Are Contracted Rates for Liquidated Damages Specified in a Contract Enforceable in relation to Residential Building Work?

14/04/2023

Watson & Watson act on behalf of many Owners, Sub-Contracts, Builders and associated professionals involved in the construction of residential building works.  Such works are to be undertaken in accordance with the Statutory Warranties provided for in the Home Building Act 1989 (“HB Act”) which is set out in Section 18B of the HB Act.

Section 18G of the HB Act provides that:

“A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void”.

In other words, the Builder or Contractor cannot contract out of the Statutory Warranties and are bound by the Statutory Warranties.  Any such attempt by the Builder to contract out of the Statutory Warranties is void and not enforceable by the Builder.

Section 18B of the HB Act lists the Statutory Warranties as to residential building which include:

“1(d) a warranty that the work will be done with due diligence and within the time stipulated in the Contract or if no time is stipulated then within a reasonable time.”

There are numerous standard forms of Contract in relation to the carrying out of residential building including new homes and renovations within New South Wales. 

The standard form Contracts generally includes:

1. A Schedule setting out the General Conditions of the Contract.
2. A Schedule which refers to various conditions within the General Condition and provides for the inclusion of the particulars that relates to the particular project.  These particulars include for example, the parties, project site, scope of work, Contract sum payable and the basis for a change in the Contract sum, the date for commencement of the work, the building period, the date for completion of the work and provisions relating to extension of time in which the works are to be completed.
3. Often there are Special Conditions provided initially by the Builder which often provide for changes to the General Conditions and adding other clauses which are not referred to in the General Conditions.

Careful consideration should be given to agreeing to any of the particulars referred to in the Schedule and the terms of the Special Conditions.

Further one of the variable elements is the delay costs mostly payable by the Builder or allowed by the Builder in the event the Builder does not complete the works by the adjusted date for completion of the works.  One needs to properly consider the terms of the Contract.

Many of the standard form Contracts has a Schedule which allows the parties to insert particulars relating to various aspects.  For example, the HIA NSW Residential Building Contract for New Dwelling at Schedule 1 Item 11 has a place to insert the rate of the Liquidated damages which will apply pursuant to Clause 32 of the Contract.

This form at Item 11 states the rate of liquidated damages “If nothing stated then $1 per working day”.

Liquidated damages should be between the Home Owner and Builder an agreed assessment of the damages that would be suffered by the Owner if there was a delay in completing the works by the date for Practical Completion.  This is agreed between the parties before entering into the Contract and the agreed rate is included in the Contract.  In the usual circumstances by making a provision for liquidated damages at an agreed rate, it is generally taken to intend to exclude a right to general damages as a result of the delay in completing the works by the Builder. 

It is clear that if a Builder delays completion of the works in construction of a residential house and the Owner is unable to occupy the property, then most often the losses or damages likely to be suffered by the Home Owner, is not an insignificant figure such $1 or similar. 

Is the Owner bound by such a figure?

There are various different ways of ascertaining what would be the appropriate pre-determined damages which could be used to agree on the appropriate rate of Liquidated Damages.  One example is the rental value of the property. 

One possible argument would be that the inclusion in the Contract of a default position of $1 per working day is in breach of the HB Act which restricts the Builder from contracting out of the Statutory Warranties.

A second argument could be that the amount inserted in the Contract especially in a default application, was not intended to be the limit of the damages that the Owner would be able to recover as a result of the Builder failing to complete the works within the time allowed pursuant to the Contract.

Recently these matters have been considered by the Supreme Court of New South Wales.  The Court held that rather than such default rate of $1 per working day being void pursuant to Section 18G of the HB Act, that the liquidated clause in that case, should not be interpreted as providing an exclusive remedy to the Owner for delay by the Builder in completing the works.  In those circumstances, the Owner would be entitled to actual damages due to delay. 

Each case depends upon the facts and circumstances of the case.

Further one needs to look carefully at the actual damages suffered as the result of a delay in the Builder bringing the works to completion.

Watson & Watson have been advising Home Owners and Builders or Contractors and others associated with building works for many years.  These include issues and debates that arise surrounding the failure by the Builder to comply with the terms and conditions of the Contract and failing to bring the construction to completion as required.  These include numerous and extensive issues that arise in relation to the interpretation and operation of the various Contracts and the Home Building Act.

Often a dispute arises relating to one aspect of the building works or Contract and there are other aspects which may give rise to opportunities and/or liabilities or risks for the Owner or Builder, which must be considered.

For example, we have advised Builders on various occasions who are at risk if they have not completed the building works as required by the Building Contract.  One recent example is a Builder has decided not to pursue a claim for in excess of $100,000 having regard to the prospects of a counter claim based on delay.

If you have any issues in relation to Contracts in particular, in relation to disputes concerning residential building or strata matters or any other matters concerning building and construction, please contact Richard Watson or his Personal Assistant Shereen Da Gloria to discuss the matter and seek timely advice.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.