Liquidated damages and limitation of liability provisions following termination – the supreme court provides some clarity

The recent judgment of the Supreme Court in Triple Point Technology Inc v PTT Public Company Ltd provides greater clarity concerning the rights of an employer to claim liquidated damages from its contractor, where the contractor has fallen into culpable delay in the completion of its works, but has not actually finished them, before the employer decides to terminate the contract. It also addresses the meaning of provisions which limit a contractor’s liability.

The Key Contract Terms

By the Contract between the parties, PTT appointed Triple Point to design, implement, support, and maintain a new software system for its commodities trading business.

The dispute focussed on two key provisions in the Contract. By Article 5(3), if Triple Point failed to complete its works by the time for their completion, it would become liable to pay liquidated damages at the rate of 0.1% of the value of the undelivered work per day. Triple Point’s liability for such liquidated damages was to continue to accrue up to the date on which PTT accepted Triple Point’s works.

Article 12.3 contained a limitation of liability clause which limited Triple Point’s liability to PTT for any breach of the Contract. It limited Triple Point’s liability to the total amount of the fees which it received from PTT under the Contract for the carrying out of its services. However, the limitations in Article 12.3 did not apply to liability arising from Triple Point’s liability resulting from “fraud, negligence, gross negligence or wilful misconduct.” “Negligence” was therefore one of four exceptions to the liability cap.

The Background Facts and Key Issues

Triple Point fell into significant delay with the performance of its services, and the parties became embroiled in arguments about Triple Point’s entitlements to fees. Due to a perceived lack of payment for its services, Triple Point stopped work, and PTT then contended that Triple Point was guilty of a repudiatory breach of the Contract, and that it was entitled to terminate the Contract. PTT duly proceeded to terminate the Contract.

Post-termination, Triple Point demanded payment of the fees that it alleged were due to it, but PTT refused to pay them. Triple Point then commenced an action in the Technology and Construction Court (TCC), claiming payment of its invoices, and PTT counter-claimed for damages, including liquidated damages for delay and damages flowing from the termination.

The key issues before the TCC included whether Triple Point was liable for culpable delay in the execution of its services, and for repudiatory breach of the Contract, and if so, whether its liability to PTT was effectively limited or capped.

At first instance, the TCC held that the delays to Triple Point’s services were caused by Triple Point’s contractual negligence and that Triple Point had committed repudiatory breaches of the Contract, which entitled PTT to terminate the Contract. PTT could claim liquidated damages for delay and damages arising from the termination of the Contract. For reasons explained below, the TCC decided that the damages which could be claimed by PTT would be capped by the limitation of liability provisions in Article 12.3.

In deciding whether or not PTT’s claims for damages would be capped, the TCC had to consider the true meaning of the word “negligence” in the exceptions to the liability cap in Article 12.3. The TCC found that Triple Point’s delays to its services were caused by its breaches of its contractual duties of care. The TCC took the view that, as most of the services which Triple Point had to undertake under the Contract had to be performed contractually with reasonable skill and care, the parties would not have intended the liability cap to be displaced in any instance where Triple Point failed to exercise such skill and care. Therefore, the TCC decided that the word “negligence” in the exceptions to the liability cap only applied to breaches of tortious duties. The TCC considered that it had to reach such a finding, as it would make no sense to place a cap on Triple Point’s liability for contractual negligence and then to remove it immediately, with the “negligence” exception to the cap.

The Court of Appeal Decision

Triple Point appealed the TCC’s decision to the Court of Appeal and PTT cross-appealed.

The Court of Appeal agreed that Triple Point was in culpable delay with its services and that it had committed a repudiatory breach of the Contract, and that PTT was entitled to terminate the Contract. However, surprisingly, the Court of Appeal rejected PTT’s claim for liquidated damages. It also held that PTT’s counterclaims for termination losses would be capped by the limitation of liability provisions in the Contract.

Rupert Jackson LJ gave the leading judgment in the Court of Appeal. He reviewed the case law relating to liquidated damages provisions and found that there were three ways in which the termination of a contract could affect them. Firstly, it was possible that following the termination of the contract, they would no longer apply. Secondly, it was possible that they would only operate up to the point of termination. Thirdly, it was possible that the liquidated damages provisions would continue to apply up until the time when the employer’s replacement contractor had completed the works following termination.

In analysing the first of these three possible scenarios, Rupert Jackson LJ noted the decision of House of Lords in British Glanzstoff Manufacturing Co Limited v General Accident Fire & Life Assurance Corp Limited [1913]. In that case a construction contract was terminated before a contractor had fallen into culpable delay. However, their Lordships commented that, on its wording, the liquidated damages clause in the contract in question would only apply where the contractor had actually completed its works, and had been late in doing so. It would not operate where the contract had been terminated and the contractor had been “ousted,” and a replacement contractor appointed, prior to the completion of its works. It seems that Rupert Jackson LJ relied upon Glanzstoff as either establishing a principle or laying down a precedent that where a liquidated damages clause only apparently operates when a contractor has actually completed its works late, then liquidated damages could not be claimed where the contract had been terminated, before the contractor had actually achieved such completion.

The Court of Appeal upheld the TCC’s reasoning regarding the liability cap. It too considered that it would be nonsensical for the parties to impose a cap on Triple Point’s liability for contractual negligence, only for them to remove that cap immediately, with the “negligence” exception to it.

The Supreme Court Decision

Lady Arden gave the leading judgment of the Supreme Court. She overruled the Court of Appeal’s decision regarding the liquidated damages clause, deciding that even if Triple Point did not achieve actual completion of its services, the clause would still operate up to the point of termination. She called the Court of Appeal’s decision uncommercial and believed that it represented “a radical reinterpretation of the case law” regarding liquidated damages clauses. In short, subject to the limitation of liability provisions, she found that the parties had intended that Triple Point would become liable to pay liquidated damages as soon as its services had fallen into culpable delay, and that PTT’s accrued rights to such liquidated damages did not “disappear” when it decided to terminate the Contract.

The Supreme Court also overturned the Court of Appeal’s ruling on the meaning of the word “negligence” in the exceptions to the liability cap. She held that as the liabilities being limited under Article 12.3 were those which arose “under the Contract”, the “negligence” exception had to apply to contractual negligence too. She also ruled that word “negligence” should be given its natural and ordinary meaning, and that it clearly included breach of a contractual duty of care. She noted that Triple Point had core duties which it had to perform with strict or absolute liability, where the liability cap would operate. Accordingly, her wide interpretation of the ambit of the “negligence” exception to the cap would not “emasculate” the cap. Consequently, Triple Point had no limit on its liability where it was in breach of its contractual duties of care.

Key Points arising from the Judgement

Two key points emerge from the Supreme Court’s decision in Triple Point. Firstly, liquidated damages provisions will usually operate, where a contractor’s works have fallen into culpable delay, and even where the employer terminates the contract, before the contractor has achieved completion of its works. The decision in Glanzstoff should be viewed as one which turned on its own facts. Secondly, terms which contain limitation of liability provisions and exceptions to them should be given their natural and ordinary meaning, particularly in order to establish how far those exceptions reach.