Liquidated damages – Court of Appeal guidance on its application on termination

Triple Point Technology, Inc. (Triple Point) v PTT Public Company Ltd (PTT) [2019] EWCA Civ 230

The Court of Appeal has recently handed down authoritative guidance on claiming liquidated damages (LADs) for delay.

Background

This case concerned a software development contract. Triple Point is a supplier of a software systems in commodities trading and PTT are a company which, among other things, undertakes commodities trading (principally oil, refined products and petrochemicals).

In 2012 PTT decided to acquire a new Commodities Trading, Risk Management and Vessel Charting system.

Triple Point and PTT entered into a contract whereby the intention was for the project to be split into two Phases, with Phase 1 being the replacement of PTT’s existing system and Phase 2 involving the development of the system to accommodate PTT’s trading. Within each Phase there were a set of milestones (and deadlines for each) for which Triple Point would then be paid.

Triple Point duly commenced but work proceeded slowly, and they fell into delay due to a failure to commit appropriate resources. The first two stages of Phase 1 were completed by Triple Point, albeit 149 days late. Nevertheless, PTT paid Triple Point $1,038,000 for the two completed stages.

Triple Point then claimed for further outstanding sums which they alleged were due under unpaid invoices. PTT refused to pay this and so Triple Point suspended works in May 2014 and left the site. PTT maintained that Triple Point had wrongfully suspended work because no payment was due and so PTT terminated (or purported to terminate) the contract in February 2015.

Key provisions

The two key provisions were as follows:

• Article 5.3 provided for LADs to be paid by Triple Point at a rate of 0.1% of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work.
• Article 12.3 provided for the total liability for Triple Point to be limited to the contract price received by Triple Point.

Technology & Construction Court (TCC) Proceedings

Triple Point made a claim in respect of the unpaid invoices. PTT made a counter-claim for damages in the form of the costs associated with procuring an alternative software system, wasted costs and LADs under Article 5.3. The LADs claimed were for the elements of work (by reference to the dates specified in each stage) that were not complete at termination.

The judge found in favour of PTT, awarding them $4,497,278.40 calculated as follows:

• $1,038,000 in respect of procuring alternative software and wasted costs (capped by Article 12.3 as the same amount recovered by Triple Point in fees); and
• $3,459,278.40 in respect of LADs in accordance with Article 5.3. It was held that the LADs provision was not subject to the cap in outlined in Article 12.3. This was calculated as follows:

• • $154,662 in respect of the 149-day delay for the stages Triple Point had completed in Phase 1; and
  • $3,304,616.40 in respect of delay on all other elements of the work from the specified completion dated to when the contract was terminated in February 2015.

Court of Appeal

Triple Point appealed the TCC judgment in October 2017. They appealed, inter alia, on the basis that the LADs were not recoverable under Article 5.3 on the basis that Article 5.3 only applies when work was delayed but subsequently completed and then accepted by PTT (i.e. it does not apply in respect of work which PTT never accepted). Alternatively, if PTT was entitled to LADs, then it was subject to the limitation of liability set out under Article 12.3.

Judgment

LADs

In reaching his decision, Sir Rupert Jackson first reviewed how LADs have been interpreted in the past. This outlined how case law in this area had come to differing conclusions, with cases in the past ruling that LADs either do not apply, apply only up to termination or apply beyond termination until the project in question is completed (by a second contractor).

Sir Rupert Jackson ruled that “the question whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend on the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss”. He placed a heavy reliance on Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd 1913 SC (HL) 1 in his judgment.

On reading Article 5.3, it was held that it was not drafted to apply “in a situation where the contractor never hands over completed work to the employer”. The effect of this would be that PTT would be entitled to recover only $154,662 in LADs “because Triple Point did not complete [i.e. hand over] any other sections of work”.

Limitation of LADs

In terms of Article 12.3, Sir Rupert Jackson held that the cap of liability applied to Triple Point’s total liability and that it “encompasses damages for defects, damages for delay and damages for any other breaches”. The effect of this was that, as PTT’s claim had already taken up the full $1,038,000 limitation (for procuring alternative software and wasted costs), it was prevented from being able to recover the $154,662 LAD entitlement.

Comment

This judgment may come as a surprise to many in the construction industry who generally view LADs as being able to run up to termination.

However, what this case has done is that it has pointed out the value associated with parties spending time at an early stage to negotiate and carefully draft the terms of the contract so that it reflects the intentions behind the LAD clause as there is no ‘one rule fits all’ position. Among those considerations are whether the parties wish the LADs to run up to (a) only the works completed by the terminated party; (b) up to termination of the contract (and the works completed by the contractor up to that point); or (c) completion of all the works under the contract (including those completed by a replacement contractor). It is also important to consider how the limitation of liability clause in the contract works along side the LADs and whether the parties intend for any liability cap to include LADs.

A full transcript of the case can be found here.

For further information, please contact Ghilas Lounis.