Why ‘zero’ liquidated damages can be worse for the builder

A recent judgment handed down on 26 August 2015 by the ACT Supreme Court serves as a useful reminder that liquidated damages can operate for the protection of the builder as well as the owners.

In Adapt Constructions Pty Ltd v Whittaker & Anor [2015] ACTSC 188, Justice Burns found that a rate of ‘zero’ liquidated damages in the MBA ACT New Dwellings Contract did not preclude the owners from being compensated for their actual delay costs. The case highlights that, depending on the contract, stating ‘Nil’, ‘zero’ or ‘$0’ as the amount of liquidated damages might ultimately end up worse for the builder than agreeing to a capped amount of delay damages.

The facts in Adapt Constructions v Whittaker

Mr Whittaker and Ms Luff engaged Adapt Constructions to build their house. The parties entered into a standard MBA ACT New Dwellings building contract on 10 December 2011 for a lump sum price of $480,000.00. Among other features, the owners required a polished concrete floor within their residence.

Towards the end of the building process, a dispute arose between the parties when the builder claimed payment and the owners refused on the basis that the building work was defective. The owners claimed that the concrete slab and footings were not in accordance with the approved building plans and engineering design and that the various deviations had resulted in increased cracking in the concrete slab, with further cracking expected. The parties agreed to arbitrate the dispute, and appointed Mr Bryan Ahern.

The owners claimed for damages including the cost to rectify the defective polished concrete floor, which required demolition of their almost complete residence and reconstruction of a new residence in accordance with the approved plans. The total amount of the damages claimed by the owners was $539,469.97.

Despite the builder’s argument that the cracks in the slab did not affect the structural integrity of the house, and that a solution for rectification would be to tile over the slab, the arbitrator found for the owners and ordered that the builder pay the owners the sum of $544,930.70, which included:

  • $488,897.00 for the cost of reconstruction;
  • $15,000.00 for the cost of demolition; and
  • $41,033.70 in damages for late completion.

Appeal to the ACT Supreme Court

The builder appealed this decision to the ACT Supreme Court. It argued (among other things) that the owners were not entitled to damages for late completion as the rate for liquidated damages in their contract had been intentionally left blank. The MBA contract standard wording said: ‘if nothing stated, Zero’. The builder argued that the ‘zero’ amount for liquidated damages precluded the owners from claiming any damages at all for delay.

The court, however, agreed with the arbitrator, who said that:

‘As there was no rate in item A17 [in relation to liquidated damages], there is no mechanism to calculate a sum as a pre-estimated liquidated damage for late completion. If the parties intended that there be no damages for the breach of Contract in not completing the works to Practical Completion by the due date, then they would have had to express that intention clearly.’

As such, the arbitrator concluded, and the court agreed, that the failure of the parties to insert a ‘rate’ into the item relating to liquidated damages resulted in the corresponding clause being ‘inoperable’ as the clause required a ‘rate’ in order to calculate liquidated damage. That clause being inoperable did not make another clause requiring the builder to complete the building by a date inoperable. As such an award of damages for late completion was possible based on the ordinary principles for assessing damages for breach of contract (ie. based on the losses that the owners can prove). The arbitrator had assessed these as being in the sum of $41,033.70.

Although the MBA contract has since been amended to exclude the words ‘if nothing stated, Zero’ in relation to liquidated damages, leaving the item blank, or writing ‘Zero’, ‘Nil’ or even ‘$0’ will still have the same effect as it would have before the amendment, as a ‘rate’ is still required to make the clause operable.

What do I need to do to make sure that I won’t be liable to pay damages for late completion?

Historically, cases considering clauses that provide for liquidated damages for late completion have been conflicting, which has led to uncertainty in this area of the law.

In Temloc Ltd v Errill Properties Ltd,[1] which was decided in 1987, the court found that when specifying the amount of ‘Nil’ in relation to a clause allowing for liquidated damages, the parties intended for this to be an exhaustive agreement as to damages for failure to complete the works on time. As such, the court considered that the owner had no right to claim for unliquidated damages under the principles of common law in respect of the delay.

There was evidence in Temloc, however, that Temloc and Errill had previously entered into a number of construction contracts in relation to different projects, all providing for ‘Nil’ liquidated damages. That and other evidence was taken to prove that, as the parties had a course of dealings in which no bonus would be paid to Temloc for early completion, the parties’ intention was that no damages would be paid by Temloc for late completion.

Only three years later, in 1990, the decision in Temloc was distinguished by Giles J in Baese Pty Ltd v RA Bracken Building Pty Ltd.[2] In that case, whilst the rate for liquidated damages in the contract was also specified as ‘Nil’, Giles J considered that the function of the clause in relation to liquidated damages was to:

‘enable the proprietor, if he so desired, to cause the architect as his agent to invoke the machinery whereby liquidated damages could be assessed…in order to obviate the task which would otherwise arise of establishing an actual loss due to delay, but that if the proprietor or architect did not do so, then the proprietor was entitled to rely upon his common law right to damages for breach [of contract].’

In coming to that conclusion, Giles J noted that ‘clear words’ would be needed before a party would be taken to have given up their right to claim for unliquidated damages at common law.

The court in J-Corp Pty Ltd v Mladenis, decided in 2009, confirmed the decision in Baese, holding that an intention to exclude the common law right to damages for breach of contract must be expressed in clear and unambiguous terms.

In addition, one judge in J-Corp drew a distinction between contracts that provide for ‘Nil’ damages and those that provide for damages in a positive amount, saying that:

‘The position may well be different where a contract provides for the liability of the builder for liquidated damages in a positive amount, it being unlikely that the parties would have intended that the proprietor should have the benefit of both liquidated and unliquidated damages for the same delay.’

Conclusion

It is clear now that simply leaving a section in relation to liquidated damages blank, or even providing ‘Nil’ or ‘$0’ as the amount of liquidated damages, may not allow a builder to avoid liability to pay damages for late completion.

If the parties intend for the builder not to be liable to pay damages for late completion, they need to make sure that not only is any section in relation to liquidated damages inoperable, but that they clearly express the intention that the builder will not be liable for damages for breach of contract if the building is not completed by the date specified for practical completion. In such circumstances, it is recommended that the parties’ seek legal advice in drafting the relevant provisions, to ensure that a court will recognise the agreement that was reached between the parties.

What Adapt Constructions Pty Ltd v Whittaker & Anor shows is that in lieu of taking such action, the builder may in fact be better protected by agreeing, in the contract, to a rate (no matter how small) being payable for the costs of delay. At least that way, the amount that the builder will be liable to be paid will be capped to a certain amount.

More information

If you would like more information about the findings made in Adapt Constructions Pty Ltd v Whittaker & Anor, or about your rights and obligations under construction contracts in general, please contact one of the members of our specialist Construction Project Delivery & Disputes Team:

Alisa Taylor — Partner — Construction Project Delivery & Disputes Team
(02) 6279 4388
alisa.taylor@mvlawyers.com.au

Kate May — Lawyer — Construction Project Delivery & Disputes Team
(02) 6279 4403
kate.may@mvlawyers.com.au