In Triple Point Technology, Inc (respondent) v PTT Public Company Ltd (appellant) [2021] UKSC 29, James Howells QC and Nicholas Maciolek represented the successful appellant in a hearing before the Supreme Court whose outcome has been the subject of considerable interest and speculation in the wider construction industry, in particular regarding the proper interpretation and application of liquidated damages clauses where a contract is terminated after works are delayed but before they are completed.
The Contract
The appellant (‘PTT’) engaged the respondent (‘Triple Point’) to provide the design, installation, maintenance and licensing of a software system for its commodity trading business in a series of phases of works. The clause of the contract concerning liquidated damages provided that:
‘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’
The parties’ contract also provided a cap on Triple Point’s liability to PTT at clause 12.3 in the following terms:
‘CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’s breach of contract, including software defects or inability to perform ‘Fully Complies’ or ‘Partially Complies’ functionalities as illustrated in Section 24 of Part III Project and Services.
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.
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.
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.’
The dispute
Triple Point fell into delay during its works for phase 1, and never completed the works for phase 2. In March 2015 PTT terminated the contract.
The case began with Triple Point bringing proceedings with respect to alleged failures to pay software licence fees against PTT in the Technology and Construction Court. PTT counterclaimed for the costs of termination including liquidated damages pursuant to the contract, running up to the date of termination.
The decisions below
At first instance, Jefford J dismissed Triple Point’s claims and found that PTT was entitled to damages for breach of contract, including $3,459,278.40 in respect of liquidated damages which had accrued prior to termination. She also found that those liquidated damages were not subject to a contractual cap on liability, whereas she found that PTT’s other losses on termination (valued at $10,574,756.78 ) and wasted costs ($630,000) were subject to that cap.
In the Court of Appeal, it was found that PTT was only entitled to liquidated damages arising out of works stages which had been completed (in other words only for delay to phase 1), interpreting the reference to liquidated damages being payable ‘up to the date PTT accepts such work’ as a precondition to PTT’s entitlement to liquidated damages. In making that determination, the Court of Appeal reviewed a number of authorities and found that liquidated damages clauses can be interpreted in three ways when the contract is terminated before work is completed: (i) that the clause does not apply to any of the delay; (ii) that the clause applies to any period of delay up to the date of termination; (iii) that the clause applies to any period of delay up to the date of completion by a third-party contractor. The Court of Appeal found that the clause in the contract between PTT and Triple Point fell into the first category, relying in part upon a principle said to be derived from the Scottish case of British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143; 1913 SC (HL) 1. Further, the Court of Appeal also held that the contractual cap on damages applied to PTT’s liquidated damages claim, on the basis that the exclusion from the cap in the final sentence of clause 12.3 (‘This limitation of liability shall not apply to CONTRACTOR’s liability resulting from…negligence’) applied only to free-standing torts of negligence and not negligent breach of a contractual duty of care.
The Issues before the Supreme Court
Three issues were appealed to the Supreme Court to be determined:
(1) whether PTT was entitled to liquidated damages in respect of the uncompleted phase 2 works up to the date of termination, or whether it only entitled PTT to liquidated damages for works which had been completed by the date of termination.
(2) whether, on a proper interpretation of the cap at clause 12.3, the exception relating to ‘negligence’ had the result that losses caused by Triple Point’s negligent breach of contract were not subject to the cap on liability;
(3) whether, in any event, claims for liquidated damages were subject to the cap on damages at all.
The Supreme Court found for PTT on the first issue by an absolute majority, and on the second issue by way of a 3:2 majority (Lady Arden JSC, Lord Leggatt JSC, Lord Burrows JSC : Lord Sales JSC, Lord Hodge). The Court found for Triple Point by way of an absolute majority on the third issue, but in light of the determinations on issues 1 and 2 that decision did not affect PTT’s ultimate entitlement to payment with respect to liquidated damages: whereas liquidated damages did fall within the ambit of the cap, a cap would not apply when the liquidated damages were accrued as a result of Triple Point’s negligence.
Liquidated Damages
In deciding the first issue, the Court confirmed that the interpretation of liquidated damages clauses is, as with any other clause of a contract, subject to the ordinary methods of contractual interpretation. As Lord Leggatt JSC observed, the three options enumerated by the Court of Appeal in interpreting the clause in this case can be understood as options which a particular clause might fall into depending upon its wording. However, the Court found that there is no general principle to be derived from the Glanzstoff case, in particular because the House of Lords in that case was not contemplating a situation similar to the one arising in this case where a contractor was ousted from the works before it had completed them, but after it had fallen into delay.
On the contrary, the Court held that the commercial context of liquidated damages clauses and the context of the ordinary effect of the termination of the parties’ obligations suggest that in the absence of clear wording to the contrary it should be assumed that a liquidated damages clause will apply to any period of delay in completing the work up to, and not beyond, the date of the termination of the contract. In other words, to the extent that the Court of Appeal’s judgment relied upon a Glanzstoff principle, that principle was rejected by the Supreme Court and replaced with a presumption which the courts will apply when interpreting liquidated damages clauses.
Issue 2: the negligence exception
The majority decision of the Supreme Court was that the natural meaning of the word negligence encompasses all forms of negligence, not only “free-standing” torts which have nothing to do with a parties’ contractual rights. In coming to that conclusion, the majority was particularly influenced by the fact that clause 12.3 was only concerned with limiting the damages payable for contractual rights, and further that it was not possible to identify any practical examples of a breach of a free-standing duty of care in the performance of the parties’ contract. Lord Leggatt also laid emphasis on the fact that in the interpretation of exclusion clauses, the court will start from the assumption that the parties did not intend to derogate from their normal rights and obligations unless clear words to the contrary are used (the rule in Gilbert-Ash). Lady Arden JSC found that there were a number of strict duties owed under the contract which were not also governed by a parallel duty of care in tort. Lords Sales and Hodges JJSC, dissenting, took the opposing view on the basis that on their interpretation of the parties’ agreement, all Triple Point’s obligations were governed by an overriding duty of skill and care such that the majority’s interpretation of the cap deprived it of any practical force.
Whereas both Lady Arden JSC and Lord Leggatt JSC observed that the second issue was of limited general application, several aspects of the majority’s decision is likely to be of relevance in future cases. The finding that the natural meaning of ‘negligence’ will ordinarily encompass contractual duties of care, parallel contractual and tortious duties of care as well as free-standing duties of care in tort may be of relevance by way of analogy in similarly-drafted clauses.
Moreover, Lord Leggatt JSC’s judgment on the second issue is a helpful authority on two other questions of the interpretation of contracts which continue to be of relevance in a wide number of disputes: the contra proferentem rule and arguments based on verbal surplusage.
In emphasising the significance of the rule in Gilbert-Ash, Lord Leggatt noted that, ‘To the extent that the process has not been completed already, old and outmoded formulas such as the three-limb test in Canada Steamship Lines Ltd v The King [1952] AC 192, 208, and the “contra proferentem” rule are steadily losing their last vestiges of independent authority and being subsumed within the wider Gilbert-Ash principle’. Although previous cases have made similar indications to that effect, this obiter statement is further clear confirmation that arguments based on the old principles of contra proferentem are unlikely to be successful in England and Wales.
With respect to verbal surplusage, one argument made by Triple Point was that because the cap included reference to both ‘negligence’ and ‘gross negligence’, and because ‘gross negligence’ is not a separate cause of action in law, if the reference to negligence were given its ordinary meaning that would render the reference to gross negligence redundant. Lord Leggatt JSC accepted that conclusion, however he found that it did not affect his preferred interpretation of the clause, as ‘arguments of this sort based on verbal surplusage in a commercial contract do not count for much’. This is clear further authority from the Supreme Court that arguments based on redundant or surplus language are unlikely to be relevant in the interpretation of commercial contracts.
James Howells QC and Nicholas Maciolek were instructed by Watson Farley & Williams LLP.
To read the full judgment click here.
16 July 2021
