UK Supreme Court upholds ‘orthodox’ approach to damages in English law

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Importantly for business parties, the ruling states that parties are expected to be aware of this approach.

The damages clauses provide for remedies agreed in advance for the contracting parties in the event of a particular breach of the contract. This allows the innocent party to avoid the time and effort required to quantify their loss and provides the parties with commercial certainty as to the remedies available for a particular violation. July 16, 2021, at Triple Point Technology, Inc v PTT Public Company Ltd,[1] the UK Supreme Court overturned a decision of the Court of Appeal and upheld several important principles regarding damages:

  • Damages cease to accumulate upon termination of a contract, but rights acquired on the date of termination survive.
  • Following termination of a contract containing a damages clause, the contracting parties must seek damages for breach of contract under general principles of English law.
  • Contracting parties are not required to include provisions regarding the effect of termination on the accrual of damages. Instead, they can reason that such consequences are assumed.

PTT Public Company Ltd (PTT) and Triple Point Technology, Inc (Triple Point) entered into a software agreement dated February 8, 2013 (the Software Agreement), which provided that Triple Point would design, install, maintain and license the software. to PTT, and would be paid in stages upon completion of certain “stages”. The parties have agreed that in the event that Triple Point does not provide the agreed services within the time limits specified in the contract, damages will be payable to PTT.

Triple Point did not meet the deadline for “Phase 1” of the project, which involved preparatory work and process review. The parties agreed to a revised Phase 1 project plan, and PTT agreed to pay Triple Point over US $ 1 million for the first milestone payment. Triple Point agreed to continue working on the project if payment is made.

Following payment, Triple Point demanded further payments compared to previous invoices. The PTT refused these requests. Triple Point then refused to do any other work. PTT terminated the contract.

In first instance proceedings before the Technology and Construction Tribunal, Triple Point claimed sums allegedly due as set out on invoices issued to PTT. PTT sought damages for breach of contract upon termination, damages up to the date of termination, costs associated with the investment in alternative software, and interest. Jefford J denied Triple Point’s claim and concluded that PTT was entitled to liquidated damages for delays incurred before termination, damages for wasted costs associated with the project prior to termination and certain associated costs. obtaining a new software system from another third party.[2]

On appeal, the Court of Appeal considered the relevant provisions and found that PTT was only entitled to damages for the work product that had been completed in accordance with the agreed steps set out in the software contract (as opposed to work that had not been completed before termination of the contract).

decision

The Supreme Court dismissed the Court of Appeal on whether damages could accumulate in connection with work that had not been done prior to the termination.

The Supreme Court concluded that under English law damages accumulate until the date of termination, after which the parties must claim damages for breach of contract in the ordinary manner. Applied to the facts of the case, the Court determined that damages accrued until the date of termination for both work performed and work not performed by Triple Point.

In the leading Supreme Court decision, Lady Arden noted that the Court of Appeal erred (in particular in relying on the little-known Glanzstoff[3] case) in its conclusion that the damages did not apply beyond the specific event provided for in the relevant contractual provision.[4] The Court of Appeal concluded that “[i]in the event of abandonment or termination of the construction contract, the employer finds himself in a new territory which the damages clause might not have provided for ”.[5] In the case of the software contract, the damages clause stipulated that the damages would be calculated “until the date on which PTT accepts [the delayed]work. ”The Court of Appeal therefore ruled that PTT was not entitled to damages in a situation in which Triple Point had not completed the agreed work in the first place.

Lady Arden rejected this approach on the grounds that it was “incompatible with commercial reality and the accepted function of damages”.[6] It concluded that the parties are assumed to be aware of the general position on damages in English law, namely that the accumulation of damages ceases upon termination of the relevant contract and, thereafter, the parties should claim damages for breach of contract.[7]

The Supreme Court therefore determined that the contracting parties did not have to concern themselves with the matter, since the position was so common that it did not require a clear articulation in a contract. Instead, commercial parties can simply take a position in English law with regard to damages as “lu”. As such, they don’t need to include a specific provision for the impact of termination on damages in their agreement.

Lessons for Contracting Parties

This case confirmed the orthodox position in English law that, for contracts containing a damages clause, damages accumulate until the date of termination. After termination, damages can be claimed for breach of contract under common law. Importantly for commercial parties, the Supreme Court ruling indicates that parties are expected to be aware of this orthodox position regarding damages. English law therefore does not oblige the parties to include express language on this issue in their contracts. If the parties wish to agree to another different outcome, they will need to explicitly define an alternative approach to damages in their agreement.

The Supreme Court’s decision was based on questions of contractual interpretation and used contractual language to determine the objective intention of the contracting parties. Therefore, the parties may choose to depart from the orthodox application of damages, but this would require particularly clear language.

This article is made available by Latham & Watkins for educational purposes only and to give you general information and a general understanding of the law, and not to provide specific legal advice. Your receipt of this communication alone does not create an attorney-client relationship between you and Latham & Watkins. The content of this article should not be used as a substitute for competent legal advice from a professional lawyer licensed in your jurisdiction.

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