Liquidated damages are a common clause in construction contracts, but they are misunderstood. Understanding how liquidated damages work is an essential practice that is often overlooked.
This article sets out the associated legal principles surrounding liquidated damages in Queensland and across Australia, when they are enforceable, and what you can do if you’re facing a claim or seeking to recover them.
What Are Liquidated Damages?
Liquidated damages are an-agreed-amount of money that one party settles to pay the other in the event of a breach of the contract. These are typically in place in the event of a party failing to meet a deadline or performance obligation specified under the contract. The purpose is to provide certainty to parties about the consequences of delay or breach, without needing to prove actual loss.
A typical clause might state – “If the contractor fails to complete the works by the date for practical completion, the contractor shall be liable to the principal for liquidated damages at the rate of $1,000 per day for each day of delay.”
Are Liquidated Damages Enforceable?
The key legal question is whether the clause constitutes a genuine pre-estimate of loss or whether it is a penalty (which is unenforceable) law. This notion was upheld within the case of Andrews v Australian and New Zealand Banking Group Ltd (2012) 247 CLR 205, held within The High Court of Australia. This case outlined:
- A clause will be a penalty (and subsequently not enforceable) if it imposes a detriment that is out of proportion to the legitimate interest of the innocent party
- Nonetheless, it can still be enforceable even in the event it is not a perfect estimate of loss, provided it reflects a legitimate interest and is not oppressive or unconscionable.
liquidated damages clauses are more likely to be upheld if:
- The amount is reasonable and proportionate to likely losses;
- The parties had equal bargaining power and;
- The clause was negotiated, not imposed.
Liquidated Damages in Construction Contracts
Liquidated damages clauses are common practice within Queensland construction contracts and are often enforced. Parties often include liquidated damages clauses for delays in practical completion.
It is important to highlight that the principal is not required to prove actual loss to claim liquidated damages, as long as the clause itself is valid and the event of delay occurred. This results in the damages becoming automatically payable, unless the clause is deemed as invalid leaving the principal to seek general damages in court proceedings.
It is imperative that parties are cautious where extensions of time (EOTs) are disputed, as this can have the effect of determining when liquidated damages begin to accrue.
Can Liquidated Damages Be Capped or Challenged?
In short, many contracts will include a cap on liquidated damages (e.g. “not exceeding 10% of the contract sum”). The purpose is to avoid disproportionate exposure of the parties. On the other side, parties have the right to challenge a liquidated damages clause in court by arguing it is a penalty or was not properly triggered. The parties can also negotiate amendments to the liquidated damages clause mid-project, which is especially important in the event delays are due to unforeseen circumstances or mutual fault.
Practical Tips
In the event you are drafting, enforcing or defending liquidated damages clauses, here are some practical tips:
- Draft clearly: Make sure the clause is unambiguous, especially around trigger events and the daily rate.
- Estimate fairly: Do not inflate the amount, base it on likely losses (e.g. holding costs, lost rent, disruption).
- Document delays: If you are enforcing liquidated damages, keep records of timelines, extensions, and correspondence.
- Review bargaining positions: Unequal bargaining power may give rise to arguments of unconscionability.
- Seek advice early: A lawyer can help test whether a clause is enforceable before a dispute escalates to that stage.
Need Help with a Liquidated Damages Clause?
Here at Rostron Carlyle Lawyers, we advise businesses, contractors, developers and consultants on all aspects of contract drafting, disputes and enforceability of liquidated damages claims. No matter the position, whether you are looking to enforce your rights or defend against a claim, our experienced team of commercial and construction lawyers are here to help.
Call us today on 07 3009 8444 or visit www.rclaw.com.au to arrange a confidential consultation.
The blog published by Rostron Carlyle is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult Rostron Carlyle on any legal queries concerning a specific situation.
