Another delayed IT project
In Triple Point Technology, Inc v. PTT Public Company Ltd. [2021] UKSC 29, PTT, a commodities trading company, engaged Triple Point to provide a software system under a bespoke contract which included milestone payments and specific payment dates.
Work was delayed and Triple Point sought payment according to the contractual dates, even for work it had not delivered. PTT refused payment as the relevant milestones had not been met. Triple Point suspended work and PTT purported to terminate the contract.
The contract required Triple Point to pay "the penalty at the rate of 0.1 percent of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work." The issues were whether Triple Point was due any payment and whether PTT could deduct liquidated damages for delay when PTT never accepted the work as it had not been completed (except for the first two stages).
At first instance, the Technology and Construction Court found that Triple Point had failed to perform its contractual duties properly, had breached its contractual duty to exercise skill and care, and was entitled to no further payment. The judge also awarded PTT liquidated damages for delay to the first two stages and the remaining, incomplete milestones.
Both parties appealed to the Court of Appeal which unanimously held, based on a 1913 House of Lords decision, that the liquidated clause did not apply, meaning that PTT would have to claim under the ordinary rules for assessing damages for breach of contract (see Hogan Lovells alert – Talking Point Asia - liquidated damages on work never completed?).
The LDs clause: Post-termination LDs are payable for incomplete work
Allowing the appeal, the Supreme Court found that the Court of Appeal's approach was inconsistent with commercial reality and the accepted function of liquidated damages clauses, which parties include so that an employer does not have to quantify its loss. Parties to contracts containing such clauses should be taken to know that the general law is that liquidated damages stop accruing on termination. No express provision stating this is needed.
The Supreme Court also held that the Court of Appeal had departed from the generally understood position that, subject to the precise wording of the clause, liquidated damages accrue until a contract is terminated. At that point, a contractor becomes liable to pay damages for breach of contract.
The wording in the 1913 case, which Triple Point had argued was equivalent to the "up to the date PTT accepts such work" language, was distinguished because of its unusual facts. In the present case, the words meant "up to the date (if any) PTT accepts such work."
By reading the clause in light of these factors, there was less risk of Triple Point avoiding the payment of liquidated damages and of PTT's accrued right to liquidated damages being extinguished.
Therefore, although the clause referred to liquidated damages accruing "up to the date PTT accepts such work," and Triple Point had never handed over completed work, the Supreme Court held that PTT was entitled not only to recover liquidated damages for Triple Point's delay in delivering the first two stages, but also to recover liquidated damages accrued for milestones incomplete at termination.
The Supreme Court also disagreed with the Court of Appeal, holding that it was not illogical for liquidated damages to apply up to the contract termination date but not beyond.
The liability cap: it included LDs, but defined "negligence" widely
Triple Point's liability was capped at the total amount it received for the services under the contract. In the Court of Appeal, both parties attacked the judge's analysis of the cap. Triple Point argued it applied to all damages for delay (including liquidated damages), while PTT said it did not cover any of the damages claimed. Dismissing PTT's appeal on this point, the Supreme Court unanimously agreed with the Court of Appeal's finding that the clause created a standalone limitation of liability that applied to Triple Point's total liability, including liquidated damages.
As is often seen in limitation of liability clauses, liability resulting from Triple Point's fraud, negligence, gross negligence or wilful misconduct was carved out of the cap.
By a majority of three to two, the Supreme Court disagreed with the Court of Appeal and the judge at first instance, and found that the word "negligence" in the carve-out should be given its natural and ordinary meaning. It therefore covered not only the tort of negligence, but also the contractual provision requiring Triple Point to exercise all reasonable skill, care, and diligence under the contract and to comply with international standards.
The Court of Appeal wrongly held that, if "negligence" covered damages for breach of the contractual provision to exercise all reasonable skill, care, and diligence, the "negligence" carve-out would remove the core liability subject to the cap. The contract was for services (which had to be carried out using the contractual duty of care), but also imposed absolute obligations, like providing software which met certain specifications. There was also no realistic example of liability arising from an independent tort of negligence. It had to arise from the contract.
The Supreme Court added that if the parties had intended to cover tortious liability, the carve out should have used wording such as "under, arising out of, or in connection with the contract", rather than merely "under the contract."
Keep checking your delay LDs and limitation clauses
At a time when the construction market is uncertain, with projects delayed due to COVID-19, the construction industry will generally welcome this decision. It affirms the position on accrued liquidated damages that had been assumed by most parties to construction contracts until the Court of Appeal decision.
Only if a clause very clearly states that accrued liquidated damages are not payable up to the point of termination will the parties need to turn to the ordinary rules to prove actual delay losses incurred prior to termination.
Nonetheless, when drafting and negotiating construction contracts, parties may still wish to include or express wording to ensure that the accrued right to liquidated damages is preserved on termination, particularly where works remain incomplete (for example, due to suspension for non-payment or abandonment of the project).
Note too that the right to claim liquidated arises when there is culpable delay (which in most construction contracts means incomplete work at the contractual final or sectional completion date(s)). Clearly, if a contract was terminated two weeks after the contractual completion date had been missed, liquidated damages would have accrued for that fortnight only (unless you had expressly agreed that liquidated damages which would have accrued had termination not occurred were payable). Other claims, for example in relation to potential delays caused by a failure to comply with a contractual duty to proceed diligently with the works before the contractual completion date, would be separate, general damages claims.
The interpretation of "negligence" reminds us that the word "negligence" in carve-outs to construction contract limitation clauses means more than tortious liability. The important corollary is that the liable party may challenge the wide ambit of the carve-out using the Control of Exemption Clauses Ordinance (Cap. 71). It is therefore always worth closely reviewing clauses limiting or excluding liability, rather than inserting or skimming over them as "standard boilerplate".
Authored by Mark Crossley and Joyce Leung.
