Triple Point Technology Inc -v- PTT Public Co Ltd  EWCA Civ 230
Many sales contracts have liquidated damages clauses specifically designed to compensate one party for another’s delay in performance of its contractual obligations. These are distinct from clauses which liquidate damages upon termination of a contract.
It has generally been considered that liquidated damages clauses for delay are effective up to termination of the contract but thereafter only general damages are available. A recent Court of Appeal decision has given further guidance on this issue.
An American software company, Triple Point Technology (TPT), contracted with a Thai commodities trader, PTT Public Co (PTT) to design and provide a trading software platform.
These were the key terms in the contract:
- TPT was to perform in accordance with a project plan
- Phase I of the plan was to be completed within 460 days
- In the event of delay TPT would ‘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’ (Art. 5);
- TPT was to perform the contract with all reasonable skill, care, diligence and efficiency (Art. 12(1))
- TPT was liable for any damage PTT suffered as a consequence of its breach of contract (Art. 12(3))
- TPT’s ‘total liability’ was limited to the contract price received by TPT (USD1.038 million), unless the damage was caused by fraud, negligence, gross negligence or wilful misconduct on the part of TPT (Art. 12(3))
- Payments by PTT were to be in accordance with milestones specified within the contract (Art. 18)
TPT completed Phase I of the project 149 days late. The work for Phase I was invoiced and paid for.
TPT sent further invoices in accordance with calendar dates set out in the project plan but PTT refused to pay them because the delivery milestones had not been met and thus payment had not fallen due. TPT refused to proceed with the project and PTT terminated, holding TPT in repudiatory breach.
TPT sued for payment of the unpaid invoices amounting to almost USD5 million. PTT counterclaimed for liquidated damages for delay under Article 5 and general damages as a consequence of TPT’s breach (largely for the cost of obtaining alternative software).
Mrs Justice Jefford in the High Court decided in August 2017 that payment was conditional upon meeting the contractual milestones and so no payments were due to TPT.
The judge found that delays in performance were caused by TPT’s negligent management of the project, entitling PTT to terminate. She awarded (i) general damages for the costs of procuring an alternative system exceeding USD11 million but then capped those damages at the contractual limit of liability of USD1.038 million and (ii) liquidated damages for delays in delivery of the software for the entire period of delay up to completion of the project by the second software provider (i.e. post termination) of USD3.46 million which were not subject to the cap in Article 12.
TPT appealed and PTT cross-appealed against the decision that its general damages claim was subject to a cap. Amongst TPT’s other arguments, it asserted that even if liquidated damages were due, they could only be awarded in respect of delayed work provided by TPT and accepted by PTT - the clause could not apply after termination of the contract.
On 5 March 2019 the Court of Appeal handed down its judgment. The Court rejected TPT’s arguments regarding PTT’s liability to pay its fees.
On the quantum of PTT’s counterclaim, the Court did however allow the appeal.
First, the Court found that the damages calculated by reference to the liquidated damages clause were proportionate to the legitimate interest of the innocent party and could not be construed as a penalty. You may recall from previous bulletins of ours that this is now the test for the validity of a liquidated damages clause (such a clause no longer needs to be a reasonable pre-estimate of the likely loss a party will suffer).
Indeed, the Court found the liquidated damages were modest in comparison with PTT’s actual financial consequences of the delay (costing them more than USD18 million).
Liquidated damages post termination
Secondly, the Court considered, by reference to the relevant case law, the scope in time of a liquidated damages clause where a substitute supplier steps in.
The Court thought there were three options:
- the clause did not apply at all
- the clause applied only until termination of the first contract; or
- the clause applied until the second supplier completed the project
Lord Justice Jackson said, quite logically, that such a determination depends upon the specific wording of the liquidated damages clause.
In this case, he considered the clause did not apply where the delayed works were not performed by TPT and approved by PTT so the liquidated damages could not extend beyond TPT’s phase I performance delays as no further services were delivered by TPT thereafter.
Limit on liability
Thirdly, the limitation clause referred to ‘total liability’ thus encompassing all types of damages, not just those referred to in Article 12 itself, so including liquidated damages for delay.
To break the contractual limit of liability PTT had to identify a freestanding tort of negligence. The Court of Appeal did not accept PTT’s argument that ‘negligence’ in the context of the limitation clause meant a breach of a contractual duty of care. There needed to be something more, such as a contractor causing personal injury through carelessness of work.
The Court of Appeal therefore limited PTT’s total damages to USD1.038 million.
How far a liquidated damages clause for delay will apply post termination of a contract will depend on the clause’s precise wording. That will not come as a surprise to many of you! But it does mean that the distinction between liquidated damages for delay pre termination and general damages post termination might not be the standard rule going forward if the clause is appropriately worded, in spite of misgivings by Jackson LJ in this case. So in the event of delayed performance, any liquidated damages clause will have to be carefully examined to see if it could apply in the event of substituted performance.
When drafting a contract, you may wish to ensure the precise terms of a liquidated damages clause enable recovery even where, in the event of termination for breach of contract, the counterparty is no longer performing the contract. It is not uncommon for an innocent party to cancel a contract and seek performance elsewhere in the event of extensive delay where a deadline for performance is a condition of the contract. Attention should also be paid to limitation clauses to ensure that they do not nullify the benefits of a liquidated damages clause as proved to be the case in this dispute.
This case serves to highlight the risks and costs of remedying performance where something goes wrong and a tribunal or court holds the parties to the damages and limitation of liability clauses contained in the contract. Great care is required when negotiating these types of clauses.