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Liquidated Damages - Supreme Court interpretation restores clarity

Posted on 3 August 2021

The Supreme Court has given an important decision clarifying the effect of termination of a contract on the recovery of liquidated damages. By overturning the Court of Appeal's decision, which had departed from the previous 'orthodox position', much needed clarity has been provided not only for those who advise on technology-related agreements but also in relation to other agreements that commonly feature service level and service credit regimes, such as outsourcing, complex services, and construction agreements. The decision is also relevant to those that advise on and negotiate liability clauses and offers further insight into how the courts will interpret supplementary clauses that increasingly sit alongside, and seek to further carve out a party's liability under, a clause that generally caps a party's liability.

The main issue before the Supreme Court in Triple Point Technology Inc, ("TPT") v PTT Public Company Ltd ("PTC") though was whether a customer under a software supply and services agreement was entitled to receive liquidated damages for work which the supplier had never completed, and which was never therefore accepted by the customer, on an on-going basis until a replacement supplier had completed the work; or whether such a right to receive liquidated damages came to an end on termination of the agreement (or didn't apply at all, as the Court of Appeal had found).

Adopting a familiar form, the clause in question provided for the liquidated damages to be paid for each day of delay by the supplier "from the due date for delivery up to the date [the customer] accepts such work". Disagreeing with the Court of Appeal, the Supreme Court determined that liquidated damages would accrue until the contract was terminated, at which point the customer would also be entitled to general damages in the ordinary way to reflect the losses incurred at that point.

The effect of this was that liquidated damages were found to be payable for a period of 3,220 days up until termination rather than 149 days (to reflect the delays in some of the supplier's work that had eventually been delivered). In short, this amounted to the customer being entitled to liquidated damages of US$3.4m rather than the sum of US$154,662 resulting from the Court of Appeal's decision.

In addition, suppliers will be concerned to see that the Supreme Court found that a general cap on liability may be relatively easily set aside where there is a further clause that carves out "negligence" from that general cap – particularly where it can be found that the supplier did not exercise reasonable skill and care, albeit, in this particular case, the general cap did still apply to the liquidated damages. 

The Supreme Court's decision restores the predictability and accepted commercial function of a liquidated damages clause, which had been thrown into turmoil by the Court of Appeal's earlier interpretation. It also arguably provides further evidence of the present Supreme Court's desire to take a more "commercial" approach to these matters – recognising the commercial realities of the relevant situation in hand.

Background

Triple Point Technology Inc (TPT) entered into a contract with PTT Public Company Ltd (PPC) to provide PPC with customised software and associated services. TPT was to be remunerated by reference to 'milestones' within the contract when specified work had been completed, with liquidated damages available for delay. TPT successfully completed stages 1 and 2 of Phase 1 of the project, albeit 149 days late, and submitted an invoice for the work, which PPC paid. TPT then asked PPC to pay further invoices for uncompleted work. PPC refused to make any further payments, causing TPT to suspend work. PPC argued that TPT had wrongfully suspended work and terminated the contract. TPT commenced proceedings in order to recover payment. PPC denied that any further payments were due to TPT and counter-claimed for liquidated damages for delay, in addition to damages due upon termination of the contract.

Liquidated damages are pre-determined damages negotiated between parties and inserted into a contract to reflect the actual loss likely to occur upon a breach of contract, and are payable to the other party in the event of that breach. The party who has suffered loss therefore has the benefit of not having to quantify its loss, and the courts do not need to determine the appropriate amount, as the situation has already been accounted for. In essence, parties typically agree a liquidated damages regime to provide a remedy that is predictable and certain for a particular event such as a delay in completion.

The Technology and Construction Court had dismissed TPT's claim for payment and ordered it to pay substantial damages on PPC's counterclaim of $4,497,278.40, $3,459,278.40 of which was liquidated damages for delay.

However, the Court of Appeal allowed TPT's appeal, which meant the amount of liquidated damages was now assessed at the much smaller sum of $154,662 to reflect the delays to TPT's delivery of stages 1 and 2 of the project, but not any liquidated damages for any of the other delays to the later stages of the project because these were never delivered by TPT.

Supreme Court Decision

The Availability of Liquidated Damages

The Supreme Court overturned the Court of Appeal's findings that the liquidated damages clause did not entitle the customer to claim liquidated damages for the delays to the other stages of the project because the work was never completed and accepted. It found that the obligation to pay liquidated damages should run from the due date for performance until the customer terminates the contract, irrespective of whether the work was ever completed. The Court of Appeal's interpretation that PPC should only receive liquidated damages for stages of work that were eventually completed was, according to Lady Arden, "inconsistent with the commercial reality" of these types of agreement "and the accepted function of liquidated damages".

Lady Arden also concluded that a finding that there should be no liquidated damages in circumstances where there was no acceptance would "render the liquidated damages clause of little value in a commercial contract", in an interpretation that would "throw the baby out with the bath water".  Lord Leggatt meanwhile noted that such a conclusion would also give a contractor who had badly overrun on a project an incentive not to complete the work in order to avoid paying liquidated damages for delay, an incentive which made no sense.

The Cap on Liability for Negligence

The Supreme Court also considered whether the general cap on liability should apply or whether this had effectively been superseded by a further clause that made it clear that "except for the specific remedies expressly identified" the general cap on liability would "not apply to [TPT's] liability resulting from fraud, negligence, gross negligence or wilful misconduct of [TPT]…”.

On this question, the Court of Appeal's decision that the word 'negligence' in the limitation of liability clause meant only an 'independent tort' was also overturned, albeit with Lord Sales and Lord Hodge dissenting.

Liquidated Damages: a specific remedy identified in the contract

Nevertheless, the Supreme Court agreed with the Court of Appeal on the facts that TPT's liability under the liquidated damages was subject to the general cap on liability on the basis that the liquidated damages was a "specific remed[y] expressly identified" in the agreement. Ultimately, this did not prevent PPC from recovering its full losses though (including its other general losses on termination) in light of the fact that the general cap on liability did not apply to TPT's failure to take reasonable skill and care in performing its obligations.

Commentary

As noted above, service level and credit regimes are important parts of many different types of agreement. These provisions are often heavily negotiated and, if not drafted correctly or properly considered (including how the service level regime interacts with other clauses of the agreement, such as the liability clause), disputes are likely to arise. One of the key lessons here is that parties should state when the entitlement to liquidated damages starts and ends – especially if they intend to reverse the orthodox position. But, alongside this, while not directly considered in this case, it would be sensible for thought to be given to the use of other wording such as liquidated damages being the "sole and exclusive remedy" available to a party – particularly in the context of supplementary provisions that may also be breached when a particular service level or milestone is not reached (and liquidated damage payment triggered).

While the Supreme Court should be applauded for providing greater certainty as to the availability of liquidated damages and how heavily negotiated liability clauses will be interpreted, this case also illustrates that such liability clauses continue to be a fertile ground for litigation. For instance, we are seeing an increasing number of liability clauses that now include carve outs to the general caps on liability, for "negligence", "gross negligence" and/or "wilful misconduct" by a party, as was the case here. These go beyond the traditional carve-outs covering items that cannot be limited or excluded by law. Both customers and suppliers should properly consider the use of such drafting and what this may mean for the commercial deal that has been reached in order to avoid costly disputes later down the line.

Despite the courts now showing an increasing willingness to show appreciation for the commercial realities of the particular situation, it is still imperative that contracting parties are as clear as possible as to what their intentions are. This is further heightened by the fact that many of the additional carve outs noted above and that frequently appear in international Software as a Service (SaaS) agreements, such as "gross negligence" and "wilful misconduct", may not have the same meaning that applies under English law in other relevant jurisdictions. This may therefore leave those parties to SaaS and other agreements open to the courts inferring a different meaning to the one that was perhaps intended.

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