Be careful when negotiating and drafting liquidated damages clauses - have you clearly and carefully limited liability for delay?

The recent decision of the New South Wales Court of Appeal (NSWCA), Carbone v Fowler Homes Pty Ltd[1] is a timely reminder of the importance of ensuring that liquidated damages clauses are clearly and carefully drafted. 

In Carbone, the NSWCA decided that a liquidated damages clause which limited liquidated damages to $1 per day did not remove Fowler Homes’ liability to the Carbones’ for common law damages for delay. 

In reaching its decision, the NSWCA applied the WA Supreme Court of Appeal decision of J-Corp Pty Ltd[2] in which the Court found that a liquidated damages clause that specified $0 per day did not exclude J-Corp’s liability for delay. 

Key Takeaways and Tips

• Clear and express language must be used to exclude a party’s liability for common law damages for delay. 
• A liquidated damages clause that limits a party’s liability for liquidated damages to a nominal amount when compared with the contract sum will not, on its own, exclude the aggrieved party’s right to claim common law damages for delay. 
• Parties should carefully consider any liquidated damages sum included in a building contract and whether that sum is: 
  • a genuine pre-estimate of the principal’s loss arising from a delay in completion; and
  • intended to be the principal’s sole remedy for a delay in completion by the builder, and include clear drafting to reflect the negotiated position. 

Carbone v Fowler Homes Pty Ltd

Mr J Carbone and his son, Mr M Carbone, entered into standard form Housing Industry Association “NSW Residential Building Contract for New Dwellings” contracts with Fowler Homes for the construction of residential dwellings.  Each of the contracts was in materially identical terms and had a “building period” of 48 weeks. The contracts made provision for liquidated damages in an amount specified in the schedule, with the standard form providing that “if nothing stated, then $1”.

Construction was delayed, and practical completion was not achieved within the 48-week period provided for in the contracts. 

One of the issues arising on appeal was whether the liquidated damages clause applied, and thereby reduced any claim for breach of contract to a nominal amount. 

Fowler Homes: 

• sought rely upon the liquidated damages clause of $1 per day if a claim for damages for breach of contract had been made by Mr J and Mr Mr Carbone[3]; and
• said that there was an important difference between liquidated damages of $1 per day and $0 per day, and that this meant the Court could depart from the WA Supreme Court of Appeal J-Corp decision. 

Mr J and Mr M Carbone said that the liquidated damages clause, properly construed, did not prevent a claim for such damages for delay as an owner might prove. 

The Court of Appeal agreed with Mr J and Mr M Carbone, finding that:

• J-Corp was not distinguishable and should be followed;
• there was no reason for a clause in an HIA contract, which contains regimes to relieve the builder from delays outside of its contract, “to leave an owner with a nominal return in circumstances where the builder fails to adhere to its promised timing and the owner can establish loss caused by the builder’s delay”. 

The Court of Appeal held that, on its proper construction, the liquidated damages clause complemented, and did not exclude, damages for Fowler Homes’ delay. 

[1] Carbone v Fowler Homes Pty Ltd; Carbone v Fowler Homes Pty Ltd [2024] NSWCA. 

[2] J-Corp Pty Ltd v Mladenis (2009) WASCA 157.  In J-Corp, the clause in the contract provided that if the builder did not complete the works on time “it shall be liable to pay the Proprietor liquidated damages at the rate of NIL DOLLARS ($0.00) per day”.  The clause did not stand in the way of the owner’s entitlement to prove general damages if the builder breached its obligation to complete within the time specified as there was no clear intention to exclude an entitlement to claim and prove unliquidated damages.  Mr J Carbone and M M Carbone also relied on the decisions of Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137 and Cappello v Hammond & Simonds NSW Pty Ltd (2020) NSWC 1021. 

[3] The case brought by Mr J and Mr M Carbone before the District Court involved claims for deceit and statutory unconscionability, as well as claims for damages for lost rent. Whilst Mr J and Mr M Carbone did not claim for breach of contract, the Court of Appeal found that the trial was conducted on the basis that a breach of contract claim had been pleaded.