UK Supreme Court re-affirms that liquidated damages provisions survive termination of a contract

At A Glance

This past month, the Supreme Court overturned the Court of Appeal’s decision in Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, and most notably, found that liability for liquidated damages survives termination of the contract and extends to work that was not completed as at the date of termination.

Background

Triple Point Technology Inc. (“Triple Point”) contracted with PTT Public Company Ltd (“PTT”) to provide both software and software instalment services (the “Contract”). The project had two phases, each phase containing various stages, and payment was to be made upon completion of specific targets at times specified within the Contract.  

Triple Point completed certain of the works under Phase One of the Contract but was 149 days delayed. It completed none of the works under Phase Two of the Contract. PTT paid Triple Point for the completed work, but thereafter terminated the agreement.

Triple Point commenced proceedings against PTT to recover outstanding sums on unpaid invoices. PTT counterclaimed for damages for breach of contract and liquidated damages for delay under the contractual provisions. Article 12.3 of the Contract set out a cap on recoverable damages, with a carve out for “negligence”.

The relevant provisions of the Contract are set out below:

Article 5.3 [Liquidated Damages Clause]

• “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 …” (Emphasis added).

Article 12.3 [Damages Cap Clause]

• “[1] [Triple Point] shall be liable to [PTT] for any damage suffered by [PTT] as a consequence of [Triple Point’s] breach of contract…. [2] The total liability of [Triple Point] to [PTT] under the Contract shall be limited to the Contract Price received by [Triple Point] with respect to the services or deliverables involved under this Contract. [3] Except for the specific remedies expressly identified as such in this Contract, [PTT’s] exclusive remedy for any claim arising out of this Contract will be for [Triple Point], upon receipt of written notice, to use best endeavour to cure the breach at its expense, or failing that, to return the fees paid to [Triple Point] for the Services or Deliverables related to the breach. [4] This limitation of liability shall not apply to [Triple Point’s] liability resulting from fraud, negligence, gross negligence or wilful misconduct of [Triple Point] or any of its officers, employees or agents.” (Numbers added for reference).

First Instance and Court of Appeal Judgments

At trial, Jefford J dismissed Triple Point's claims and found that the delay was caused by breach of its contractual duty to exercise skill and care. Jefford J awarded PTT: liquidated damages under Article 5.3 (uncapped); and costs for procuring another system and wasted costs (both capped under Article 12.3).

The Court of Appeal set aside the award for liquidated damages, finding that PTT was only entitled to liquidated damages for work which had been completed prior to termination of the Contract. It also found that all damages were subject to the Article 12.3 cap on the grounds that exclusion of the cap in relation to “negligence” applied only to the freestanding tort of negligence, and did not apply to contractual obligations to exercise skill and care.

The Supreme Court Judgment 

PTT’s appeal raised three issues:

1) Whether liquidated damages were payable for work which had not been completed before the Contract was terminated;

2) Whether “negligence” under the Contract included a breach of the contractual duty of skill and care; and

3) Whether liquidated damages were subject to a cap in the Contract.

In allowing the appeal on Issue 1, Lady Arden held that the Court of Appeal erred in finding that liquidated damages would only accrue in respect of work completed before termination of the Contract. In her reasons, she stated that this approach was inconsistent with commercial practice and the intended purpose of liquidated damages clause (paragraph 35 of the judgment).  Instead, the Supreme Court found that liquidated damages were payable for work that was never completed by Triple Point. Liquidated damages cease to accrue on termination, but rights accrued as at the date of termination survive.

The Supreme Court allowed the appeal on Issue 2 finding that a contractual breach of the duty of skill and care constituted negligence under Article 12.3. The dissenting judgments of Lords Sales and Hodge emphasise the unpredictability of proceedings resting on contractual interpretation.  

PTT’s appeal on Issue 3 was unanimously rejected, the Supreme Court finding that liquidated damages counted towards the maximum damages recoverable under the Article 12.3 cap.

Looking Forward

This ruling re-affirms the orthodox interpretation of liquidated damages clauses and their survival beyond termination of the contract. The non-defaulting party continues to accrue liquidated damages in respect of a delay in contractual performance whilst the defaulting party has opportunity to complete its contractual obligation. Dependent on the terms of a contract, the non-defaulting party may defer termination until the delay becomes uncommercial.

The commercial objective of a liquidated damages clause is, generally, to introduce certainty and efficiency in quantifying damages. The Supreme Court judgment respects this commercial objective. For the right to liquidated damages for delay by the contractor to be conditional upon the contractor completing the work would introduce considerable uncertainty at the time of contracting about what sum would be recoverable in the event of delay (paragraph 80 of the judgment).

Failure to overturn the Court of Appeal judgment may also have encouraged rapid termination of contracts without the opportunity for them to be completed later than scheduled. It may also have undermined the principle that accrued contractual rights should not be extinguished on termination without clear words to that effect in a contract.  

While issues surrounding liquidated damages and delay might typically arise in construction disputes, the context of this case (software development) demonstrates that the principles are of relevance to commercial parties and legal advisers more generally.   

Notwithstanding the significance of this judgment, the interpretation of a contract will turn on the facts of each case. As Lady Arden emphasised, “in general the decision of one case as to the meaning and effect of a clause cannot be binding as to the meaning and effect of even a similar clause in another case.”