NSW ruling underscores need for explicit liquidated damages clauses in construction contracts

In the case between owners Giuseppe and Matthew Carbone and builder Fowler Homes Pty Ltd, Fowler Homes argued that the liquidated damages clause in the contract at hand - which provided for liquidated damages at AU$1 per day - should limit its liability for delay to that amount.

The NSW Court of Appeal (NSWCA) did not agree and found that the liquidated damages clause did not remove Fowler Homes’ liability to the Carbones for general damages. The ruling confirmed that liquidated damages amounts that are negligible compared to the contract sum will not free parties of their liability for delay, unless this is clearly stated in the contract. Without clear language stating otherwise, the impacted party can claim for proven delays.

“The point of a liquidated damages clause in a trifling amount, whether it be $0 or $1 per day, is that this is utterly negligible compared to the contract price, and for that reason the law treats the parties’ bargain carefully, requiring clear language before the entirety of a party’s basic right is treated as having been abrogated,” the Court said.

In making its decision, the NSWCA applied reasoning from the Western Australia Court of Appeal’s (WACA) decision in the 2009 case involving construction company J-CORP Pty Ltd, where the WACA found that a liquidated damages clause that specified $0 per day did not exclude J-CORP’s liability for delay.

The NSWCA said it was “unpersuaded” by Fowler Homes’ attempt to highlight the difference between the $1 per day provided in its contract compared to the $0 per day provided in the J-CORP case. According to the NSWCA, $1 was still a “nominal, albeit non-zero amount”.

Nicole Whitby, a construction law expert at Pinsent Masons, said: “The case tells us that liquidated damages amounts which are negligible compared to the contract sum will not absolve parties of liability for general damages, absent clear language stating as such, for delay which the impacted party is able to prove.”

“It will be interesting to see future judicial consideration of what constitutes this ‘nominal, albeit non-zero amount’ following the ruling. More broadly, this case serves as a reminder about the importance of clear and explicit contractual drafting where parties intend to limit liability for delay to liquidated damages and thereby do away with the right to claim general damages for loss arising from delay,” she said.