Shearman And Sterling

Royal Courts of Justice in London

July 23, 2021

UK Supreme Court Gives Guidance on Interpreting Liquidated Damages Clauses and Limitation of Liability Provisions

Subscribe

Jump to...

 

UK SUPREME COURT GIVES GUIDANCE ON INTERPRETING LIQUIDATED DAMAGES CLAUSES AND LIMITATION OF LIABILITY PROVISIONS

Summary

The U.K. Supreme Court’s decision in Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 has reaffirmed orthodox approaches to the interpretation of liquidated damages and limitation of liability clauses.

Liquidated damages are a pre-determined sum that is payable as damages for loss caused by a breach of a contract, irrespective of the amount of loss actually suffered. They are typically used in construction (and other services) contracts to simplify and provide certainty as to the remedy for the breach (for example, where there is delay in the contractor reaching a delivery milestone).

The Supreme Court unanimously overturned the decision of the Court of Appeal in confirming that under the contract in this case (and consistent with the generally accepted position), liquidated damages for delayed performance accrued from the start of the period of delay up to termination of the contract, whether or not the relevant obligation is actually performed prior to termination (from which point the party’s right to damages will be those under the common law) (Issue 1).

The Supreme Court also applied the usual principles of contractual interpretation to a limitation of liability clause with the following results:

  • A “negligence” carve-out to a contractual liability cap should be given its ordinary and natural meaning so that, at least in the contract in this case, it covered both tortious negligence and the contractual duty to perform the contract with reasonable skill and care (Issue 2).
  • Liquidated damages (and not only common law damages) counted towards the relevant contractual liability cap (Issue 3).

What does this decision mean for commercial parties? It provides some comfort that business common sense should continue to guide the courts’ interpretation of limitation of liability clauses and when and in what way liquidated damages clauses are triggered.

Above all, it provides certainty as to how liquidated damages clauses (a common feature in English law governed construction contracts) will be interpreted by the English Courts. As the Supreme Court noted: the “commercial reality and the accepted function of liquidated damages [is that] 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).”

More generally, the Court’s approach to Issues 1 and 2 suggest that it continues to favor the “unitary” approach to contractual construction. That is, where there are rival meanings, rather than an emphasis on the literal meaning of the text over the wider context (or vice versa), finding the true construction of the wording in question is an iterative process by which suggested interpretations are checked against the provisions of the contract and their commercial consequences are investigated. The case also highlights the strong reluctance of the English courts to find in past cases principles of construction that are generally applicable to similarly-worded clauses in other cases, rather than using the general rules of construction to find the meaning of the clause in the context of each particular case.

Background

The Appellant, PTT, a Thai state-owned oil and gas company, and the Respondent, Triple Point, a U.S.-based company which specializes in the design, development and implementation of commodities trading software, entered into an English law contract in 2013 for software and software implementation services to be provided to PTT. The contract provided for liquidated damages to be payable by Triple Point, in the event of delay, by reference to agreed milestones. It also limited Triple Point’s liability under the contract but contained a typical carve out from the limitation of liability for “fraud, negligence, gross negligence or wilful misconduct.”

Work under the contract began in March 2013 and soon fell into delay. A dispute arose over payments allegedly due and Triple Point suspended work in May 2014. PTT terminated the contract in 2015; by this time, only the first two of nine milestones had been achieved.

Supreme Court Decision

On Issue 1, the Court of Appeal’s decision had been that the liquidated damages clause did not operate beyond the precise event for which it expressly provided. Therefore, because in this case the relevant provision required liquidated damages to be calculated “up to the date PTT accepts such [undelivered] work” and the works were not complete and PTT had not accepted them before termination, the Court of Appeal concluded that the right to liquidated damages did not arise at all; the relevant trigger had not been met. The Supreme Court disagreed and held that the Court of Appeal’s approach was inconsistent with commercial reality and the accepted function of liquidated damages clauses—to provide a remedy that is predictable for a specific breach, in this case a performance delay. The parties’ objective aim in including the liquidated damages clause was that the employer (i.e. PTT, the party paying for the relevant services) should not have to quantify its loss caused by the contractor’s (i.e. Triple Point’s) delay (and seek common law damages), which it may have been difficult for PTT to do. Despite its literal wording, the liquidated damages clause therefore applied even in circumstances where Triple Point never completed the works—the Supreme Court held that “[r]eading the clause in that way meets commercial common sense and prevents the unlikely elimination of accrued rights [i.e. to liquidated damages].”

Notably, the Supreme Court also strongly rejected the Court of Appeal’s reliance on a previous case as authority for how liquidated damages clauses similar to the clause in this clause should be applied where delayed performance does not occur prior to termination. The Court issued a reminder that aside from the situation where the past interpretations of the courts of market-accepted wording or standard form industry-recognized clauses may be treated as binding in later cases, in general, the decision of one case as to the meaning and effect of a clause cannot be binding as to the meaning and effect of even a similar clause in another case.

On Issue 2, the Court’s focus was on the meaning of the word “negligence” in the relevant carve out to the limitation of liability clause. The Court of Appeal (and High Court) had held that negligence in this context meant only that of the independent tortious kind, not also the contractual duty of reasonable skill and care. This was because, in circumstances where the bulk of the contract was for the provision of services, there was little point in introducing a carve out to exclude contractual negligence from the limitation, as that would take what was said to be the bulk, if not the entirety, of claims in connection with the contract outside the liability cap and emasculate it. However, the Supreme Court held that there was no reason not to adopt the ordinary meaning of “negligence” and this included both the tort of failing to use due care and breach of the contractual duty to exercise due skill and care (which was PTT’s claim). In coming to this view, the Supreme Court noted that the contract was not in fact only for the provision of services. The Court drew a distinction between the services in respect of which Triple Point owed a contractual duty of skill and care, and several other “results” that Triple Point was simply under an absolute obligation to ensure occurred, such as providing software which met certain functionality specifications. The possibility of breaches of those absolute obligations meant that there was scope for the cap to apply even if the “negligence” carve out from the cap also encompassed the contractual duty. Further, there was no realistic example of an independent tort arising in this case, especially as liability for “negligence” had to be one which arose out of the contract itself.

Issue 3 was the only issue on which the appeal did not succeed. The Supreme Court confirmed that, on the proper construction of the contract in question, liquidated damages counted towards the liability cap. This was based on the particular wording of the clause in question and largely confined to the facts of the case.

Authors and Contributors

Jonathan Swil

Partner

Litigation

+44 20 7655 5725

+44 20 7655 5725

London

James Matthews

Senior Associate

Litigation

+44 20 7655 5819

+44 20 7655 5819

London

Practices

Regional Experience