Limitation clauses and liquidated damages (LDs) clauses are a common feature of shipbuilding and ship repair contracts. Projects can often overrun and LDs give Owners certainty that they can recover damages, without having to prove their loss. Equally, limitation clauses give the shipyard certainty that their losses will not rise above a certain point.

Or do they? Limitation clauses often contain carve-outs and exceptions, and can be linked to the LDs provisions, sometimes making it difficult to tell what is and isn't covered by the limitation cap. In Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, the Supreme Court had to grapple with just such a clause and the resulting judgment has provided useful guidance in this area. Although it involved a software contract, the general principles arising from the decision will undoubtedly have wider application.

Background

Triple Point was a software company that entered into an English law contract with PTT (a commodity trader) for the design, installation and maintenance of particular trading software.

The contract provided that if Triple Point failed to deliver work on time, it had to pay a daily rate of liquidated damages "from the due date for delivery up to the date PTT accepts such work" (Article 5.3).

Article 12.3 limited the total liability of Triple Point to PTT to the contract price (sentence 2). It also provided that "except for the specific remedies expressly identified as such in this Contract" PTT’s exclusive remedy was for Triple Point to cure the breach at its expense, or return the fees paid (sentence 3). Sentence 4 had a carve out which meant that the limitation of liability did not apply to Triple Point's liability resulting from fraud, negligence, gross negligence or wilful misconduct.

Disputes arose between the parties, due to delays to the software project. Triple Point demanded payment of certain invoices and PTT refused to pay, asserting that the invoices were not payable. Triple Point stopped work and PTT ultimately terminated the contract. Triple Point commenced proceedings, seeking payment of the invoices. PTT counterclaimed damages for the delays. The matter ended up before the Supreme Court, who had to consider the following issues:

1. Were LDs payable where Triple Point never completed (or PTT never accepted) a particular piece of work?
   
   
2. Does the word "negligence" in sentence 4 of Article 12.3 cover a negligent breach of the contract by Triple Point, or only any independent tort of negligence, separate from the contract?
   
   
3. Are LDs included in the liability cap (the Contract Price) referred to in sentence 2 of Article 12.3?

Supreme Court ruling

Issue 1:

Triple Point argued that the wording "up to the date PTT accepts such work" in Article 5.3 meant that PTT was not entitled to LDs for any work which was not ultimately accepted by PTT by termination of the contract. The Court of Appeal agreed. The effect of that decision would be that where a contract was terminated before completion or acceptance, the right to liquidated damages would be lost and the Owner would have to prove its claim for general damages.

The Supreme Court allowed the appeal, finding that the wording simply meant that LDs would stop running if and when a piece of work was accepted by PTT; acceptance by PTT was not a precondition to LDs becoming payable. Therefore, LDs will apply during any delay, even if the work is never completed. Once the contract is terminated, LDs cease to run (although any accrued LDs were still payable) and Owners then have a claim for general damages. 

Issue 2:

Triple Point argued that "negligence" could not include negligent breach of contract, on the basis that the contract was wholly or substantially for the provision of services, which were to be provided using reasonable skill and care. Consequently, carving out from the liability cap negligent breach of contract (i.e. a failure to use reasonable skill and care) would render the cap toothless and of little protection. The lower courts agreed, ruling that "negligence" only related to independent torts of negligence.

The Supreme Court again allowed the appeal. The contract was not merely for the provision of services (there were absolute requirements to provide certain things, such as defect-free software). "Negligence" has an accepted meaning in English law, and no realistic example of an independent tort had been proposed. Consequently, there was no justification to stretch the meaning of "negligence" beyond its natural and ordinary reading, i.e. that damages for a negligent breach of contract were not caught by the liability cap.

Issue 3:

The Supreme Court dismissed the appeal and agreed that the overall cap in sentence 2 included any LDs that were incurred under Article 5.3. The exception in sentence 3 for specific remedies did not also qualify sentence 2. 

Conclusions

Although the case turned on a specific clause and related to the supply of software, a number of conclusions that are relevant to shipbuilding and ship repair can be drawn from the Supreme Court judgment. Absent clear contract wording:

1. An Owner's right to liquidated damages will not be lost due to (a) an Owner failing to accept any particular piece of work or (b) the termination of the contract;
   
   
2. The use of the word "negligence" will include negligent breach of contract;
   
   
3. Liquidated damages are likely to be included in any overall liability cap.

The more general lesson, therefore, is that if you want to depart from the orthodox position, you will need to include express, clear wording as to your intentions when drafting your contract.