practices, for example in the construction industry, whereby LDs are deducted from interim payments during the course of the contract, and the practical difficulties that invariably arise from the right to levy LDs being extinguished upon termination (as the Court of Appeal held) and the consequent need to 'unwind' past deductions of LDs.

The Supreme Court's decision, which reinstates the 'orthodox' position on LDs, will no doubt come as a relief to the construction industry. That said, given the significant disparity between the Court of Appeal's reasoning and the Supreme Court's judgment, parties entering into new contracts may still wish to provide expressly for the effect of termination on LDs, and/or to consider clarifying any LDs provisions that are similarly worded to those in Triple Point in line with the Supreme Court's interpretation (e.g. by clarifying that LDs should apply "up to the date (if any) [the employer] accepts such work"). This is likely to assist in removing any doubt as to the terms of the parties' agreement in relation to a key contractual remedy, and in avoiding similar disputes arising in the future.