17 Sep 2015
No liquidated damages? No problem (unless you're a builder)
by Katherine Mallik
Even if a contract states that no liquidated damages are payable to a party for a delay, that party may still be entitled to claim damages at common law.
A court will not readily accept an argument by a contractor that the parties intended to exclude a claim for damages for delay without clear words to that effect. In the recent case of Adapt Constructions Pty Ltd v Whittaker  ACTSC 188, the ACT Supreme Court found that a construction contract based on a standard form which left blank the amount for liquidated damages to be paid for delays to completion did not prevent the principal to the contract from recovering unliquidated damages at common law for that delay.
Background to the Adapt Constructions case
The parties to the dispute entered into a standard form contract for the construction of a house in the ACT in 2011. The contract provided that if the builder did not complete the house by the date required by the contract, liquidated damages would be payable at the rate specified in the contract. A space was left blank in the contract for the rate of the liquidated damages to be inserted, with a note stating that if no rate was inserted, the amount of liquidated damages would be zero.
The parties did not insert a rate for liquidated damages in the contract. The house was not completed in time and the owners sought damages from the builder at common law. The builder argued that, because the contract had left the liquidated damages clause blank, the owners were not entitled to any damages, including unliquidated damages at common law.
"No liquidated damages" does not mean "no damages"
The parties' dispute was referred to arbitration. The arbitrator found that:
- because a liquidated damages rate had not been inserted in the contract, there was no mechanism to calculate damages using a pre-agreed rate, and the liquidated damages clause was effectively "inoperable";
- while this meant that the owners were not entitled to liquidated damages, the arbitrator was able to assess damages for late completion (ie. for breach of contract); and
- if the parties had intended that no damages would be payable, this would have been clearly expressed in the contract.
The builder sought leave to appeal from the arbitrator's award from the ACT Supreme Court on the basis that the arbitrator had made an error of law.
What is the state of the law in Australia?
The ACT Supreme Court considered the UK case of Temloc Ltd v Errill Properties Ltd, in which the UK Court of Appeal found that a contract which provided for liquidated damages to be paid at a rate of "£nil" was intended to preclude the principal from claiming unliquidated damages.
However, in that case the parties had separately agreed that, as no bonus would be payable for early completion, no damages (whether liquidated or unliquidated) would be payable for late completion, and that this was taken into account in determining whether the rate of "£nil" was intended to apply to both liquidated and unliquidated damages.
The ACT Supreme Court also considered the Australian cases Baese Pty Ltd v RA Bracken Building Pty Ltd and J-Corp Pty Ltd v Mladenis, which confirm that, unless the contract says otherwise, a contract which provides for "zero" or "nil" liquidated damages to be paid does not automatically prevent the principal from claiming unliquidated damages.
How can you tell if a principal can claim unliquidated damages?
In light of these cases, the Supreme Court suggested that, in determining whether the parties' intention was that a principal should not have a common law entitlement to damages for delayed completion:
- a court must decide whether the parties intended for that party to not have that entitlement, having regard to the language of the contract (and may have regard to the surrounding circumstances and the purpose of the transaction);
- if the contract provides that the principal may elect to claim liquidated damages, this may indicate that the parties intended that the principal would be entitled to claim both liquidated and unliquidated damages;
- if the contract provides for liquidated damages to be payable automatically, this may indicate that liquidated damages are intended to be the only remedy; and
- an intention to exclude a right to unliquidated damages at common law must be expressed clearly in the contract.
As the arbitrator had examined the contract to determine whether it showed a clear intention to exclude the owners' right to unliquidated damages and had found that it did not, there was no error at law.
Clear drafting is the solution
Care needs to be taken in using standard form contracts. If the parties to a contract agree that the principal will not be entitled to liquidated or unliquidated damages for delays to completion, they should clearly state this in the contract ‒ it is not sufficient to leave the amount of liquidated damages in a standard form contract blank or to insert the amount as "zero" or "nil".