Be aware when negotiating liquidated damages clauses – clear words are still required in Australia to abrogate a party's right to common law damages for delay

The recent New South Wales Court of Appeal’s judgment in Carbone v Fowler Homes Pty Ltd; Carbone v Fowler Homes Pty Ltd (2024) NSWCA 192 is a salutary reminder of the importance of clearly and carefully drafted liquidated damages provisions in building contracts. That importance is particularly elevated for residential building contracts that are commonly based on builder’s standard forms, as the recent changes to the unfair contract terms legislation may now render unfairly drafted liquidated damages clauses void, as well as exposing the builder to significant financial penalties.

The implications

Key takeaways from the Carbone decision are that:

• a mere reference to $nil (or a nominal amount) in a liquidated damages clause will not, on its own, exclude the aggrieved party’s right to claim common law damages for breach of contract for delayed completion;
• clear express words are required to exclude such right if that is what is intended, as Australian courts are (unlike UK courts) generally reluctant to abrogate the right based on a contextual reading of the contract; and
• for builders, the most prudent approach to the negotiation of a liquidated damages regime is to agree a genuine pre-estimate of the loss likely to be suffered in the event of delayed completion, and to include clear express words negating any right to common law damages.

A case summary & the Court of Appeal’s decision

The Appellants, Joe Carbone and Matthew Carbone, each entered into a contract with Fowler Homes Pty Ltd, for the construction of a residential duplex dwelling on adjacent sites in Oran Park NSW. Each contract was in materially identically terms, and was based on the standard form NSW Residential Building Contract for New Dwellings issued by the Housing Industry Association.

Each contract specified a “Building Period” of no more than 48 weeks after the building period commenced. Importantly, the Court of Appeal noted that in each contract, the pecuniary consequences of delay were asymmetric. For delay attributable to the owner’s act, default or omission, delay damages were stated to be the actual increase to the costs to the builder plus the builder’s margin. In contrast, if the building works did not reach practical completion by the end of the 48-week period as extended, it was accepted that each contract made provision for liquidated damages in the amount of $1 per day.

Works commenced in about August 2018, and ought to have been completed by about July 2019. However, disputes arose between the Appellants and Fowler Homes, and possession to the duplexes was not granted until about April 2021.

The case before the District Court at first instance involved questions of deceit and statutory unconscionability, and whether the Appellants were entitled to damages for lost rent. Although the Appellants did not plead a breach of contract, there were references throughout the trial to questions relevant to a claim in damages for breach of contract.

The primary judge did not consider that damages for breach of contract was an issue that arose for determination and considered that the only claims to be determined were for statutory unconscionability and deceit. The primary judge rejected the Appellants” claims in this regard.

On appeal, it was held that, while the Appellants did not plead a claim for damages for breach of contract, the trial was conducted on the basis that such claim was made. This then gave the Court of Appeal a leeway to determine the issue of whether the liquidated damages clauses excluded the Appellants’ entitlement to claim damages for breach of contract.

The Appellants argued that the liquidated damages clause, properly construed, did not prevent a claim for such damages for delay. In support of this proposition, the Appellants relied upon:

• Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137, where Giles J held that “clear words” would be required “before it was held [to be] a liquidated damages clause with the entirety of a proprietor’s rights” (in the context of a clause that specified damages of “nil”);
• Cappello v Hammond & Simonds NSW Pty Ltd (2020) NSWSC 1021 where Ball J held that a clause specifying damages of $1 per working day did not provide an exclusive remedy for delay; and
• J-Corp Pty Ltd v Mladenis (2009) WASCA 157 where the WA Court of Appeal held that any intention to exclude the common law right to damages for breach of contract would need to be expressed in “clear and unambiguous terms”. It was held that a liquidated damages clause specifying “NIL DOLLARS ($00.00) per day” was not, on its own, enough to exclude the common law right to damages.

The Court of Appeal in Carbone agreed with the Appellants, and noted that a liquidated damages clause in a nominal amount, whether it be $0 or $1, was negligible compared to the contract price, and for that reason, the law treated the parties’ bargain carefully, requiring clear language before the entirety of a party’s basic right to damages for breach of contract was treated as having been abrogated.

Conclusion

The Court of Appeal’s decision in Carbone is a timely reminder that for builders the most prudent approach to the negotiation of a liquidated damages regime is to agree a genuine pre-estimate of the loss likely to be suffered in the event of delayed completion, and include clear express words negating any right to common law damages.

The position taken most recently by the Court of Appeal, and other Australian courts in the preceding decisions, is markedly different to that taken by UK courts in cases such as Temloc Ltd v Errill Properties (1987) 39 BLR 30, where the courts have been more prepared to accept that a liquidated damages regime that allows for damages in the amount of “£ nil” could operate to exclude any common law right to damages, even in the absence of clear express terms to that effect.

As the “internationalisation” of the construction industry continues to gather pace, new entrants in the Australian construction market will need to be cognisant of the differing judicial approach to certain fundamental construction law concepts, such as the proper construction of liquidated damages clauses.