What happens to liquidated damages when a contract is terminated? Is the employer entitled to payment up until the point of termination? Can damages go beyond termination until the point at which the project is completed by someone else? If so, what happens if the project is never completed? These are all questions which one would normally associate with construction contracts. However, it was in the context of a software development project that they came to be considered in the Court of Appeal in Triple Point Technology v PTT [2019] EWCA Civ 230.
The Development Project
Triple Point is a supplier of software systems. PTT is a commodities trader based in Thailand. In 2012, PTT decided to acquire a new software system to deal with trading, risk management and vessel chartering (a “CTRM” system) and placed an order with Triple Point.
The project was subject to a written contract (“the CTRM Contract”), which provided for payment against certain milestones. The work started in February 2013. But it did not proceed to plan. Stages 1 and 2 of the project were completed, albeit 149 days late, and PTT made the payment associated with those stages. Following that, however, there was further delay and Triple Point eventually sought payment in respect of certain software licence fees. PTT said that these sums were not due because they too were governed by the milestone programme and because Triple Point had completed no further stages. In May 2014, Triple Point said that it was not prepared to continue working without receiving further payment. It suspended work and left the site. PTT maintained that Triple Point had wrongfully suspended work, and sought to terminate the contract under the termination provisions of the CTRM Contract. Triple Point then sued in respect of its invoices. PTT counterclaimed damages, which included liquidated damages for delay.
The First Instance Decision: Liquidated Damages Awarded
At first instance, Jefford J dismissed Triple Point’s claim and awarded nearly US$4.5 million to PTT on the counterclaim. She held that the software licence fees were governed by the milestone programme set out in the CTRM Contract. The further milestones not having been reached, she held that Triple Point was entitled to no further payment. She also found that Triple Point had failed properly to perform its duties under the contract and that the delay was due to breach of its contractual duty to exercise skill and care.
Jefford J found that Triple Point was not entitled to suspend work in May 2014 and was accordingly in repudiatory breach of contract. PTT was entitled to terminate under the contract and/or to accept the repudiatory breach. It was entitled to recover the costs of procuring an alternative system and wasted costs. Those damages were subject to a cap of US$1,038,000 million under Article 12.3 of the CTRM Contract. But PTT was also entitled to recover liquidated damages for delay under Article 5.3 of the contract in the sum of US$3,459,278, which damages were not subject to the Article 12.3 cap.
Triple Point’s Appeal
Triple Point appealed challenging, amongst other things, the conclusion that liquidated damages for delay were recoverable, and that those damages were not subject to the cap. PTT cross-appealed contending that the cap ought not to have been applied to any of the award.
Thus, the points which are of general interest in this case focused on two provisions in the CTRM Contract, Article 5.3, which was the liquidated damages clause, and Article 12.3, which gave rise to the cap.
Liquidated Damages in the context of Termination
Article 5.3 provided:
“If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by PTT, CONTRACTOR 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.”
At first instance, Jefford J awarded liquidated damages amounting to US$154,662 in respect of the delay to stages 1 and 2, and US$3,304,616 in respect of all other elements of the work up until the date of termination.
In the Court of Appeal, Sir Rupert Jackson noted that there were a number of potentially conflicting strands of authority dealing with liquidated damages clauses in the context of projects that had not been completed by the contractor. In the House of Lords in British Glanzstoff Manufacturing Co Ltd v. General Accident, Fire and Life Assurance Co Ltd 1913 SC (HL) 1, it was held that a liquidated damages clause did not apply where the contractor had failed to complete and the employer had engaged another contractor to do so. On its true construction, the clause only applied where the contractors had themselves completed the works, albeit late.
However, while initially it was followed, that decision appeared to have fallen into some obscurity, and in a series of cases from 2006 onwards, both here and abroad, it was either not cited at all, or not cited properly. In some of those cases, the court awarded liquidated damages up to the point of termination but not thereafter. In others, the court awarded liquidated damages beyond termination until the project was completed by another contractor appointed by the employer.
The Court was therefore faced with three possible solutions in a case in which the contractor fails to complete and a second contractor steps in:
- that the liquidated damages clause does not apply at all;
- that the clause only applies up until the point of termination;
- that it applies until the second contractor achieves completion.
Sir Rupert Jackson (with whom Floyd and Lewison LJJ agreed) said that, while he had doubts about that last category, much would depend upon the wording of the liquidated damages clause in question. He considered that there was force in the House of Lords reasoning in Glanzstoff. Although awarding damages up until termination was generally treated as the orthodox analysis in the textbooks, that approach was not without difficulty. Upon abandonment or termination, the employer is in new territory and it may be artificial to treat the liquidated damages clause as applicable in the period prior to termination, while applying the ordinary rules for assessment of damage thereafter. In the present case, like the relevant clause in Glanzstoff, Article 5.3 was focused specifically on delay between the contractual completion date and the date when Triple Point actually achieved completion. It had no application to the situation in which the contractor never in fact handed over completed work to the employer. See [108-112].
Thus, PTT was in principle entitled to the US$154,662 in respect of stages 1 and 2. But the judge had been wrong to award liquidated damages for the period beyond termination. PTT would, of course, have been entitled to damages for non-completion assessed on ordinary principles. Such damages would be at large, rather than fixed in advance. See [113].
The Limitation Clause
The Court then proceeded to consider the effect of the cap. This focused on the somewhat obscurely worded provision in Article 12.3 of the CTRM Contract, which said:
“[1] CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’S breach of contract…. [2] The total liability of CONTRACTOR to PTT under the Contract shall be limited to the Contract Price received by CONTRACTOR 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 CONTRACTOR, 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 CONTRACTOR for the Services or Deliverables related to the breach. [4] This limitation of liability shall not apply to CONTRACTOR’s liability resulting from fraud, negligence, gross negligence or wilful misconduct of CONTRACTOR or any of its officers, employees or agents.” (numbers supplied for reference)
The first question was whether the fourth sentence meant that no limitation of liability applied, given that the judge had found that Triple Point was in breach of its duty to exercise skill and care. She had held that the word “negligence” was to be narrowly construed and did not include breach of a contractual duty of skill and care. The Court of Appeal agreed. “Negligence” in this context meant the freestanding tort of negligence – for example, if the contractor carelessly left electrical wiring exposed which caused personal injury. That approach fitted with the language used and made commercial sense. PTT’s argument, that “negligence” encompassed breach of a contractual duty of care, would deprive the Article 12.3 cap of any practical effect. See [119-120].
The second question was whether the limitation of liability applied to liquidated damages. This depended upon the detailed provisions of the clause, which it was accepted had not been well drafted. In the result, the Court held – overturning the judge’s conclusion – that the second sentence created a standalone cap that applied to the contractor’s total liability. That included the liability for liquidated damages. Therefore, even though PTT was in principle entitled to liquidated damages for delay in stages 1 and 2, the damages already awarded exceeded the cap, and the appeal was allowed in respect of this sum too. See [126-128].
Comment: Liquidated Damages, Termination and Limitation of Liability
The Court of Appeal’s decision provides welcome clarity in an area that has hitherto been subject to conflicting approaches. It will plainly be of particular importance in construction cases, but will also be relevant to other types of project in which performance is due to take place over time and to a schedule.
It is primarily a question of construction of the relevant clause. However, one detects in the judgment something of a steer in the direction of the solution in Glanzstoff, namely that the liquidated damages clause does not apply at all to cases where the contractor does not complete. The third option – whereby liquidated damages continues beyond termination – seems to give rise to significant problems, delay by the second contractor being one; another being where it would end if the work was never in fact completed by anyone. It seems likely that one would need clear words to achieve this approach.
Some will no doubt argue that the answer in Triple Point does not give sufficient weight to the principle that accrued contractual rights should be unaffected by a termination. However, there is nothing conceptually wrong with an interpretation that makes liquidated damages contingent upon ultimate completion by the contractor of the relevant project. And certainly Article 5.3 seemed in terms to be premised on completion by the contractor being reached. It remains to be seen whether difficulties in relation to accrued rights will in practice occur.
The decision on Article 12.3 was, of course, heavily dependent upon the contractual words that were used. However, the Court’s approach demonstrates yet again the progress that has been made away from the instinctive hostility that there used to be to clauses exempting or limiting liability (for further recent examples see Taberna Europe CDO II v. Selskabet AFI [2016] EWCA Civ 1262 and Persimmon Homes v. Ove Arup [2017] EWCA Civ 373). Now, more than ever, it would seem that parties to commercial contracts of this sort can be confident that the court will give effect to the risk allocation provisions that they have put in place.
© Neil Hext QC of 4 New Square, March 2019. The author assumes no responsibility to any party in respect of this article. Specific legal advice tailored to specific problems should always be obtained.
