Introduction
A recent Court of Appeal decision, in the context of a software development contract, has provided a useful outline of how UK Courts will approach clauses providing for liquidated damages for delay, Lord Justice Jackson stating at [110] that
“In my view, the question whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss”.
The judgement is found in Triple Point Technology, Inc. v PTT Public Company Limited [2019] EWCA Civ 230. Whilst Triple Point contains an interesting analysis of whether the liquidated damages clause in question was a penalty clause or not (the court finding that it was not) and interesting analysis in relation to a contractual cap on liability, this case summary focuses in the main on the court’s approach to construing the relevant liquidated damages clause.
Part 6 of the judgement [68 to 114] contains a review of case law relevant to liquidated damages clauses running from the early 1900’s to last year. At [106], Lord Justice Jackson categorised these cases across three different approaches, namely,
“i)The clause does not apply: Glanzstoff; Chanthall; Gibbs; ii) The clause only applies up to termination of the first contract: Greenore; Shaw; LW Infrastructure; Bluewater; iii) The clause continues to apply until the second contractor achieves completion: Hall; Crestdream; GPP”
the learned Judge noted that the approach in category (ii) is treated by the textbooks as the orthodox analysis [110], expressed doubt about the cases in category (iii) [108] and said that he saw much force in the House of Lords’ reasoning in Glaszstoff [109], which was placed in category (i).
In general terms, Triple Point highlights that those drafting liquidated damages clauses should seek to make express whether or not liquidated damages are to be engaged (a) only in the event of delayed delivery by the initial supplier or (b) regardless of whether or not there is delivery by the initial supplier.
Background
The Claimant in the underlying action, the Appellant in this matter, was Triple Point Technology, Inc. (‘TPP’), a Delaware company which designs, develops and implements commodities trading software.
The Defendant and Respondent, PTT Public Company Limited (‘PTT’), is a company based in Thailand which undertakes commodities trading, principally in petrochemicals.
The facts in the dispute follow a pattern which will be familiar to many members of SCL.
In 2012, PTT decided to acquire a new Commodities Trading, Risk Management and Vessel Chartering System (“CTRM System”). PTT envisioned a two phase process: In the first phase, the new CTRM System would replace their existing system, and in the second phase the new CTRM System would be developed to accommodate new types of trade.
The parties entered into a contract which contained a liquidated damages clause, referred to as “Article 5.3” 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.
The parties agreed an overall contract price in respect of both Phases, completion dates for stages of each of Phase 1 and Phase 2 and the proportion of the contract price referable to each. Phases 1 and 2 were to run concurrently.
Work was slow and Stages 1 and 2 of Phase 1 were completed some 149 days late. PTT paid TPP for this work. By this time, however, other completion dates had passed for both Phase 1 and Phase 2 and TPP’s work in respect of relevant Stages for each Phase was not complete. Nevertheless, TPP demanded payment of the proportions of the contract price by reference to completion dates.
TPP suspended work on 27 May 2014, after PTT refused to make payments referable to work that had not yet been completed. On 15 February 2015, PTT terminated the CTRM contract.
Findings in the High Court
TPP commenced High Court proceedings for the sums it said were due. PTT counterclaimed for damages for delay and damages upon termination.
In the High Court, in TPP Technology, Inc. v PTT Public Company Limited [2017] EWHC 2178 (TCC), Mrs Justice Jefford dismissed the claim and awarded PTT $4,497,278.40 on their counterclaim. Of this sum, $3,459,278.40 were liquidated damages for delay pursuant to Article 5.3 of the contract.
In the course of her judgement, Mrs Justice Jefford made a series of findings of fact and conclusions in relation to the true construction of the contact which were not challenged on appeal. She, also, found that the liquidated damages clause was not a penalty clause, a conclusion that the Court of Appeal agreed with.
It would appear that the argument that succeeded on appeal, namely that the liquidated damages clause only applies when work was completed and accepted may not have been raised before Mrs Justice Jefford. No authorities were cited to the Judge on this issue. Relevant authorities, including Glanzstoff, were only provided to the Court of Appeal at its request.
The Appeal
Among other grounds of appeal, TPP argued that “Liquidated damages for delay under Article 5 are irrecoverable”. TTP’s successful contention on appeal was that Article 5.3 only applies when work was delayed and subsequently completed and accepted; TTP argued that Article 5.3 did not apply in respect of work which the employer never accepted.
As has been noted above, Part 6 of the judgement [68 to 114] contains a review of case law relevant to the interpretation of liquidated damages clauses running from British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd 1912 SC 591 (Court of Session) and 1913 SC (HL) 1 to GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).
At [106], Lord Justice Jackson categorised the cases according to three different approaches towards clauses providing liquidated damages for delay, namely “i)The clause does not apply: Glanzstoff; Chanthall; Gibbs; ii) The clause only applies up to termination of the first contract: Greenore; Shaw; LW Infrastructure; Bluewater; iii) The clause continues to apply until the second contractor achieves completion: Hall; Crestdream; GPP”, the learned Judge noted that the approach in category (ii) is treated by the textbooks as the orthodox analysis [110], expressed doubt about the cases in category (iii) [108] and said that he saw much force in the House of Lords’ reasoning in Glaszstoff [109], which was placed in category (i).
In Glanzstoff, the House of Lords held that the relevant clause applied only (per Lord Haldane LC) “if the contractors have actually completed the works, but have been late in completing the works, then, and in that case only, the clause applies.”
Turning to Article 5.3 in Triple Point, the Court of Appeal held that, on its proper construction, Article 5.3 only applied if relevant work was completed, Jackson LJ stating at [112]
“This clause, like clause 24 in Glanzstoff, seems to be focused specifically on delay between the contractual completion date and the date when Triple Point actually achieves completion… In my view Article 5.3 in this case, like clause 24 in Glanzstoff, has no application in a situation where the contractor never hands over completed work to the employer”.
Comment
Liquidated damages clauses have, generally, been construed in the ‘Greenore manner’, namely that the liquidated damages clause in question only applies up to termination of the first contract, the customer being entitled to liquidated damages for delay up to the date of termination and general damages thereafter. In Triple Point at [109] Jackson LJ comments, that his own decision in Greenore may possibly have been different, bearing in mind the approach in Glanzstoff. This apparent ‘rowing back’ from Greenore may increase the possibility that a court will now follow Glanzstoff, increasing uncertainty for litigants and contracting parties. In any event, Triple Point highlights the importance of ensuring that liquidated damages clauses make explicit whether or not liquidated damages are to be either (a) engaged only in the event of delivery by the initial supplier or (b) regardless of whether or not there has been such delivery.
Quentin Tannock
Jonathan Schaffer-Goddard
Quentin Tannock and Jonathan Schaffer-Goddard are barristers at 4 Pump Court, a leading barristers’ chambers with expertise in commercial, construction, energy, professional negligence, shipping, information technology and telecommunications work.
