Liquidated damages in construction contracts: The approach of the Australian courts

Introduction

Construction contracts commonly include a clause which provides for liquidated damages to be paid for late completion. The benefit of such a regime is that the liquidated damages specified (often a daily or weekly rate) will be treated as a contractually binding pre-estimate of loss, and the innocent party will not be required to prove its actual losses arising out of late completion.

Despite such clauses being commonly used around the world, they can be interpreted very differently depending on the jurisdiction in which they are to apply. The divergent approach of national courts in interpreting liquidated damages regimes that specify a rate of "Nil" or "N/A", or a nominal amount such as "$1" or "£1" can lead to unanticipated results.

Whether a clause drafted with this language will abrogate the principal's right to claim common law damages for breach of contract for delayed completion was recently the subject of judicial consideration by the New South Wales Court of Appeal in Carbone v Fowler Homes Pty Ltd (2024) NSWCA 192.

Background

Joe Carbone and Matthew Carbone entered into identical standard form contracts with the respondent, Fowler Homes Pty Ltd, to build two duplexes in Oran Park in New South Wales Australia. The contracts were entered into on the Housing Industry Association standard form “NSW Residential Building Contracts for New Dwellings”. The stipulated “Building Period” was no more than 48 weeks, and the financial consequences of delay were asymmetric. Delay damages attributable to the owner were stated to be the actual increase to the costs of the builder, plus margin. By contrast, if the building works were delayed beyond the Building Period by reason of the contractor, the applicable liquidated damages rate was AUD1 per day.

The works started in August 2018 and were completed by about July 2019, although due to various disputes between the parties, possession of the properties was not granted until April 2021.

The Carbones argued that they could claim unliquidated damages in addition to the liquidated damages. The builder sought to limit the Carbones' remedy to the amounts stipulated in the contracts.

The Court of Appeal's decision

The Court of Appeal in Carbone held that absent some other express provision in the contract to the contrary, the nominal amount of liquidated damages of AUD1 per day was so negligible compared to the contract price that it did not make sense for the parties to have intended to exclude other damages flowing from a breach of contract. The court allowed a claim for unliquidated damages for the failure to complete by the specified date.

The position taken by the Court of Appeal in Carbone is not new. A similar approach was previously taken by the New South Wales Supreme Court in Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137, where the Court held that, in the context of a contract expressly providing for liquidated damages of “$nil” per day in the event of late completion, “clear words” would be required “before it was held [to be] a liquidated damages clause with the entirety of a proprietor's rights”.

Similarly, the Western Australian Court of Appeal in J-Corp Pty Ltd v Mladenis (2009) WASCA 157 held that any intention to exclude the common law right to damages for breach of contract ought to be expressed in “clear and unambiguous terms”. In that case, it was held that a liquidated damages clause specifying “NIL DOLLARS (USD00.00) per day” was not sufficient to exclude a claim for unliquidated damages.

Contrast this with the approach taken by the English courts in Temloc Ltd v Errill Properties (1987) 39 BLR 30. The respondent, Errill, was engaged to construct a large shopping centre. The contract contained a liquidated damages clause, which stipulated a liquidated damages rate of “£NIL” per week.

Errill completed the shopping centre approximately six weeks late, and the English Court of Appeal was called upon to consider whether a claim for unliquidated damages was permitted. The court held that the insertion of “£NIL” into the relevant clause was valid and provided an agreed remedy between the parties in the event of delay. Moreover, the Court of Appeal held that as a matter of both construction and common sense, the parties' actions of agreeing, and writing into their agreement, that the applicable rate of liquidated damages was “£NIL” per week constituted an exhaustive agreement as to the damages which were to be payable by the contractor in the event of a failure to complete the works on time.

Key takeaways

With the construction industry becoming increasingly international, the recent NSW Court of Appeal's decision in Carbone is a timely reminder that courts in different jurisdictions, even common law jurisdictions such as Australia and England, can take different approaches to key legal principles.

For contractors undertaking projects in other jurisdictions, it is advisable to seek appropriate legal advice from local counsel, particularly in relation to important matters such as liquidated damages provisions, so that not only the terms of their bargain accurately reflect the agreement reached, but that the terms of the bargain are consistent with local legal principles.