Usually, liquidated damages give the customer rights to pre-agreed payments if the delivery is late, eg in this case by 0.1% per day. But what happens if the work is not delivered at all? Does it keep accruing, or does it not apply in that scenario?
Triple Point had agreed to supply a new software system to PTT. PTT had paid Triple Point for some of the work, despite a delay. However, it refused to pay Triple Point any further for work that was due. Triple Point refused to continue to work on the delivery, so PTT terminated the contract. Triple Point sued PTT for non-payment of the invoices. PTT counterclaimed for damages including liquidated damages arising out of the delay.
In an earlier court ruling on one point, the High Court had decided that Triple Point had been at fault and was in "repudiatory breach", ie they had acted contrary to the way it should have done, thus denying PTT the benefits of the contract.
Then, the courts had to decide whether PTT could claim for liquidated damages. The liquidated damages clause in the contract said: "If [supplier] fails to deliver work within the time specified and the delay has not been introduced by [customer], [SUPPLIER] 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 [customer] 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." [our emphasis added]
The Court of Appeal had ruled in 2019 that because of the way the liquidated damages clause had been drafted, it only applied to the delays where the work was subsequently completed and accepted. PTT's claim could not succeed in respect of work that was so late that it was not delivered at all.
This decision was criticised by several commentators on the basis that the innocent party is then only compensated under the provision if work is delivered late and not for a total failure to deliver that work.
The Supreme Court has overturned that Court of Appeal ruling. It has decided that the liquidated damages would apply, and would come to an end on termination of the contract. It said that effectively the words "if any" should apply when understanding the phrase "the date [customer] accepts such work". As at termination, the innocent party could then still claim in addition for damages for breach of contract under the general law.
There were two other important issues that the Supreme Court ruled on.
Firstly, under the wording of the liability clause under the contract, the liquidated damages claims were still subject to the overall cap on liability that the contract wording had provided, so it could not go on for an indefinite sum.
Secondly, there was another part to the limitation of liability clause that said: "This limitation of liability shall not apply to [supplier's] liability resulting from fraud, negligence, gross negligence or wilful misconduct of [supplier] or any of its officers, employees or agents." Triple Point had successfully argued in the High Court and Court of Appeal that the reference to "negligence" only applied to negligence in tort (ie applying outside of contractual obligations) rather than for breach of contact. The Supreme Court disagreed with that position and said that negligence, ie a duty to take reasonable skill and care, could apply for the duties expressed under the contract as well as those arising in tort. The contract wording had therefore provided that liability for negligence was unlimited. The Supreme Court added that this did not nullify the rest of the limitation of liability, as there were several other obligations under the contract (rather than just the obligations to take reasonable skill and care) that could be covered by the cap.
The result has been a victory for business common sense. Why should a delivering party be better off for failing to deliver rather than delivering late? However, huge time and cost was expended by both parties in fighting the case, because the wording could have been clearer.
In addition, the ruling around the meaning of negligence shows that contracting parties need to be very careful about the wording they use in liability clauses. Not being clear as to whether liability for negligence in all situations was uncapped or not, has led to different decisions by different judges throughout this case.
Therefore, the main lesson is for parties to be absolutely clear what they want in their contracts - whether for liquidated damages clauses or limitation of liability, or something else.