Parties to a construction contract need to be very careful when completing contracts in relation to liquidated damages, particularly where it is not intended that liquidated damages apply.
There have been a number of cases recently where contractors have argued that the insertion of 'Nil' or 'N/A' by the parties means that the principal is unable to recover anything from a contractor for late completion. The argument is that the principal has effectively excluded its rights in relation to time claims altogether by completing the contracts in this way.
The recent decision of the Western Australian Court of Appeal in J-Corp Pty Ltd v Mladenis  WASCA 157 has reiterated the fact that this issue does create uncertainty and ambiguity and that parties should be clear in respect of either preserving or excluding the common law right to damages for late completion.
The appellant, J-Corp Pty Ltd (Builder), entered into a building contract with the respondents (Proprietor) for the construction of a three level brick house for a lump sum of $311,484.12 (Contract). The Contract was a standard form of contract prepared and used by the Builder.
Clause 11.9 of the Contract provided that, if the Builder failed to reach practical completion by the due date, the specified rate of liquidated damages available to the Proprietor was 'NIL DOLLARS ($00.00) per day'. The parties agreed that there was no communication or negotiation with respect to the inclusion of this clause prior to entering into the Contract.
The Builder did not reach practical completion within the specified period and the Proprietor commenced proceedings for recovery of damages suffered as a result of the delay. The Builder sought to rely on clause 11.9 to exclude any damages for delay. The Builder failed at first instance and appealed.
The critical issue in the appeal was whether the primary judge erred in finding that, on its proper construction, the Contract did not exclude any entitlement of the Proprietor to claim unliquidated damages. The essential question to be determined by the Court was whether clause 11.9 excluded the Proprietor's right to claim for damages at common law for losses suffered as a result of the Builder's breach of Contract.
The Court commented that the principles to be applied in the construction of a contract are well established and require the Court to consider:
- The common intentions of the parties;
- What the reasonable person would understand the contract to mean;
- The surrounding circumstances known to the parties; and
- The purpose and object of the transaction.
Upon consideration of the particular provisions of the Contract, the Court was unable to find any clear words that expressed an intention of the parties to exclude the Proprietor's entitlement to unliquidated damages for delay. Further the Court held that clause 11.9 did not constitute clear words to that effect. In reaching this conclusion the Court dismissed the Builder's submission that the insertion of 'NIL DOLLARS ($00.00)' demonstrated the intention of the parties to exclude the entitlement of the Proprietor to any damages in the event of delay.
It is important to ensure when drafting contractual clauses in relation to time and liquidated damages that the parties are very clear in relation to their agreement. The contract should deal very clearly with liquidated damages in terms of whether they are to apply and if they are not to apply whether the parties have excluded the right to unliquidated damages.
This case reaffirms to the construction industry that the use of 'Nil' or 'Not Applicable' for liquidated damages clauses in building contracts will not necessarily exclude a party's right to common law damages.
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