Liquidated damages for delay

A recent important judgment of the UK Supreme Court has helpfully returned us to a common-sense view about the interpretation of liquidated damages clauses for delay. This article explains the background to this decision and its significance.

Pay for Delay

Delays in performance of a contract are not uncommon, particularly when it involves the creation and delivery of Technology or in the context of Construction projects. The impact of delay can sometimes be difficult to evaluate when the contract is entered into. Therefore, it is often in the interests of the supplier and the client to create certainty around this by pre-determining compensation in terms of a daily or other time related rate for delays caused by the supplier. Often these provisions are capped or otherwise limited.

In Triple Point -v- PTT, the Supreme Court was asked to interpret a contract containing these types of provisions after a Court of Appeal decision which took many by surprise.

The contract was for the design, installation, maintenance and licencing of software by Triple Point to PTT for use in PTT’s commodity trading business. Based on the findings of the first instance judge in the Technology and Construction Court, the fault for the failure of the project lay at the door of Triple Point. However, as is often the case in disputes of this nature, the key battleground turned out to be the language used in the contract around ascertaining the compensation to PTT, and the limits and caps on liability.

Triple Points

There were three issues which the Supreme Court had to determine. The most important was the first regarding the interpretation of the liquidated damages clause for delay. The Court of Appeal had decided that the liquidated damages provisions only applied to delays to work which had been completed. According to the Court of Appeal, any work which was delayed but uncompleted at the time the contract was terminated did not fall within the liquidated damages provision. This made a material difference to the sum that could be claimed for delay, reducing it from approximately US$3.46Million to US$155,000.

The Supreme Court overturned the Court of Appeal’s decision on this issue. It said the Court of Appeal had fallen into error in treating a much earlier (though little known) case as establishing a precedent for interpreting such a clause. A liquidated damages clause for delay does not require that the delayed work be completed before the clause can bite and the view reached by the Court of Appeal was illogical and contrary to the intention behind clauses of this nature. The Supreme Court reiterated the commonly held view that clauses like this are designed to set a price for delay to avoid haggling over the impact and level of compensation for delay when it arises. The Supreme Court also clarified that time usually stops running on calculating delay, and the consequent level of liquidated damages, at the point the contract is terminated.

The second issue related to a limitation of liability clause in the contract. Under the contract, this clause was to be disapplied in relation to any breaches caused by Triple Point’s “negligence”. The majority in the Supreme Court decided (three to two) that this meant not only negligence in the sense of the tort of negligence, but also negligence in the contractual sense of a lack of skill and care in the performance of the services by Triple Point.

On the third issue, the Supreme Court agreed with the Court of Appeal that liquidated damages for delay counted towards an overall contractual cap on liability.

Conclusion

Determining these sorts of issues is very important not only for what might be recovered at trial, but also in deciding early on what might be recovered and putting early settlement offers under Part 36 or otherwise. They will also influence strategic decisions when one party may be considering whether or not to terminate a contract. The Supreme Court’s judgment offers a welcome return to greater certainty on interpreting provisions for compensation for delay, though of course each contract will still need to be carefully construed (and drafted), particularly when such clauses interact with exclusions, limitations and caps on liability. The issues concerning what was meant by “negligence” and the operation of the overall cap on liability also illustrate the extent of clarity needed when drafting such provisions.

A copy of the judgment is here.

If you require further information about anything covered in this briefing, please contact Ian De Freitas, Edward Banyard Smith, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2021