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Nominal liquidated damages may not keep general damages away

A Building Contract usually contains a provision for a cap on liquidated damages. In some contracts, particularly Master Builders and HIA contracts, the amount for liquidated damages is usually a default position (unless otherwise stated) at $1 a day for each day of delay from the date the builder was meant to reach completion under the Building Contract until the builder actually completes the works.

The amount set for liquidated damages is meant to represent a genuine pre-estimate of loss that would be suffered by the principal should the works be delayed. If the amount of liquidated damages is excessive, it may be argued that such a clause is a penalty and thus be held to be void.

In the recent case of Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021, the Supreme Court of NSW considered whether a Building Contract which contained a provision for a nominal amount of liquidated damages in the amount of $1 per day excluded the homeowner from also claiming general damages for delay.

The contract was a HIA Costs Plus contract for works related to renovations to a dwelling. The homeowner alleged that the builder was approximately seven months late in completing the works. The Homeowner claimed that it was entitled to general damages, in addition to the claim for the amount of liquidated damages.

The general principle in law is that where parties agree on a rate for liquidated damages, it is taken to exclude claims for general damages.

Justice Ball stated [at paragraph 27]:

“Accepting that principle, the question remains whether by inserting a nominal amount as the amount payable by way of liquidated damages the parties intended, in effect, to exclude the operation of the liquidated damages clause or whether they intended to exclude a right to claim damages for delay altogether. The answer to that question does not depend on the application of any general principle but on the proper construction of the contract in question.” (Emphasis added)

It was also noted that Section 18B(1)(d) of the Home Building Act 1989 (NSW) implies into a residential Building Contract a warranty that the builder will complete the works within the time stipulated in the Building Contract. If the Building Contract seeks to limit a party from claiming damages in the form of nominal liquidated damages it has the effect of restricting that party’s rights in respect of the warranty and would be held to be void under Section 18G of the Home Building Act 1989 (NSW).

Justice Ball held that he preferred the interpretation that if only a nominal amount of liquidated damages is provided for under a Building Contract, it should not be interpreted as preventing a claim for general damages. Accordingly, the parties intend that general damages can be claimed rather than limiting it to the amount of the nominal amount of liquidated damages.

However, Justice Ball ultimately upheld in this case that the Home Owner was only entitled to nominal damages as the majority of the delays were due to the Homeowner’s requested variations to the works and did not appear to have suffered any additional loss.

In light of the above, it is important for liquidated damages to represent a genuine pre-estimate of loss, otherwise:

  1. it will either be held to be a penalty if it is too high and thus void; or
  2. if the amount of liquidated damages is only nominal, then it can be also be held to be either void or may not exclude general damages.

If you or someone you may know is in need of assistance or clarification regarding the above, please email us at info@bradburylegal.com.au or call (02) 9248 3450.