September 4, 2023
In an effort to kick-start Australia’s recovery from COVID-19, the state and federal governments have accelerated many large-scale infrastructure projects.[1] This, coupled with the demand for residential home builds, has led to an industry that appears to be defined by significant delay and cost exceedances.
With the current project delays, part 2 of this article series considers the principal’s entitlement to seek liquidated damages as compensation for a contractor’s late completion of the works.
What are Liquidated Damages?
Liquidated damages are a pre-determined sum prescribed within a contract as representing the likely losses that a principal will incur if the contractor breaches the contract. Typically, in the construction industry, the most prominent exercise of liquidated damages by the principal is in circumstances of substantial delays to project delivery.
Depending on the contract, a principal may accrue and levy liquidated damages for every day, week, or month the project is delayed, for which the contractor is liable.
For example, clause 34.7 of the AS4902 standard form design and construct contract provides:
“If WUC does not reach practical completion by the date for practical completion, the Superintendent shall certify, as due and payable to the Principal, liquidated damages in Item 29 for every day after the date for practical completion to and including the earliest of the date of practical completion or termination of the Contract or the Principal taking WUC out of the hands of the Contractor…”
In the event delay is caused by circumstances in which the contractor claims it is not responsible or is outside its control, it is entitled to claim an extension of time. Contractors may avoid liquidated damages (in part or in full) if the extension of time is granted, as it will shift the date for project completion and, therefore, the date upon which the contractor’s liability to pay liquidated damages to the principal commences.
Under clause 34.7 of the AS902, where an extension of time has been granted, and the contractor has already paid, or the principal has set off liquidated damages, the principal is obligated to repay the contractor the liquidated damages the subject of the extension of time.
Principals Entitlements
There are two factors regarding the construction of liquidated damages clauses:
- Whether the contract provides a positive sum or specified rate for liquidated damages; and
- If the liquidated damages clause is mandatory (i.e., the use of ‘shall’ or ‘must’ in respect of the contractor’s liability to pay the principal), this will apply even where the liquidated damages rate is ‘nil’.
In circumstances where the contract provides a liquidated damages rate, this will weigh in favour of the party’s intention for liquidated damages to be the only remedy available to the principal. This is because the agreed amount is considered to be a genuine pre-estimate of the damages, which has the effect of limiting the contractor’s liability.[2]
Where a fixed amount payable for liquidated damages is specified within a contract, it will not matter if the actual losses are smaller or greater than the amount provided.[3] Further, the principal may not ignore the agreed amount and elect to claim general damages for breach of contract.[4]
Is the clause a ‘genuine pre-estimate’?
When determining whether a liquidated damages sum is a “genuine pre-estimate”, the following factors are typically considered in respect of construction contracts:
- If the sum is an extravagant or unconscionable amount in comparison to the total amount that could conceivably flow from the breach;
- If a single lump sum is payable for the occurrence of one or several events, and some of the events are serious while others are minor; and
- Whether the difficulty in quantifying the losses suffered will not prevent the principal from claiming damages.
Liquidated Damages or Penalty?
Generally, a liquidated damages clause in standard form contracts will be enforceable, especially in a commercial context where parties are taken to apportion the risks between them.
That said, liquidated damages clauses are not intended to punish the contractor for late completion and must be reasonable. Whether the stipulated liquidated damages rate amounts to a penalty or is enforceable will depend on the circumstances at the time of contract execution.
For example, where the liquidated damages are ‘extravagant and unconscionable’ (i.e., the amount claimed by the principal is disproportionate to the loss they are likely to suffer), the liquidated damages clause will not be enforceable.
Advantages of Liquidated Damages
Liquidated damages clauses are an essential part of construction contracts, as they:
- Provide contractors with increased certainty of risk and their potential exposure if they fail to complete the project on time;
- Create an incentive for the contractor to work efficiently to complete the project on time (or promptly notify the superintendent and principal of any delays for which it may be entitled to an extension of time);
- Minimise disputes surrounding the calculation of loss suffered as a result of a specific breach; and
- A right for principals to easily claim compensation for late completion and recover damages without having to prove the actual loss incurred.
Read more about the operation and effectiveness of liquidated damages clauses in Lamont Project and Construction Lawyers article series “Liquidated Damages” here.
Lamont Project & Construction Lawyers
The Lamont Project & Construction Lawyers team has extensive knowledge regarding the principal’s entitlement to liquidated damages as compensation for delay under various standard form and bespoke contracts. Further, our team has experience and a comprehensive understanding of the intricate risks related to liquidated damages clauses. With this knowledge and expertise, Lamont Project & Construction Lawyers can provide the required support and advise on major projects with respect to the principal’s entitlement to liquidated damages under the contract.
If you would like to discuss any matters raised in this article as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only and it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Quinn Hironaka
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064
[1] Rider Levett Bucknall, Australia Report – First Quarter 2023.
[2] NLS Pty Ltd v Hughes (1966) 120 CLR 583.
[3] Adopt Constructions Pty Ltd v Whittaker & Anor [2015] ACTSC 188.
[4] IPN Medical Centres Pty Ltd v Van Houten & Anor [2015] QSC 204.