Supreme Court Spotlight – Nominal liquidated damages clauses

nominal liquidated damanges clauses

In Capello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021 His Honour Justice Ball considered the entitlement of a homeowner to general delay damages in circumstances where the contract stipulated liquidated damages of $1 a day.

In this case, Ball J held that the clause in dispute, within an industry-standard contract, was void.

Facts

In September 2017 Mr & Mrs Cappello entered into a contract for the renovation of their residence in Haberfield with the defendant builder, Hammond & Simonds NSW Pty Ltd. The contract was in the form of an HIA standard contract for costs plus works.

The Builder commenced the works on 4 September 2017 and on 23 August 2018 sent the Owners a progress claim for $156,113.54. The Cappellos disputed the invoice on the basis that the works were incomplete and paid part of the claim, leaving $81,113.54 unpaid.

On 10 October 2018, the Builder suspended the works in accordance with the Contract and on 18 October 2018 served a notice to show cause. The Owners did not pay the balance and so the Builder terminated the contract in November 2018.

Liquidated damages

Liquidated damages are a pre-set amount to compensate for loss arising from a particular breach of contract.

A construction contract will commonly contain a liquidated damages clause providing for a pre-set amount of damages to become payable to an owner if a contractor completes the work later than the agreed completion date.

The purpose of such clauses is to avoid the costs of quantifying the actual damages for delay.

In Cappello the completion date was March 2018, work was completed seven months late, in October 2018 and the Builder had made no claims for extensions of time. Clause 28 set liquidated damages at $1 per day, the figure that is also the default amount of LDs payable under the HIA Costs Plus Contract.

The Proceedings

On 9 January 2019, the Cappellos issued proceedings seeking amongst other orders general delay damages.

The Builder argued that clause 28 excluded a right to general delay damages and that the $1 nominated in clause 28 was an exclusive remedy.

The Owner countered first, that on a proper construction of the contract, clause 28 was not an exclusive remedy, and second, that s18G of the Home Building Act 1989 rendered the clause void because it operated to restrict the Owners’ damages for breach of the s18(1) (d) warranty as to the completion time.

Ball J agreed generally with the Builder’s position and said at [26]: ‘where parties choose to make provision for the payment of liquidated damages they are to be taken as excluding a right to claim general damages.’    

Findings on s18G

His Honour approached the Owners’ two arguments as ‘tied together’, finding that s18G did operate to render clause 28 void. As a result, the Owners had a general right to delay damages:

“[31] In my opinion, a provision of a contract which limits a party to claiming nominal damages for a breach of that warranty has the effect of restricting the rights of that person in respect of such a warranty since it substitutes for a substantial right for its breach a nominal one.”

Ball J indicated that this decision was restricted to nominal LDs and said: “[32]…The position, of course, may well be different if the clause had provided for the payment of a substantial amount by way of liquidated damages.’

Summary

This decision affects both Owners and Builders.

Builders under existing residential contracts that specify or default to nominal damages should take care to claim all available extensions of time.

General damages for delay can still be precluded in residential building contracts by inserting a rate that is “a substantial right” for breach of the time completion warranty.


Do you need advice regarding the nominal liquidated damages clauses?   

Clare Peacock is an experienced construction lawyer working on Sydney’s Northern Beaches. Clare provides practical, cost-effective building approval advice to property owners, builders and strata managers. Services include residential building disputesbody corporate issues and strata building problems.

Call 02 9452 9298  Send an Email  Online Enquiry

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