“Triple Point Technology Inc v PTT Public Company Limited [2021] UKSC 29” – paper by James Howells QC

(1) Summary

The United Kingdom Supreme Court, allowing an appeal by PTT from the Court of Appeal, has clarified the relevant principles of English law relating to the construction of clauses providing for the payment of liquidated damages for delay. The Supreme Court has confirmed that, unless clear words in the contract provide otherwise, liquidated damages for delay will be an accrued right which is recoverable where the contract is terminated either under its terms or at law for repudiation.

The Supreme Court also allowed PTT’s appeal against the decisions of the trial Judge and the Court of Appeal as to the construction of a limitation clause in the parties’ contract and (by majority) confirmed that by the terms of the limitation clause the damages claimed by PTT were not subject to the limitation of liability. The judgments of the majority indicate that there may be further clarification to come as to the modern approach to the construction of limitation clauses and the ‘contra proferentem’ principle of contract construction.

(2) The Facts

PTT, the state-owned Thai petrochemicals company, contracted with Triple Point to design, implement, support and maintain a new Commodities Trading and Risk Management business system for its integrated petrochemicals trading, hedging, charterparty and refinery management system for its operations in Bangkok, Dubai and Singapore. The parties agreed that the contract was to be governed by English law and subject to the jurisdiction of the Courts of England and Wales.

Triple Point was to design and implement the system based on an integrated version of its packaged proprietary software for commodities trading, charterparty management and credit risk functionalities. The system was to be implemented in two Phases: Part 1 involved the necessary business consultancy, design and implementation of a system to replace PTT’s existing bespoke system and to integrate with PTT’s other business systems and relevant commodities trading and markets’ systems. Part 2 would require Triple Point to implement new trading/hedging functionalities to allow PTT to trade and hedge in additional global and regional commodities markets.

The contract provided for Triple Point to be paid at the completion of defined milestones in respect of each Part of the implementation project^[1].

Triple Point’s implementation services were severely delayed from the outset. The trial Judge found that all delays were the result of Triple Point’s negligence and breaches of contract. After c. 1 year the parties agreed that works to meet 1^st payment milestone in respect of Part 1 of the project were sufficiently complete. PTT paid the first milestone payment.  Triple Point demanded further payments and wrongfully suspended works when PTT refused further payment.

Later, PTT terminated the contract for repudiation and under terms of Contract for negligent breach of contract and fundamental breach.

(3) Liquidated Damages – Supreme Court’s clarification of the usual approach to construction

The contract (by a term referred to throughout the Judgments as Article 5(3)) provided for liquidated damages to be paid in the following terms:

“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, provided, however, that if undelivered work has to be used in combination with or as an essential component for the work already accepted by PTT, the penalty shall be calculated in full on the cost of the combination.”  [emphasis added]

In the Technology and Construction Court, Triple Point challenged the liquidated damages provision as an unenforceable penalty but no challenge was made that the term did not provide for payment if the contract was terminated nor was the calculation of the liquidated damages challenged. The trial Judge, having found Triple Point had caused all delay to completion by its negligence and breach of contract had little difficulty finding that Triple Point was liable for all liquidated damages claimed, in the sum of US$3,459,278.

In the Court of Appeal, Triple Point again failed in its argument that the liquidated damages were a penalty, but the Court of Appeal adopted a new interpretation of the liquidated damages clause; a construction not advanced by Triple Point in its skeleton^[2].

In its Judgment, the Court of Appeal (Sir Rupert Jackson (Lewison and Floyd LJJ agreeing))^[3] held that the construction of the liquidated damages provision was that no liquidated damages were payable by Triple Point unless Triple Point had completed a relevant part of the works. In the present case, Triple Point had only completed the works in respect of the first milestone of Part 1 of the project. No liquidated damages were payable in respect of the remaining milestones even though Triple Point had, by the time of termination, missed all the contractual milestone completion dates.

The Court of Appeal suggested that there were 3 categories of clauses for the payment of liquidated damages:

1. Liquidated damages do not fall due until works are completed (or the entitlement to liquidated damages is lost if the contract is terminated prior to completion of the contract works by contractor).
2. Liquidated damages accrue from the contractual completion date to earlier of (a) actual completion or (b) termination.
3. Liquidated damages accrue from the contractual completion date to actual completion of works (even if by a different contractor after termination of relevant contract).

The Court of Appeal noted that the second category was widely accepted to be the ‘orthodox’ approach to construction of liquidated damages clauses but reasoned, based on the brief judgments of the House of Lords in the Scottish building case of British Glanzstoff Manfacturing Co Ltd v General Accident, Fire and Life Assurance Co Ltd 1913 S.C. 1 (HL) that there was a category of cases (the Court of Appeal’s ‘category 1’) where liquidated damages may not accrue until completion or that entitlement may be extinguished if the contract was terminated before completion. The Court of Appeal gave little guidance as to why it considered the provision in the contract before it to fall within its ‘category 1’. The heavy implication of the Court of Appeal’s Judgment was that a number of earlier cases had been wrongly decided because the Courts in those cases did not consider British Glanzstoff and that many liquidated damages clauses would require to be construed in accordance with the approach in the Court of Appeal’s ‘category 1’.

The reasoning of the Court of Appeal gave rise to considerable confusion and concern for parties to contracts for construction, infrastructure and IT projects and had potential impacts on shipbuilding and shipping contracts ^[4].

The Supreme Court was unanimous in its rejection of the Court of Appeal’s Judgment. The leading judgments by Lady Arden and Lord Leggatt JJSC were expressly critical of the reasoning in the Judgment of the Court of Appeal, rejecting both the approach to categorization of liquidated damages clauses in the manner of the Court of Appeal and the construction of the clause in the present case.

The Supreme Court has taken the opportunity to provide further clarity and guidance to the usual construction of a contractual clause providing for the payment of liquidated damages for a breach of contract. The Supreme Court, consistent with the reasoning in its decision in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 has confirmed that the fundamental commercial purpose of a liquidated damages clause is directly relevant to its construction:

“Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. […]”

Per Lady Arden JSC (Lord Burrows JSC agreeing) at paragraph 35

Lady Arden JSC (giving the leading Judgment) also made important additional observations as to the presumed intentions of parties who incorporate a liquidated damages clause in their contract as to the effect of early termination (under the terms of the contract or for its breach):

“[…] Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract (see Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844 and 849), After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. That is well-understood: see per Recorder Michael Harvey QC in Gibbs v Tomlinson (1992) 35 Con LR 86, p 116. Parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read. […] The territory is well-trodden, and the liquidated damages clause does not need to provide for it.”  (also at paragraph 35) ^[5]

The Supreme Court Judgments confirm that the suggestion in the reasoning of Sir Rupert Jackson in Court of Appeal, that a party’s entitlement to liquidated damages may be extinguished if the contract were terminated is not correct; liquidated damages that have become due before termination are accrued rights which will survive termination as described in the House of Lords Judgments in Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827.

The Supreme Court Judgments also provide clear, and welcome, confirmation that the usual position (unless the parties clearly provide otherwise by the terms of their agreement) will be that liquidated damages will accrue and be payable if the agreed event for which they are payable occurs before termination.

In the case of clauses for liquidated damages for delayed completion common in construction, engineering, IT and ship-building contracts the usual approach will be that liquidated damages will accrue from the agreed completion date for the relevant works (or part of the works) and be calculated in respect of the period of delay up to completion or earlier termination of the contract. Clear words will be required in the parties’ agreement to deprive a party of those rights upon early termination (or to extend the right to recover liquidated damages in respect of events or delays that occur after termination).

(4) The Limitation Clause – The ‘Gilbert Ash’ Principle

The second issue addressed by the Supreme Court is also of interest to parties to construction and engineering contracts as well of wider significance in the law of contract in English law.

At first instance, PTT’s damages on termination (assessed by the trial Judge at c. US$10.5million) were capped at US$1,038,000 on the basis that Triple Point’s liability in

damages was limited to the value of the sums paid by PTT under the contract prior to termination. The relevant part of Article 12 of the conditions of contract provided:

“CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’s breach of contract, including software defects of 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.”  (underline in original)

PTT had argued that the limitation did not apply where (under the normal meaning of the words in the final sentence) its loss was the result of negligence/negligent breach of contract by Triple Point. The trial Judge had expressly found that Triple Point’s breaches were breaches of the contractual duty to exercise reasonable skill and care in performance (a term set out earlier in Article 12 of the contract).

The trial Judge and the Court of Appeal both rejected this argument and construed the limitation clause to apply to negligent breaches of contract. Both courts decided that the exclusion from the limitation clause for negligence applied only to situations where Triple Point had committed the tort of negligence (but not in circumstances also amounting to a breach of the contract).

By a majority (Lady Arden JSC and Lords Leggatt and Burrows JJSC), the Supreme Court rejected the construction decided by the lower courts and decided that PTT’s damages were not limited by the terms of the limitation clause; the exception for negligence was to be given its normal, and well-understood, meaning. The majority were critical of the reasoning of the Court of Appeal in a number of respects in the approach to the construction of the clause.

Article 12(3) of the CTRM is a bespoke clause. While there are a number of examples of clauses (often in offshore design and build contracts) where wording excludes from a limitation clause fraudulent or grossly negligent breaches of acts of willful misconduct, the clause was unusual for its inclusion of ‘negligence’ within those exclusions. On the facts, the construction of the clause itself is unlikely to have wider relevance. Nonetheless, the reasoning of the Supreme Court in the Judgments of Lady Arden JSC and Lord Leggatt JSC are informative and may, particularly in the analysis of Lord Leggatt JSC, provide indications of future direction in the ongoing modernization of English contract law.

The reasoning of Lady Arden (Lord Burrows agreeing) underlines the importance of full textual and contextual analysis – a specific but informative application of Wood v Capita Insurance Services Ltd [2017] A.C. 1173. As Lady Arden identified, when handing down the Judgment, this case is the first time the Supreme Court has considered an IT contract. The factors that Lady Arden enumerated in her consideration of the incidents of this contract when assessing the context of the words of Article 12 are likely to be influential in the assessment of similar long-term IT and outsourcing contracts.

However, it is suggested that the reasoning of Lord Leggatt is of wider potential impact and interest.

Lord Leggatt’s analysis (at paragraphs 106 to 113) was that there has been an ongoing process of change in judicial approach in the English courts to the construction of exclusion and limitation clauses and in the Courts’ approach to the historic canon of contractual construction: the principle of ‘contra proferentem’. Lord Leggatt’s judgment, after a review of a number of authorities and legal texts, concludes that the old ‘rules’ of construction have been or should now be seen as elements of an overarching principle which he referred to as “the wider Gilbert-Ash principle” (paragraph 111). In Gilbert-Ash (Northern) v Modern Engineering (Bristol) [1974] A.C. 689 the House of Lords decided that a contract should not be construed so as to have the effect that a party has given up valuable legal rights that it would otherwise have (in that case the right of set-off) unless clear words were used in the contract (see also Photo Production v Securicor (at 850-851)).

Lord Leggatt’s analysis may signal further clarifications to come as to the application of the “Gilbert-Ash principle” to the construction of contract clauses limiting or excluding liability or which may adversely impact one or other parties’ ‘usual’ rights. It is suggested that, at least in the area of construction of limitation clauses, there is more work to be done by the Courts to balance the application of the “Gilbert-Ash principle” with recent Court of Appeal observations which have suggested that Court was becoming more inclined to construe limitation clauses so as to extend their scope to the benefit of the party relying on the limitation; notably the comments of Jackson LJ in the Court of Appeal in Persimmon v Ove Arup  [2017] C.L.C. 28, challenging ‘the mindset to cut …down’ the scope of the limitation clause.

Following the decision of the Supreme Court in Triple Point Technology v PTT draughtsmen of construction/engineering contracts would be well-advised to define in clear words the intended scope of any clauses which seek to limit or exclude liability. Particular care should be taken when a limitation clause is expressed not to apply to certain types of liability to ensure that the effect of that exception is understood.

 

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^[1] There were in total 8 relevant payment milestones for the completion of Parts 1 and 2 of the project.

^[2] As the Supreme Court noted (per Lady Arden at paragraph 24)

^[3] [2019] EWCA Civ 230, [2019] 1 WLR 3549, [2019] 3 All ER 767, [2019] BLR 271

^[4] Demurrage clauses in charterparties sharing essential legal characteristics with liquidated damages clauses in construction/IT contracts

^[5] Lord Leggatt JSC (Lord Burrows JSC agreeing) made similar observations in his Judgment at paragraph 86.