In a scenario most tech lawyers will dread, the Supreme Court recently scrutinised the drafting and construction of a liquidated damages clause, and the meaning of ‘negligence’ in a liability cap, in the case of Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29.

The facts in brief

The case concerned a contract between Triple Point Technology (Triple Point), the supplier, and PTT Public Company (PTT), the customer, for the implementation and provision of a software system for PTT.

Following termination of the contract, PTT sought liquidated damages (LDs) for failure by Triple Point to meet the contractual timetable, relying on a provision that entitled it to LDs “from the due date for delivery up to the date [PTT] accepts such work.

The contract also included a cap on Triple Point’s liability, with a carve-out for ‘negligence’:

"This limitation of liability shall not apply to [Triple Point’s] liability resulting from fraud, negligence, gross negligence or wilful misconduct..."

Trajectory through the Courts

Showing the difficulty in establishing a clear-cut construction, the Court of Appeal overturned the High Court’s decision on PTT’s entitlement to LDs, and was itself overturned by the decision of the Supreme Court.

The Supreme Court also overturned the findings of both lower courts on the meaning of ‘negligence’ as used in the carve-out from the liability cap.

High Court

The High Court held that Triple Point had breached the contract by not exercising reasonable skill and care, and that PTT was entitled to damages and LDs.  The judge held that negligence in the contractual cap meant the tort of negligence – it did not mean or include breach of the contractual duty of skill and care. 

Court of Appeal

The Court of Appeal conversely held that LDs were only due in respect of delayed works which had been completed prior to contract termination – PTT was not entitled to LDs where Triple Point did not complete the work.

The Court of Appeal also agreed that the carve-out from the liability cap for ‘negligence’ did not apply where Triple Point had breached its contractual obligation to exercise reasonable skill and care.  The exception would only apply to a negligent act/omission breaching a ‘freestanding’ duty of care owed in tort.

Supreme Court

The main issue for the Supreme Court, then, was whether PTT was entitled to LDs for delay in respect of work which had not been completed before the contract was terminated.

The Supreme Court overturned the Court of Appeal’s finding.  That LDs were not payable because the relevant work was never completed “was inconsistent with the commercial reality and accepted purpose of a liquidated damages clause” – that purpose being to provide a remedy that is predictable and certain for a particular event (here, a delay in completion).

Lady Arden called it “unrealistic to interpret the clause as meaning that if that event does not occur the contractor is free from all liability for liquidated damages, and that [PTT’s] accrued right to liquidated damages simply disappears.” The Supreme Court explained the words "up to the date [PTT] accepts such work" should be interpreted as meaning, "up to the date (if any) [PTT] accepts such work".

The Supreme Court also disagreed with the previous courts’ findings that "negligence" must mean some independent tort and not breach of a contractual duty of care.  It held in fact “negligence” has an accepted meaning in English law, covering both the separate tort of failing to use due care and also breach of a contractual provision to exercise skill and care.

Comment

The Supreme Court’s decision will be a calming return to orthodoxy for tech customers – the Court of Appeal had attracted fears that LDs for delay would be difficult to recover in the common situation of termination/abandonment of a contract.

Contract drafters are pointed to a clear, well-trodden principle - “accrued rights must be protected”.  Subject to contrary agreement, upon termination parties are discharged from their contractual obligations which would otherwise arise after termination, but not those which have arisen before.

 The focus on the word ‘negligence’ is also a reminder to tech lawyers to pay careful attention to the words used when drafting exclusions of liability – see also the case of CIS General Insurance v IBM from earlier this year.