A key benefit of a liquidated damages regime is that it gives
both parties certainty about what happens if a contractual
obligation is not met, such as failing to deliver goods by a
certain date. However, it is often this contractual certainty that
is challenged when it is time to pay damages.
There are some common challenges to a liquidated damages regime
and key steps you can take to ensure your regime is
There has been a question mark over the enforceability of many
commonly used contractual performance incentives since the High
Court's decision in Andrews v Australia and New Zealand
Banking Group Limited (Andrews).
Despite the uncertainty created by the Andrews
decision, it appears that one principle remains clear-if the amount
of the liquidated damages is a genuine pre-estimate of loss it will
not be penal and, therefore, will be enforceable.
The "prevention principle" operates to prevent a party
claiming liquidated damages for the other party's failure to
complete a task by a due date, where this failure was caused by the
party claiming damages.
The principle is based on the notion that a party cannot recover
damages for what they have caused.
Some common examples of acts of prevention include:
breach of contract, such as failing to give access or delaying
granting approvals, or
valid actions, such as instructing the other party to perform
If your contract does not provide for how a delay is to be dealt
with, the prevention principle will operate. This means that the
party who was originally contracted to provide the goods or
services in question is no longer required to do so by the original
contractual deadline. In other words, the original deadline falls
away and time becomes "at large", meaning that there is
no longer a date for liquidated damages to start running from.
In the context of liquidated damages, the principle has been
applied to disentitle a party from recovering liquidated damages
where the delay was caused by delays of both parties, or
if the other party, due to its own delays, could not have
completed the work on time.
While time being "at large" does not necessarily mean
that the party seeking damages is no longer entitled to any
damages, it does mean that the party will have to establish what is
a reasonable time for completion and the actual loss suffered as a
result of the delay. Clearly this is more difficult and costly to
establish than relying on the predetermined amount calculated under
a liquidated damages regime.
How to overcome the effect of the prevention principle
A properly drafted extension of time regime can prevent a delay,
caused by the party seeking to rely on the liquidated damages
regime, resulting in time being "at large". An
appropriately drafted extension of time clause allows the
completion deadline to be extended by the same amount of time that
the act of prevention delayed the contractor from performing its
This effectively negates the effect of any delay caused by the
party attempting to recover the liquidated damages.
An appropriately drafted extension of time
clause allows the completion deadline to be extended...[and]
negates the effect of any delay caused by the party attempting to
recover the liquidated damages.
Key points in drafting an appropriate extension of time clause
it is triggered by an act of prevention
there are strict notice requirements that the other party must
comply with to obtain an extension of time, to avoid the party
"banking" them and claiming extensions at the last
there is an ability to grant an extension of time unilaterally,
to avoid the argument that the inability to claim an extension of
time due to the notice provisions means the prevention principle
applies (as was held in Gaymark Investments Pty Limited v
Walter Construction Group Limited), and
the ability to grant an extension of time can be exercised at
any time, to ensure that if the matter is being determined after
completion there can be a retrospective allocation of
responsibility for delay.
What this means for agencies
Many standard form Commonwealth contracts include a liquidated
damages regime. As with any standard form contracts, the danger in
using many of the precedent clauses without fully considering their
application is that there is a risk that, without tailoring for the
specific circumstances of the transaction, the provisions may
In the case of liquidated damages, it is critical that the
contractual regime is not penal in nature and is flexible enough to
respond to an act of prevention through an appropriate extension of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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