Articles

By Justin Cotton, Director, and Jordan Davies, Senior Paralegal, Lovegrove & Cotton – Construction and Planning Lawyers

It is not uncommon at all in the course of completing a construction project for there to be delays involved, given the array of potential delaying events including natural disasters, supply chain issues, short supply of labour, and issues with subcontract arrangements, amongst many others. In construction contracts, the period set in the contract is meant to allow room for expected delays such as those stemming from weather, and other foreseeable sources of delay. Building contracts invariably include provisions that allow the builder to claim Extensions of Time (EOTs) for certain qualifying causes of delay (including, for example, variations or delays caused by the owner/principal).

However, there are some instances where delays fall outside the ambit of these extension of time provisions and which push out the date of practical completion (when work actually reaches practical completion) from the day for practical completion (when work was meant to reach practical completion).[1] In these instances, the builder may be subject to liability for delay either pursuant to a ‘liquidated damages’ clause under the contract or at general law for delay damages, in circumstances where the liquidated damages clause is not operative, as it were. This article discusses some of the subtleties regarding liability under each of these doctrines, and the differences between them.

Liquidated Damages

Liquidated damages, as mentioned earlier, are stipulated under a contract. The right to claim liquidated damages is a contractual right based upon a “genuine pre-estimation of loss that will be suffered” in the event of delay. Unlike general law damages, the amount is set, and ordinarily in building contracts is specified as a weekly or daily rate and thus accrues in the nature of a debt, not ‘damages’ per se. This debt vis-à-vis damages distinction is important, because it means that owners face fewer hurdles in the way of claiming liquidated damages than they do for general law damages for delay.

One important consideration for any claim for liquidated damages is that liquidated damages are not allowed to be ‘penalties’,[2] and must be of the nature of an agreed contractual payment right to protect a legitimate interest in compliance with the contract.[3] In this sense liquidated damages are described, as mentioned earlier, as a “genuine pre-estimation of loss that will be suffered”, but are not traditional damages (or really damages at all). The rate stipulated cannot be “extravagant or unconscionable” as compared to the actual loss likely to be suffered in the event of delay. In essence, they cannot be penal in nature. The assessment for purposes of the penalties doctrine is a prospective enquiry as at the date of contract formation.

Often, a liquidated damages clause will read along the following lines (the following has been taken from an AS4000-1997 standard form of contract):

If WUC [work under contract] 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 24 [item stipulating the LD rate] 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.

If an Extension of Time is directed after the Contractor has paid or the Principal has set off liquidated damages, the Principal shall forthwith repay to the Contractor such of those liquidated damages as represent the days the subject of the Extension of Time.

Under the AS4000-1997 contract, therefore, the scope of operation of the liquidated damages clause is for delay that impacts upon the critical path pushing back the date of practical completion from the date for practical completion, or dates beyond the date for practical completion up until termination or work being taken out of the hands of the contractor. Beyond this scope, general law damages for delay shall apply.

Whilst this article will not discuss the “prevention principle” (whose application may be limited in instances of contract with stipulated EOT clauses) in detail, there is the possibility that conduct by the Principal not captured by an Extension of Time clause that causes the works to be critically delayed may set “time at large” such that the works need to be completed within a “reasonable period”, not the stipulated date for practical completion under the contract. Liquidated damages would not apply, and instead a principal would have to manage the hurdles of general law damages for delay.

Whether General Law Damages for Delay is Recoverable

Where there are no liquidated damages agreed by the parties, the doctrine of general law damages for delay will apply. The thresholds for claiming same are set by the common law. The following paragraphs serve to highlight some of the difficult hurdles that claimants face under general law delay damages and the lack of commercial certainty for contractors as compared to liquidated damages under contract.

Remoteness

Whether a particular form of loss suffered by an owner is recoverable against a building contractor depends on the nature of the breach and on the imputed knowledge of the builder.[4] So the question for whether one is able to recover non-liquidated damages flowing from delay, such as damages for alternative accommodation, storage, council rates and so forth, is whether the loss is “too remote” to be within the scope of liability. The test for remoteness was set out in Hadley v Baxendale to include loss “within the reasonable contemplation of the parties at the time of contracting as a result of breach” or such loss that naturally arises from the breach according to the usual course of things.

A Case Study for General Law Delay Damages: Alternative Accommodation, Loss of Rental Yield, Council Rates and Utilities Costs

By way of example, the authors would argue that it is quite within the contemplation of parties that in the event of non-performance or breach of a domestic building contract that was entered into by an owner who clearly was desirous of occupying that domestic home, that that owner would likely have to find alternative accommodation in the event of substantial delay which can be attributed to the builder.

This would include if there were serious defective works that needed to be rectified or works that needed to be completed by a different practitioner after termination that extended beyond the date for practical completion. It is considered that consequential loss associated with alternative accommodation is a natural and probable reality of domestic home construction delay, such that it would have been in the reasonable contemplation of the parties at contractual formation, particularly given the nature of the contract being one for a residence.[5]

Moreover, if there is actual evidence that the nature of the contract was one for the construction of the client’s personal residence and this particular requirement was made known to the builder, this will make the argument even stronger, according to Koufos v C Czarnikow.[6] This is because if, on the information available to the defendant when the contract was made, a reasonable person would have realised such a loss was not unlikely in the event of breach, then the defendant ought to be accountable for that loss as a result of its breach.

There is a preponderance of case law authority that supports “alternative accommodation” and other costs such as storage costs, council rates and so forth as consequential loss or heads of damage. There are multiple cases where it has been said that the likes of alternative accommodation costs,[7] storage costs,[8] and lost rental income[9], amongst other things, are not too remote to fall within a builder’s scope of liability.[10]

One of those cases, Metricon Homes v Softley, is a Victorian Supreme Court of Appeal (‘VSCA’) proceeding where the plaintiffs had claimed alternative accommodation costs through general law damages for delay. The owners had successfully made a claim under that head of damage, amongst others, against the builder and the appeal by the builder at the VSCA was dismissed. Another case is Konsol v M.L.E. Homes Pty Ltd, a VCAT case, where the VCAT found in favour of owners for loss of rent payments due to two town houses not being completed on time by the builder they were suing.

Remoteness & Mitigation

Whilst the authors consider loss arising from contractor-attributable delays might ordinarily be within the contemplation of parties at formation of a contract, knock-on complications arising from neutral delay events relating to, for example, COVID-19, which may exacerbate delays such as the appointment of a substitute builder, would quite arguably be too remote to be considered within the scope of liability of a contractor under a building contract.

Moreover, whilst the contract is on foot, extension of time clauses often will include scope for delays arising due to events such as lockdown delays and supply delays. For instance, as is provided under a simple AS4000-1997 standard form of contract, extensions of time for causes of delays other than:

• an act or omission by the contractor;
• industrial conditions or inclement weather, occurring after the date for practical completion; or
• events directly specified by the parties

will be able to be claimed as a qualifying delay event for an extension of time. That would include delays due to lockdowns and supply chain issues occurring before the date set for practical completion under the contract. Outside that period, and depending on the contract, it could be a matter for the Superintendent’s discretion.

As another example, issues including those associated with appointing a substitute builder may point to a failure by a principal to mitigate their loss where the existing contractor was capable and willing to come back onsite to rectify defective work, or arrange for their subcontractors to do same for no additional cost. As the parties to a contract presume each other will act reasonably, the loss due to a party’s failure to mitigate their losses is considered too remote to fall within the scope of liability of the other party.

Key Hurdle: Causation

Another key hurdle for any claim for general law delay damages is causation. It can sometimes be quite straightforward, but other times it can be very complex to establish. The question of causation being made out depends on evidence of the extent to which the contractor caused or contributed to the delay resulting in the consequential loss.

The complexity of this analysis is not helped necessarily by the ambiguous requirements for causation set out in March v MH Stramare, which adopted a “common sense” approach to causation rather than a “but for” analysis. Essentially, the common sense approach requires that Courts take into account a range of factors, and not simply whether “but for event, X, would loss, Y, have occurred.” The “but for” approach was rejected due to cases of concurrent causal factors.

In Henville v Walker, an Australian Consumer Law case, the issue of causation was fleshed out. In that case there were two contributing causal factors to loss: one being a misrepresentation by a real estate agent in respect of the value of a property which was relied on by an architect for assessment of the commercial viability of a project, and secondly, a negligent assessment by the architect themselves as to the cost of construction. Had either of these events not occurred, the architect would have realised the project was commercially untenable. Nonetheless, applying a common sense approach, the Court considered the real estate agent liable in light of the overarching regulatory scheme and the context of the architect’s reliance upon the real estate agent – the real estate agent’s fraudulent misrepresentation set the architect down a causal continuum that led to their substantial financial loss.

Claiming General Law Delay Damages: A Potentially Complex Process

The point of the immediately preceding paragraphs is to emphasise one clear thing: claiming general law delay damages is far more complex than liquidated damages, where causation does not have to be proven. When making a claim under general law, there are also issues regarding mitigation, and, as mentioned earlier above in examples regarding alternative accommodation, remoteness.

One attractive aspect of general law damages for delay, however, is that they are usually considered to be uncapped, unlike liquidated damages. If a principal, A, suffers a loss of $1,000,000.00 on account of delay of 3 weeks caused by the contractor, B, but the contract stipulates a weekly liquidated damages rate of $100,000.00 per week, the principal may be left financially bereft (compensated only for $300,000.00). Accordingly, sometimes a principal will want to claim general law damages for delay and undo the liquidated damages clause.

As mentioned earlier in this piece, if the principal has committed an act of prevention, the prevention principle might set time “at large” if there is no relevant Extension of Time clause, which would be curious as a principal would be, in such a case, relying on its own wrongful act of prevention to entitle it to general law delay damages. Otherwise, a liquidated damages clause might be invalidated as a penalty (also discussed earlier in this piece).

The interplay between liquidated damages and general law delay damages is a curious one, and which is subject to unsettled debate in common law jurisdictions around the world.

The Interplay between Liquidated Damages Clauses & Claims for General Law Delay Damages

It is accepted that there cannot be a simultaneous claim of liquidated damages and general law damages for delay regarding the same period. The existence of a clause stipulating pre-estimation of damages “does involve an implied limitation on the liability to pay damages”.[11] After termination of a contract, this concern is not necessarily at play.[12]

If a contract contains a liquidated damages clause for delay, it cannot extinguish entirely a right to claim general law delay damages if on proper construction of the contract the liquidated damages clause applies only for a given period (in most cases the clause does not survive termination).[13] After the period has elapsed for the operation of the contract, and therefore the liquidated damages clause, claims may be made under general law damages for delay.[14]

Some interesting developments have occurred in very recent times overseas in respect to whether the rate stipulated in a liquidated damages clause acts as a cap even where the provision is void or unenforceable. In the United Kingdom, the English Technology and Construction Court (TCC) has left it open for liquidated damages clauses to act as a cap on general law delay damages in circumstances where on the proper construction of the contract the liquidated damages clause is also construed to also be a separately operating limited liability clause.[15] In the case before the TCC, the rate concerned was in the tens of thousands of pounds per week, not the usual low rates you see in common residential building contracts in Australia, and was also capped at “7% of the final Trade Contract Sum”.[16]

In Victorian residential building, such an interpretation could be considered to cut against the grain of Section 10 of the Domestic Building Contracts Act 1995 (VIC), as limiting liability beyond the operation of the contract quite arguably restricts rights of consumers to take proceedings in respect of breaches under the Section 8 implied warranties, and perhaps most particularly Section 8(d); if so, this would also be the case for corresponding legislation in other States and Territories. In commercial contracting, however, it may be another story, if the liquidated damages clause was properly to be construed as a cap on liability agreed between commercially sophisticated parties. Nonetheless, there is an absence of Australian case-law on point and the impacts of liquidated damages upon general law delay damages in less regulated spheres of contracting is somewhat a legal grey area in this country.

Regardless, the contractual provision in the case before the TCC was a peculiar one. It should also be noted that in Singapore, the Singaporean High Court[17] did not consider that liquidated damages clauses operated as a cap on general law delay damages as the Court considered at [58] that general law delay damages and liquidated damages are doctrinally distinct:

“In my view, general damages and liquidated damages are underpinned by different considerations. General damages are intended to compensate the innocent party for the actual losses suffered as a result of the breach. In contrast, liquidated damages are intended to be a genuine pre-estimate of the likely losses that would be suffered in the event of a breach.”

It would appear then that in Australian residential contracting, there is little to no interplay between liquidated damages and general law delay damages. Where a liquidated damages clause is stipulated in a contract and the contract is on foot, loss arising from delay during the operation of that liquidated damages clause as stipulated in the contract (i.e. until the date of practical completion) will be valued in accordance with the liquidated damages rate. Outside the operation of the liquidated damages clause, the liquidated damages rate will not operate as a cap on general law delay damages by virtue of operation of the likes of the Domestic Building Contracts Act 1995 (VIC). In commercial building contracting, however, the matter could be considered a grey area. The success or otherwise of arguments pertaining to the operation of liquidated damages as a cap on general law delay damages will depend on the strength of arguments surrounding the proper interpretation of the liquidated damages clause within the context of the contract as a whole.

Conclusion

It is a matter of commercial certainty that liquidated damages clauses are included in contracts. The rate should be fashioned as a genuine pre-estimation of damage that protects the principal for anticipated potential loss whilst providing certainty to the contractor. Liquidated damages provisions should be paired up with sound extension of time and variation clauses that balance the right of a principal to claim liquidated damages against affording due fairness to a contractor.

When parties agree to contracts, whether for domestic or commercial building work, it is essential they check the terms of the contracts they are signing up to, particularly the clauses relating to liquidated damages rates, which are sometimes buried in annexures to the contract.

Disputes regarding delay can be immensely complex, with a range of legal doctrines potentially at play. If you are a principal to a building contract, or an owner of a residential building project, and your construction project is delayed, or if you are a builder subject to a claim for liquidated damages or general law delay damages, it is essential that you seek expert construction legal advice.

 

 

Disclaimer: This article is not legal advice. The article canvasses a number of issues that may be relevant to disputes regarding project delay, and some of the case law and academic discourse on point. It discusses issues in general terms and has no regard to specific circumstances of any particular case.

 

Footnotes

[1] Note: It is important to be mindful of the subtleties regarding these terms in contracts like the AS4000-1997, AS2124-1997 etc.

[2] See Paciocco v ANZ; Dunlop Pneumatic Tyres v New Garage & Motor Co.

[3] Paciocco v ANZ.

[4] Hadley v Baxendale 156 ER 145

[5] Hadley v Baxendale 156 ER 145

[6] [1969] 1 AC 350.

[7] Kennedy v Collings Construction Co Pty Ltd (1991) 7 BCL 25; Leeda Projects Pty Ltd v Zeng (2020) 61 VR 384, at [8] per Kaye JA; Metricon Homes v Softley (2016) 49 VR 746, at [115].

[8] Leeda Projects Pty Ltd v Zeng (2020) 61 VR 384, at [8] per Kaye JA.

[9] Konsol v M.L.E. Homes Pty Ltd (Building and Property) [2019] VCAT 1065 (VCAT Reference No. BP705/2018), at [275].

[10] See eg: Leeda Projects Pty Ltd v Zeng (2020) 61 VR 384, at [8] per Kaye JA; Metricon Homes v Softley (2016) 49 VR 746; Kennedy v Collings Construction Co Pty Ltd (1991) 7 BCL 25; and Konsol v M.L.E. Homes Pty Ltd (Building and Property) [2019] VCAT 1065 (VCAT Reference No. BP705/2018), at [275].

 

[11] IPN Medical Centres Pty Ltd v Van Houten [2015] QSC 204, [204].

[12] Konsol v M.L.E. Homes Pty Ltd (Building and Property) [2019] VCAT 1065 (VCAT Reference No. BP705/2018), at [270]; CF. Eco World – Ballymore Embassy Gardens Company Limited v Dobler UK Limited [2021] EWHC 2207 (TCC).

[13] Konsol v M.L.E. Homes Pty Ltd (Building and Property) [2019] VCAT 1065 (VCAT Reference No. BP705/2018), at [270].

[14] Ibid, [274].

[15] Eco World – Ballymore Embassy Gardens Company Limited v Dobler UK Limited [2021] EWHC 2207 (TCC).

[16] Ibid, [111]-[117].

[17] Crescendas Bionics Pte Ltd v Jurong Primewide Pte Ltd [2021] SGHC 189, [58].