Key takeaway points
- Liquidated damages clauses in building contracts need to be strongly drafted in order to exclude general damages as a remedy.
- The recent judgment delivered by the New South Wales Court of Appeal in Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192 illuminates a key issue relating to liquidated damages clauses in standard form building contracts.
- The case provides a reminder that liquidated damages clauses must be carefully drafted to avoid contention.
- This particularly relates to the aggrieved party’s ability to claim general damages if the contract is breached through delaying the date of completion.
The recent judgment delivered by the New South Wales Court of Appeal in Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192 illuminates a key issue relating to liquidated damages clauses in standard form building contracts. Specifically, the case provided a reminder that liquidated damages clauses must be carefully drafted to avoid contention, particularly relating to the aggrieved party’s ability to claim general damages if the contract is breached through delaying the date of completion.
This case has relevant implications for contracts executed in all jurisdictions due to the nature of general damages principles and the prevalence of liquidated damages clauses. Additionally, the case covers a myriad of issues – however the focus for this case update will be the issue of liquidated damages.
Background to the case
Joe Carbone and Matthew Carbone (the appellants) owned neighbouring blocks of land in Western Sydney at Oran Park. They both entered into contracts with Fowler Homes Pty Ltd (‘Fowler Homes’) for construction of a duplex on their respective lots. These contracts were based on the standard form NSW Residential Building Contract for New Dwellings (the Standard Contract), and the terms of both were identified as materially identical. Hence, both had the same “Building Period” of no more than 48 weeks – where practical completion was to be achieved in that period by Fowler Homes. If that was not achieved, clause 32.1 of the Standard Contract (the liquidated damages clause) was activated. This referred to Item 11 of the Schedule, where the daily rate was to be inserted, and $1 was noted as the applicable default daily rate if nothing was inserted. In this case, the executed version had “$.00 per working day” inserted at Item 11.
The works commenced in August 2018, with the projected date of practical completion being by July 2019. However, the appellants were unable to obtain access and possession of these duplexes until April 2021 because of disputes arising between the parties.
In earlier proceedings, issues concerning unconscionability and damages for lost rent were considered. The primary judge did not determine that the appellants could claim damages for lost rent because of Fowler Homes’ delay in completion, suggesting it was outside of the scope of the pleadings. This then led to the appeal, to determine the breach of contract resulting from the delay by Fowler Homes and the provision of liquidated damages.
Key issue
The Court of Appeal had to consider to what extent the appellants should be awarded damages for the breach by Fowler Homes, by construing the liquidated damages clause and determining whether its operation prohibited a breach of contract claim for general damages.
Decision
Ultimately, the appellants were successful in establishing a case for damages for breach of contract and were able to prove substantial damages. This led to consideration of the quantification of their loss, with Fowler Homes relying on the liquidated damages clause seen within both building contracts to argue that the damages should be no more than $1 per day of delay. Meanwhile, the appellants contended that the construction of the liquidated damages clause did not prevent their ability to claim general damages for delay.
The Court of Appeal ultimately agreed with this submission. It was held that Fowler Homes was unable to rely on the liquidated damages clause and that the clause did not exclude the appellants from claiming general damages for the loss they established resulting from the delay.
Reasoning and findings
The Court of Appeal noted that Fowler Homes attempted to rely on the liquidated damages clause by notice of contention, filed under r51.40 of the Uniform Civil Procedure Rules 2005 (NSW). It was necessary to file a notice of contention as the liquidated damages clause had not previously been pleaded. Their Honours recognised that affirming the prior decision on the grounds stated in the notice of contention would have the effect of Fowler Homes being required to pay only $1 per day for the delay (which would have amounted to $600 at most). However, the Court cited the principle that the “rules of the court are the servants of justice, not its masters,” persuading Their Honours away from this viewpoint. The Court noted that the liquidated damages clause had not been pleaded throughout the proceeding. The appellants contended that it could not be relied upon in the appeal as the clause would be challenged as unenforceable per the Contracts Review Act 1980 (NSW), requiring the Court to undertake an exercise of factual inquiries that had not been previously made. The Court stated that this point was sound, as on its face a clause that prohibits a party from claiming substantial damages from a builder in the case of the builder’s breach, is capable of being unjust within the meaning of the Contracts Review Act 1980 (NSW).
Additionally, the appellants submitted that, on construction of the liquidated damages clause, it did not prevent a claim for general damages for delay alongside the liquidated damages. This was based on the principle deriving from Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137 (‘Baese’), that clear wording would be required “before it was held that a liquidated damages clause was the entirety of a proprietor’s rights.” In Baese, this result was reached as a matter of construction, where the clause specified “nil” for liquidated damages. The appellants also raised the decision of Cappello v Hammond & Simmonds NSW Pty Ltd [2020] NSWSC 1021, where a liquidated damages clause charging $1 per day was not interpreted as providing an “exclusive remedy for delay.” The Court raised a similar, earlier decision in the Western Australian Court of Appeal. In J- Corp Pty Ltd v Mladenis [2009] WASCA 157, the clause in question provided that the builder would pay no liquidated damages. The clause was construed to not bar the owner’s entitlement to receive unliquidated damages if the builder failed to satisfy its obligations and complete work within the building period.
In response, Fowler Homes submitted there was a difference between $1 per day and $0 per day, which would mean the above reasoning could have limited application. They also attempted to distinguish the cases the appellant referenced. However, the Court was of the view that due to the negligible nature of the liquidated damages in question, they found that clear language was required in order to strip a party of their right to claim for general damages.
The Court ultimately took a practical approach, considering the context of the Standard Contract, which already provided for a mechanism to activate an automatic extension in favour of the builder. There was no compelling reason to leave an owner with nominal liquidated damages, where delay by the builder results in loss for the owner.
This judgment highlights the importance of particular drafting for liquidated damages clauses to determine whether they abrogate a party’s rights to claim unliquidated damages.
Please contact Kerry Gibson or Steve Latham if you are concerned about a liquidated damages clause within a contract to understand the effect of these clauses and how to best protect your interests in cases of delay, given the current climate of the building and construction industry.
