Most standard form construction contracts provide for liquidated damages (“LDs”) to be payable for late completion. When parties do not want LDs to apply, they may:
- delete the LDs clause entirely
- provide that “nil” liquidated damages are payable for late completion, or something similar
Doing either of these things, without saying more, can cause problems. Why? Because it leaves open the question of whether a party can claim unliquidated damages for delay even though it cannot recover LDs. Unliquidated damages, also known as “general” damages, are damages that a party proves it actually suffered because of the other party’s late performance.
There have been a handful of cases dealing with this legal problem. In an Australian case, decided yesterday, the court grappled with a construction contract which said that the rate of LDs was “N/A”. The builder was late in its construction of a 12 storey apartment building. The developer could not recover liquidated damages because they were “N/A”, but did this mean it could not also recover unliquidated damages, i.e. so that the contractor did not have to compensate the developer for its delay-based losses arising from any contractor-culpable delay?
An arbitrator held that unliquidated damages could be recovered. The court upheld the arbitrator’s award. The reason unliquidated damages were recoverable was because there was nothing in the parties’ contractual arrangements to indicate clearly that they intended no damages to be recoverable for delay. Contrast this case with one notorious case (Temloc v Errill) where a statement that LDs were “nil” prevented the developer from recovering any damages in respect of contractor-culpable delay. More recently, in the 2007 case of Chattan the TCC held that the parties’ agreement to exclude liquidated damages prevented the recovery of general damages for delay. Is there a conflict in these cases? No - they just turn on what the parties were found to have intended.
What lessons to draw from this? Where parties agree that LDs are not payable, it is imperative that they spell out in their contract whether it is intended that general damages for delay are recoverable. Otherwise the developer may find that it has no entitlement to recover its delay-based losses from a culpable contractor. Equally, where a figure for LDs is specified that later appears to be an under-estimate, it will be very hard for a developer to avoid the LDs being treated as its exhaustive remedy for its delay-based losses.
Reference: Silent Vector Pty Ltd v Squarcini [2008] WASC 246
