Australia: Liquidated damages in residential building contracts in New South Wales

In New South Wales, most contracts for the construction and renovation of residential buildings are largely based off a standard form building contract, such as the HIA Residential Building Contract, that has been specifically drafted for use in relation to residential building work in NSW.

Most residential building contracts will include a clause providing for liquidated damages to become payable to an owner where a builder completes the work after the agreed completion date. The purpose of a liquidated damages clause is to specify a fixed amount of damages payable to the owner if the work is not completed within an agreed timeframe.

Commonly, the standard form building contracts will include a nominal amount for liquidated damages as the default position. However, the NSW Supreme Court has recently determined that such clauses in residential building contracts will not prevent the owners from making a claim for general damages; that is the actual damages suffered by the delay.

Cappello v Hammond & Simonds NSW Pty Ltd

In Cappello v Hammond & Simonds NSW Pty Ltd ¹ , the parties had entered into a HIA building contract. The contract specified liquidated damages as $1 per day, being the contract's default position. The works ended up being completed seven months late and the builder did not correctly apply for any extension of time.

One of the issues considered in this case was whether the liquidated damages provision conflicted with the operation of the Home Building Act 1989 (Act). In particular, section 18B(1)(d) of the Act implies a warranty into all residential building contracts that work will be completed by the time stipulated in the contract and section 18G renders void all contractual provisions that attempt to override any statutory warranty.

The Court ultimately found that the liquidated damages provision was not to be read as limiting the owner's claim for damages to a nominal amount, as it would operate to restrict the rights of the owner under section 18B(1)(d) and, therefore, be rendered void by section 18G. Rather, the Court concluded that liquidated damages was not the only remedy for delay and that the owner was also entitled to a claim for general damages (although, in this particular case, the owner was unable to demonstrate any damage).

Importantly, the Supreme Court stated that the outcome may have been different if the liquidated damages clause provided for a substantial amount, rather than a nominal amount.

What this means

This decision affects both homeowners and builders.

A homeowner may now be entitled to claim for actual damages incurred as a result of a builder's delay in excess of a nominal liquidated damages amount specified in the residential building contract.

If a builder wishes to limit its exposure to such damages, it is critical that they correctly claim extensions of time under the contract to validly extend the date for completion.

Footnote

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.