Liquidated damages clauses fix the amount that one party must pay another party for breach of contract. In construction contracts, they often fix the amount that a builder or subcontractor must pay their client if their work isn't completed in time.
Liquidated damages clauses can help avoid arguments about loss caused by delay and give certainty to builders, subcontractors and owners. They can also help to motivate contractors to get their building work done in time.
Penalties
The amount specified in a liquidated damages clause must be carefully considered when entering into a construction contract. The amount must be a genuine pre-estimate of the loss that the party will incur from the breach. If the amount is so large that it is out of all proportion with the greatest possible loss likely to result from the breach then it may be considered to be a penalty and therefore unenforceable.
Nominal damages
If the amount stated for liquidated damages is unreasonably low, then it may amount to 'nominal damages'. If so, the party who has suffered from the delay may be able to fall back on the general law of damages and still claim the amount of their actual loss caused by the delay. The amounts specified in the fallback provisions for a number of commonly used standard form construction contracts are likely to be considered nominal damages by NSW Courts and Tribunals.
It's important that all parties to a construction contract carefully consider the amount identified in any liquidated damages clause. If not, the clause may be ineffective and misleading.
Delay
If you have entered into a contract that contains liquidated damages for delay, you should carefully consider what the contract says about delay. Most construction contracts will fix a date for practical completion, which will be the date the work under the contract must be finished. Liquidated damages clauses often kick in when the work has not been completed by the date for practical completion.
Extensions of time
Most construction contracts also include provisions for the extension of time for common delays that aren't caused by the contractor - such as inclement weather or delays in receiving instructions. These extension of time clauses can extend the date for practical completion so that if the contractor complies with the requirements in the extension of time clause, the liquidated damages clause does not kick in until a later date than stated in the contract.
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.
