The Court of Appeal has ruled that a contractual provision for liquidated damages for delay had no application in respect of software development work which was never completed. It also held that a limitation of liability provision imposed an overall cap on the contractor's total liability, which included liquidated damages for delay.
PTT and Triple Point entered into a contract under which Triple Point would supply PTT with a software system which would be provided in two phases, each comprising 9 stages of work.
The first two stages of phase 1 were completed, albeit 149 days late, and PTT made the payment associated with those stages. Triple Point then sought payment in respect of work which had not been completed, relying on the calendar dates for payment stated in certain work order forms provided to Triple Point by PTT. PTT refused to make such payment in reliance on Article 18 of the contract under which payment would be made by milestones (which had not been met apart from in respect of the first two stages of phase 1).
Triple Point subsequently suspended the work. PTT considered that the suspension was wrongful and purported to terminate the contract. Undeterred, Triple Point raised a court action against PTT to recover its unpaid invoices and PTT counter-claimed liquidated damages for delay and wrongful termination of the contract.
Article 5 provided that Triple Point would be liable to pay PTT "…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…."
Article 12.3 stated that Triple Point would be liable to PTT for "any damage suffered by PTT as a consequence of [Triple Point's] breach of contract" while the second sentence limited Triple Point's total liability to the "…Contract Price received" by Triple Point.
The third sentence of Article 12.3 provided that:
“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 [Triple Point]…to use best endeavours to cure the breach at its expense, or failing that, to return the fees paid to [Triple Point] for the [works] related to the breach.”
The fourth sentence provided that the limitation of liability did not apply to Triple Point’s fraud, negligence, gross negligence or wilful misconduct.
At first instance, the judge decided that payments were to be made by reference to the milestones and that there were therefore no further payments due to Triple Point. The judge also held that Triple Point was in breach of its contractual duty to exercise professional skill and care and was not entitled to suspend work.
PTT was therefore entitled to terminate the contract and claim general damages (in the form of the recovery of the cost of procuring an alternative software system and wasted costs). These were subject to the liability cap (which limited the total recoverable amount to the total amount that had been paid to Triple Point for the services provided under the contract). PTT was also entitled to recover liquidated damages for delay which were not subject to a cap.
Triple Point appealed the judge's decision. Among other grounds of appeal, it claimed that liquidated damages for delay could not be recovered because they only applied when work was delayed, and then subsequently completed and accepted. The judge's decision relating to the liability cap was challenged by both parties; Triple Point claimed that the cap should apply to all of the damages claimed, including liquidated damages for delay, while PTT stated that it should not apply to any of the damages claimed.
Allowing Triple Point's appeal on this point, the Court of Appeal identified three approaches the courts have taken in relation to the award of liquidated damages for delay where a contractor fails to complete the work agreed and others are employed to complete it:
The Court of Appeal stated that it had doubts about the third approach and that, while the second approach is favoured by most textbooks, much would "depend on the wording of the clause itself". It considered that Article 5 was focussed specifically on delay between the contractual completion date and the date when Triple Point actually achieved completion. Article 5 therefore had no application in respect of work which was never handed over to PTT.
This meant that only the first 149 days of delay could be recovered by PTT as liquidated damages. Damages for incomplete work could be claimed as general damages for delay.
The Court of Appeal first considered whether PTT's claim that the liability cap did not apply to any of the damages claimed was correct. The judge at first instance had ruled that the word "negligence" of the fourth sentence of Article 12.3 did not encompass breach of a contractual duty of professional skill and care. The Court of Appeal agreed with the judge and rejected PTT's claim on the basis that "negligence" had to be narrowly construed and meant the freestanding tort of negligence.
As for whether the liability cap applied to liquidated damages, the second sentence of Article 12.3 created a standalone cap that applied to Triple Point's total liability and that cap did encompass liquidated damages. PTT was therefore entitled to liquidated damages for the 149-day delay, but was prevented from recovering them as the cap had been wholly used up by the award of general damages.
This case provides useful guidance on the law with respect to liquidated damages caused for delay, an area that has been subject to conflicting approaches.
The case highlights the need for absolute clarity when drafting liquidated damage clauses alongside liability caps to reflect the parties' intentions about the allocation of risk and the impact of delays.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions