Where a contractor fails to achieve practical completion by the date for practical completion, the contract may require the contractor to pay liquidated damages. A question sometimes arises as to whether the inclusion of a liquidated damages regime in the contract means that the principal cannot claim other losses from the builder. This question has been considered in several recent court decisions.
In NSW, the answer to this question will depend on (1) whether the Home Building Act applies and (2) if the Home Building does not apply, the terms of the contract.
Where the Home Building Act applies
Where the Home Building Act applies, an entitlement to liquidated damages will not prevent prevent the principal from pursuing other claims.
This is because:
- pursuant to section 18B(1)(d) of the Home Building Act, the construction contract will contain an implied warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,
- pursuant to section 18G of the Home Building Act, a provision of an agreement that purports to restrict or remove the rights of a person in respect of a statutory warranty is void, and
- to the extent that a liquidated damages provision has the effect of excluding or limiting the rights of a principal in respect of a breach of the warranty in section 18B(1)(d) of the Act, the provision would be void as a result of section 18G.
The NSW Supreme Court has held that, following this line of logic, a liquidated damages provision in a contract covered by the Home Building Act would not prevent the principal from making a claim in respect of a breach of the warranty in clause 18(B)(1)(d). This is because:
- if the provision is intended to operate to exclude that type of remedy, the provision would be void; and
- it is unlikely that, at the time of entering into the contract, the parties would agree on a term that would be void.
This reasoning was applied in Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021, where the NSW Supreme Court found that a nominal liquidated damages rate (of $1 per day) did not prevent the principal from pursuing other remedies for a delay.
The NSW Court Appeal reached the same conclusion, expressly agreeing with the decision in Cappello, in the case of Carbone v Fowler Homes [2024] NSWCA 192. In that case, the parties had used an HIA standard form of contract where the contract schedule identified liquidated damages as "$0.00 per working day" and the standard form provided "if nothing stated, then $1". The Court of Appeal found that the principal was entitled to claim any proven loss consequent on the builder's delay.
These cases are consistent with an earlier decision made by the Court of Appeal in Western Australia, where the Court found that a liquidated damages rate of "Nil" did not prevent the principal from claiming unliquidated damages from the contractor. (See J-Corp Pty Ltd v Mladenis [2009] WASCA 157.)
Where the Home Building Act does not apply
If the Home Building Act does not apply, the position is more complicated.
Historically, common thinking has been that liquidated damages would generally apply as an exclusive remedy. In Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021, the Court explained:
"generally, where parties choose to make provision for the payment of liquidated damages they are to be taken as excluding a right to claim general damages. The whole point of a clause providing for the payment of liquidated damages is to avoid the expense and time in quantifying the actual damages flowing from a breach of contract arising from delay in completing the work. That purpose would be seriously undermined if the liquidated damages clause was not interpreted as setting out exclusively the damages that could be recovered for delay."
However, this does not always mean that liquidated damages will be the principal's sole remedy, as the builder found out in the recent NSW Supreme Court decision of Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group [2023] NSWSC 343.
Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd
In this case, the NSW Supreme Court found that a liquidated damages entitlement of $200 per working day on a $2m project did not prevent the principal from pursuing a principal for other remedies for a delay to practical completion.
The case arose out a project involving the construction of 6 residential apartments in Gerringong, NSW. The relevant history of the project was as follows:
- The date for practical completion under the contract was 4 July 2017.
- To finance the project, the principal had taken out certain loans. These loans were repayable in July and August 2017. The principal intended to pay out these loans as quickly as possible following completion of the project and the sale of the units.
- Disputes arose during the course of the project and the builder suspended works on 20 March 2018. (The court found that this suspension was wrongful.)
- On 20 March 2019, the principal demanded the builder to resume work.
- On 5 April 2019 the principal terminated the contract. The principal subsequently engaged other contractors to complete the project.
- On 29 June 2020 - roughly 3 years after the date for practical completion in the contract - the principal obtained an occupation certificate and the strata plan was registered. It was at this point that the owners were able to give effect to the pre-sales of the units and discharge their loans.
The liquidated damages clause in the contract was in the following terms:
“30.1 If the building works do not reach practical completion by the end of the contract period the owner is entitled to liquidated damages in the sum specified in Item 13 of Schedule 1 for each working day after the end of the contract period to and including the earlier of;
a. the date of practical completion;
b. the date this contract is ended; or
c. the date the owner takes possession of the site or any part of the site."
The sum specified in Item 13 of Schedule 1 was $200 per working day.
Had liquidated damages been awarded for the period from the date for practical completion (4 July 2017) to the date the contract was terminated (5 April 2029), this would have amounted to approximately $88,000. Had they been awarded from the date for practical completion to the date the occupation certificate was issued (29 June 2020), this would have amounted to approximately $150,000.
The principal claimed - and was ultimately awarded (in a decision made by the Court of Appeal) - roughly $485,000 in respect of interest on the loans it was unable to repay due to the builder's delays. That is, the principal was able to recover an amount that was more than three times it would have been entitled to receive, had liquidated damages been the principal's only remedy.
The Court (at first instance) explained its decision in the following way (with added emphasis):
"...there is a "familiar principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law”.
It has thus been said:
“So when one is concerned with a building contract, one starts with the presumption that each party is to be entitled to all those remedies for its breach as would arise by operation of law ... To rebut that presumption one must be able to find in the contract clear unequivocal words in which the parties have expressed their agreement that this remedy shall not be available in respect of breaches of that particular contract."
The Builder did not engage with this point.
I see no such “clear unequivocal words” in cl 30.
Indeed, cl 30 provides that the Owners are “entitled” to liquidated damages, suggesting that the parties intended that such entitlement be in addition to, and not in substitution for, such other rights as the Owners might have, including for Hungerfords interest.
For that reason, I do not accept the Builder’s contention that, in effect, cl 30 has the effect of precluding the Owners’ claim for Hungerfords interest."
This aspect of the Court's decision was not the subject of the appeal. (The appeal dealt with a range of other matters which are not relevant for current purposes.)
Takeaways
These decisions are obviously good news for principals, particularly if the project is covered by the NSW Home Building Act. A principal who has suffered losses exceeding the liquidated damages rate in the contract may be able to recover those losses, subject to those losses having been caused by the delay and not being too remote.
On the other hand, if you are a contractor, you need to be aware that:
- on projects where the Home Building Act applies, you may be exposed to liabilities greater than the liquidated damages rate in the contract, and you will need to take this risk into account in your program and price; and
- on projects where the Home Building Act does not apply, if you wish to ensure that liquidated damages will be the principal's only remedy for a delay, you will need to ensure that this principle is reflected in the contract, in very clear terms.
It is another case that demonstrates the value that a specialist construction lawyer can provide at the time of entering a new construction contract.
