UpdateLiquidated Damages and Cap Carve Outs

15th September 2021
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A recent Supreme Court (SC) decision brought some calmness back to the tech world by overturning what was deemed to be a surprising decision by the Court of Appeal (CoA). The CoA had caused a stir when their interpretation of a liquidated damages clause removed the predictability and certainty that such clauses should provide; and when their interpretation of negligence departed from the traditional definition of negligence under English law. The following will look at the SC’s decision to overturn the ruling of the CoA and instead return to the orthodox view of a liquidated damages clause and the traditional understanding of negligence under English law.

The parties entered into a software contract in 2013 that was tailored specifically for their agreement, and that dictated the terms and obligations for the design, installation (by data transmission), maintenance and licencing of software by Triple Point Technology, Inc (TP) for PTT Public Company Ltd (PTT). Ultimately, the contract was terminated and the question of liquidated damages and a cap carve out clause arose.

Dealing with the first question, the SC clarified that the principal issue was whether, under the contract, PTT were entitled to liquidated damages for work that had not been completed or delivered before the contract was terminated. Lady Arden highlighted that for the clause in question to make commercial sense, it could not have meant that liquidated damages would only be available in the incredibly limited circumstance provided for in the contract. The contract stipulated that liquidated damages would only be available where, although there was delay, the work was eventually completed and delivered. It was noted that such an intention by the parties for the clause to mean only this, would not have been commercially rational.

Rather, Lady Arden explained that the parties must have intended that where an event intended for by the contract did not happen, the right of liquidated damages would not be removed or extinguished, instead it would continue up until the date of termination of the contract. The SC stated that the CoA’s approach in this instance did not protect the accrued rights of PTT, but actually caused them to be lost. As a result, the decision was overturned and the predictability and certainty that such clauses aim to provide, was returned.

The second question dealt with the argument by TP that there should be a cap on the damages to be awarded. The CoA in their decision stated that the definition of negligence under English law could and would not apply to this contract and so, breaches of a contractual duty of care would be excluded from the cap carve out clause.

Negligence under English law specifically includes the breach of a contractual duty of care and the lower courts argued that to include such a breach within the definition of negligence in this contract, would mean that the bulk of potential claims would not fall within the cap. Therefore, negligence could not be understood in the ordinary sense. This was incorrect for numerous reasons. One being simply that the contract was governed by English law, so to the English law definition of negligence must be adhered to.

Moreover, the exclusion of breaches of contractual duty of care from the definition of negligence would mean that only breaches of duty of care that arose entirely independently of such breaches, in other words, independent torts, would be included. Lady Arden explicitly pointed out, that no one had yet presented a realistic example of such a tort. As a result, such a departure from the definition of negligence under English law, was incorrect.

The SC decision therefore, re-established the orthodox position of liquidated damages clauses and this was well received. In addition, it reiterated the English law definition of negligence and acted as a good reminder to pay careful attention to exclusions of liability clauses.

 

Emma Lerner
W Legal Limited
emma.lerner@wlegal.co.uk

 

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