UK Supreme Court Affirms “Orthodox” Approach to Liquidated Damages in English Law

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Importantly for commercial parties, the decision indicates that parties are assumed to be aware of this approach.

Liquidated damages clauses provide pre-agreed remedies for contracting parties in the event of particular breaches of contract. This allows the innocent party to avoid the time and effort of quantifying its loss, and provides the parties with commercial certainty in respect of the remedies available for a particular breach. On 16 July 2021, in Triple Point Technology, Inc v. PTT Public Company Ltd,[1] the UK Supreme Court overturned a Court of Appeal decision and affirmed several important principles in relation to liquidated damages:

  • Liquidated damages cease to accrue upon termination of a contract, but rights accrued as at the date of termination survive.
  • Following termination of a contract containing a liquidated damages clause, the contracting parties must seek damages for breach of contract under the general principles of English law.
  • Contracting parties do not have to include provisions concerning the effect of termination on the accrual of liquidated damages. Instead, they can reason that such consequences are assumed.

PTT Public Company Ltd (PTT) and Triple Point Technology, Inc (Triple Point) entered into a software contract dated 8 February 2013 (the Software Agreement), which provided that Triple Point would design, install, maintain, and licence software to PTT, and would be paid in stages upon the completion of certain “milestones”. The parties agreed that, in the event that Triple Point failed to deliver agreed services within the milestones provided in the contract, liquidated damages would be payable to PTT.

Triple Point failed to comply with the required deadline in respect of “Phase 1” of the project, which involved preparatory and process review groundwork. The parties agreed to a revised Phase 1 project plan, and PTT agreed to pay Triple Point over US$1 million in respect of the first payment milestone. Triple Point agreed to continue work on the project if payment was made.

Following payment, Triple Point demanded further payments in relation to previous invoices. PTT refused these demands. Triple Point then refused to perform any further works. PTT terminated the contract.

In first-instance proceedings before the Technology and Construction Court, Triple Point claimed for sums allegedly due as set out in invoices issued to PTT. PTT counterclaimed for damages for breach of contract upon termination, liquidated damages until the date of termination, costs associated with investment in an alternative software programme, and interest. Jefford J dismissed Triple Point’s claim and found that PTT was entitled to liquidated damages as a result of delays incurred prior to termination, damages for wasted costs associated with the project prior to termination, and certain costs associated with obtaining a new software system from an alternative third party.[2]

On appeal, the Court of Appeal reviewed the relevant provisions and found that PTT was only entitled to liquidated damages for work product that had been completed in accordance with the agreed stages set out in the Software Agreement (as opposed to work that had not been completed before the termination of the contract).

The Decision

The Supreme Court overruled the Court of Appeal on the question of whether liquidated damages could accrue in relation to work that was not performed prior to termination.

The Supreme Court concluded that, as a matter of English law, liquidated damages accrue until the date of termination, after which point the parties must claim damages for breach of contract in the ordinary way. Applied to the facts of the case, the Court determined that liquidated damages accrued until the date of termination in respect of both work performed and work not performed by Triple Point.

In the Supreme Court’s leading judgment, Lady Arden noted that the Court of Appeal had erred (particularly as a result of relying on the little-known Glanzstoff[3] case) in its conclusion that liquidated damages had no application beyond the specific event provided for in the relevant contractual provision.[4] The Court of Appeal had concluded that “[i]f a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision”.[5] In the case of the Software Agreement, the liquidated damages clause stipulated that damages would be calculated “up to the date PTT accepts [the delayed] work”. The Court of Appeal therefore held that PTT did not have an entitlement to liquidated damages in a situation in which Triple Point did not complete agreed works in the first place.

Lady Arden dismissed this approach on the basis that it was “inconsistent with commercial reality and the accepted function of liquidated damages”.[6] She concluded that parties are assumed to be aware of the general position in respect of liquidated damages under English law, namely that the accrual of liquidated damages ceases upon termination of the relevant contract and, thereafter, the parties must claim damages for breach of contract.[7]

The Supreme Court therefore determined that contracting parties do not need to concern themselves with the issue, since the position was so well-trodden that it did not require clear articulation in a contract. Instead, commercial parties can simply take the position in English law in respect of liquidated damages as “read”. As such, they do not need to include a particular provision for the impact of termination on liquidated damages in their agreement.

Lessons for Contracting Parties

This case affirmed the orthodox position in English law that — for contracts that contain a liquidated damages clause — liquidated damages accrue until the date of termination. After termination, damages can be claimed for breach of contract under the general law. Importantly for commercial parties, the Supreme Court’s decision indicates that parties are assumed to be aware of this orthodox position in respect of liquidated damages. English law therefore does not require parties to include express language on this issue within their contracts. If parties wish to agree to another, differing outcome, they will need to explicitly outline an alternative approach to liquidated damages in their agreement.

The Supreme Court’s decision rested on issues of contractual construction, and used the contractual wording to determine the objective intention of the contracting parties. Therefore, parties may opt to depart from the orthodox application of liquidated damages, but doing so would require particularly clear language.

Endnotes

[1] [2021] UKSC 29.

[2] The decision also contained certain conclusions on the contractual “cap” on liquidated damages and other sums recoverable, which are not considered in this blog post.

[3] British Glanzstoff Manufacturing Co Ltd v. General Accident, Fire and Life Assurance Corpn Ltd [1913] AC 143.

[4] The Court noted that the Glanzstoff decision was “little-known” and turned on the particular interpretation of the contract in question. It therefore did not have wider applicability.

[5] Triple Point Technology, Inc v. PTT Public Company Ltd [2021] UKSC 29 at Paragraph 35.

[6] Triple Point Technology, Inc v. PTT Public Company Ltd [2021] UKSC 29, Per Lady Arden at Paragraph 35.

[7] Per Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827 at [844] and [849]; Harvey QC in Gibbs v. Tomlinson (1992) 35 Con LR 86, p 116.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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