Liquidated damages clauses, which allow parties to predetermine the amount of damages payable in the event of a breach, are a common feature of standard form construction contracts. Australian Standard (AS) construction contracts, for example, allow for liquidated damages for delays in reaching practical completion. The parties may insert the agreed rate for liquidated damages at Annexure - Part A to those contracts.
Sometimes parties agree to exclude liquidated damages provisions from the standard forms, preferring to seek general damages in the event of a breach. Care should be taken in these cases because in some instances parties intending to exclude liquidated damages inadvertently excluded their general damages as well.
Risk in writing: 'NIL' and 'N/A' for liquidated damages
The landmark English case of Temloc Ltd v Errill Properties Ltd provides a harsh example. The parties wanted to exclude liquidated damages from a JCT standard form contract. To achieve this the rate for liquidated damages in the annexure was NIL. It was assumed that, by identifying the rate of NIL, they had excluded liquidated damages and the innocent party could rely on general damages instead. The English Court of Appeal found that this was not the case. The standard contract contained only one remedy for delay - liquidated damages. Once this remedy was excluded, there was no fall-back mechanism in the contract for recovering any general damages for delay.
A similar situation occurred in NSW but with a different outcome. In Baese Pty Ltd v RA Bracken Building Pty Ltd the parties entered "NIL" for the "rate for liquidated damages and ascertained damages" in the annexure of a standard contract. The Supreme Court found that the particular contract, unlike the contract in Temloc, contained rights to general damages for delay. This meant that the parties did not, by setting the rate for liquidated damages at nil, exclude general damages for delay. A similar outcome occurred in South Australia in Decor Ceilings Pty Ltd v Cox Constructions Pty Ltd where the Supreme Court found that the right to general damages can only be excluded from a contract with clear and unmistakeable words.
The Baese and Décor cases did not reject the principle in Temloc. The Supreme Court of NSW followed Temloc closely in CS Phillips Pty Ltd v Baulderstone Hornibrook Pty Ltd. In that case the parties wrote N/A in the annexure for liquidated damages. The court found that N/A had the same effect as NIL and that the contract, like Temloc, was expressed so that the liquidated damages clause was the only remedy for delay. Once that clause was deleted there were no rights under the contract to recover any general damages for delay.
If the parties agree to exclude liquidated damages, it should be addressed in clear and express language that they will be deleting the liquidated damages regime but retaining the right to recover general damages for any breach.
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