Out-Law News | 23 Jul 2021 | 7:30 am | 5 min. read
The Supreme Court overturned an earlier judgment of the Court of Appeal by rejecting a supplier’s claim that liquidated damages for delay were not payable in respect of works which it had not completed at the point of termination and provided crucial guidance on the correct interpretation of liquidated damages clauses.
The Supreme Court’s guidance on this important issue will be welcomed by everyone in the construction and technology sectors as these clauses form a core element of risk allocation in commercial contracts, said Alexander Grant of Pinsent Masons, the law firm behind Out-Law.
In the case before the Supreme Court, Thailand-based commodities trader PTT Public Company (PTT) was seeking liquidated damages for delay to works under a contract it had entered into with US-based software business Triple Point Technology (Triple Point) for the supply of a new software system.
The Supreme Court considered PTT’s claims for liquidated damages following the company’s appeal against a 2019 ruling by the Court of Appeal on the issue.
Liquidated damages clauses are common features of commercial contracts, providing a means of redress to customers when projects they have contracted are delayed as a result of failings by the supplier.
Patrick Quinn, also of Pinsent Masons, said: “Until March 2019, the law concerning the operation and applicability of liquidated damages clauses for delay when a contract is terminated was well established. The courts only rarely departed from the widely accepted orthodox position, that liquidated damages are payable up to the date a contract is terminated, and general damages are recoverable thereafter. That understanding was challenged dramatically before the Court of Appeal.”
In its ruling the Court of Appeal said that case law in England and Wales provides for three possible interpretations of liquidated damages clauses – that the liquidated damages clause does not apply at all; that the clause only applies up until the termination of the contract; or that the clause continues to apply until a replacement contractor has completed the works.
Grant said: “The Court of Appeal did not establish a test or rule to be applied to determine when each approach applies and instead held that it would depend in on the wording of the liquidated damages provision in each case.”
Stuart Davey of Pinsent Masons, who specialises in resolving disputes over technology contracts, said: “In assessing the wording of the liquidated damages clause in the contract between PTT and Triple Point, Sir Rupert Jackson in the Court of Appeal considered that that the wording of the clause was analogous to that considered by the House of Lords in the 1913 case of Glanzstoff that had previously had been little referred to. On that basis it decided the wording of the clause, ‘up to the date PTT accepts such work’ meant that liquidated damages did not apply in circumstances where the contractor – in this case Triple Point – never completed the works because, by definition, the employer – PTT – never accepted them.”
Quinn said: “The words relied on by Sir Rupert Jackson are synonymous with the words used in many standard form construction and technology contracts, which generally provide that liquidated damages are payable until the point the works have been completed by the contractor or taken over by the employer. Therefore, while the Court of Appeal set out three approaches to these clauses, in reality there was a material risk that the approach taken by the Court of Appeal would become the dominant approach going forward, which could, as it did in the case of PTT and Triple Point, significantly impact an employer’s ability to recover losses for delay when a contract is terminated.”
As a result of its reasoning, the Court of Appeal had concluded that PTT was only entitled to claim liquidated damages of $154,662 in respect of stages one and two of phase one of the works which Triple Point had completed late, but not a sum exceeding $3.4 million in liquidated damages in respect of the remaining phase one and phase two works which were delayed but not completed at the date of termination.
In the Supreme Court’s view, the Court of Appeal’s interpretation of the liquidated damages clause in the contract between PTT and Triple Point had been wrong.
It said: “On its true construction [the clause] provided for liquidated damages if Triple Point did not discharge its obligations within the time fixed by the contract irrespective of whether PTT accepted any works which were completed late. The function of the words on which the Court of Appeal relied was to provide an end date for liquidated damages on acceptance of the works… But it did not follow that there were to be no liquidated damages if there was no such acceptance. To reach that conclusion would be to render the liquidated damages clause of little value in a commercial contract. To use an idiomatic phrase, the interpretation accepted by the Court of Appeal in effect threw out the baby with the bathwater.”
According to Grant, the Supreme Court more importantly ruled that, while the Court of Appeal was right when it identified three potential interpretations of liquidated damages clauses, “it is ordinarily to be expected that, unless the clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract”.
Grant said: “The central purpose of liquidated damages clauses is to make it easier to recover the losses that would ordinarily be extremely difficult to quantify or evidence. Therefore, this decision has been keenly awaited by many in the construction industry as it had the potential to materially change the balance of power under construction contracts by making employers think twice before terminating, because in doing so its rights to recover liquidated damages for delay would fall away. However, while this has been avoided by the Supreme Court restoring the previously understood position, there may yet be a sting in the tail for employers if they are not careful agreeing when and how contractual limits on liability apply.”
The return to orthodoxy will also provide a sigh of relief to customers of IT providers, and will provide greater certainty as to the financial remedies available to them in the event that an IT supplier delays in the implementation of an IT solution, according to Davey. He said it is notable that the court considered the commercial rationale that parties were unlikely to intend that any right to liquidated damages would fall away by the fact of termination of the contract.
The Supreme Court also considered whether an exception for negligence from the overall liability cap had the effect of excluding all breaches of the duty of contractual skill and care or only losses for the commission of some independent tort. In this area, the Supreme Court was less agreed, but a majority reversed the decision of the Court of Appeal’s decision.
Davey said “Lady Arden found that the word negligence should be given its natural and ordinary meaning with the effect of removing from the cap all damages for negligence on Triple Point’s part, including damages for a breach of the obligation of skill and care in contract. This will be another warning to drafters of technology and construction contracts, following the decision earlier this year in the case of CIS v IBM, on the importance of clearly drafting limitation of liability provisions.”
13 Mar 2019
16 Aug 2011