Can an Owner/Principal deduct an amount for delay damages or agreed Liquidated damages from an amount claimed by the Contractor or an amount certified by a Superintendent appointed under the Contract as payable by the Owner/Principal?

11/04/2024

Building Contracts most often (but not always) provide an agreement that the Contract Sum for the agreed Scope of Work will be paid by Progress Payments based on Progress Claims. The payments are usually to be on account of the price payable under the Contract.  In many standard form Contracts the provision is by way of Progress Claims when the works reach each agreed stage which is listed in a Schedule to the Contract.

The actual price for the agreed Scope of Work is not finally payable until completion of the Contract and it is only on completion, that respective rights and liabilities in respect of the contracted work could finally be determined.  This is referred to in numerous cases which has followed the principle referred to in the Decision of the Supreme Court of Queensland (Court of Appeal) in a case of Blue Chip Pty Limited v Concrete Constructions Group Pty Limited decided 2 April 1996.

Additionally, Building Contracts often provide for Liquidated damages at an agreed rate for example, if the Contractor does not complete the work within the period (as adjusted for example, by Extensions of time) as required under the Contract, the Owner is entitled to an adjustment in his/her favour due to delay in completing the building works.  The Liquidated damages should be at an agreed rate being an appropriate pre-estimate of damage payable in certain circumstances. 

Often in Contracts but not always, there is a third party (as nominated between the Builder and Principal) who issues Certificates as to amount payable on account in relation to various Progress Claim made by the Contractor for payment by the Principal/Owner.

In numerous cases for example, in particular in the case of Bluechip Pty Limited v Concrete Constructions Group Pty Limited, the question arose as to whether on the facts of that case, the Principal was entitled to deduct damages for delay and Liquidated damages from the amount specified in the Certificate for Progress Claim certified by the Superintendent. 

One primary issue in the case of Bluechip Pty Limited v Concrete Constructions Group Pty Limited, was whether the Court would imply into the Contract that the Principal had the right to deduct Liquidated damages from the amount certified by the Superintendent.

A secondary important issue considered in this case, is the principle that progress payments (excluding the final progress claim under the Contract) are generally payment on account of the Contract Sum and as such, can be revisited following payment.

In this case:

1.       The Contractor made a Progress Claim for Payment from the Principal. 

2.       The Principal did not prior to certification, take issue with the Claim by claiming a right to set off an amount for Liquidated damage claimable by the Principal from the Contractor as a consequence of the Contractor failing to complete the works within the adjusted time as required under the Contract.

3.       The Superintendent certified in full the Contractor’s claim.

4.       Following the issue of the Certificate, the Principal deducted a significant amount for claimed Liquidated damages for delay and paid to the Contractor the balance of the Progress Payment.

5.       The Contractor disputed the Principal’s right to Liquidated damages and claimed that the Principal had committed a substantial breach of the Contract by failing to pay the full amount certififed by the Superintendent.

6.       The Principal submitted that the Contract contained an implied term that gave the Principal the power to deduct Liquidated damages from the Progress Payment certified to be made.

7.       The Contract made references to the Liquidated damages and the agreed rate for Liquidated damages to be applied.

8.       The Supreme Court of Queensland (Court of Appeal) dismissed the appeal by the Principal and in this regard noted:

“(1)     Progress claims and payments made under building contracts are intended to be provisinal only.

(2)      A term giving the Principal power to deduct Liquidated damages      before making Progress Payments should not be implied into a           contract because:

(a)      the implication of the term is not necessary in order to give effect to the intention of the parties or to make the Contract workable; and

(b)      (despite “Subject to provisions of the Contract”), the implied term would be directly opposed to an express provision of the Contract.

(3)      The correct constructon of General Condition 42.1, (of the Contract) when taken in its entirety (and despite “Subject to the provisions of the contract”), is that what is certified is intended to be paid.”

9.       Even though the Contract referred to the rate of Liquidated damages and the circumstances in which they may apply, the Court held there was no express term that the Liquidated damages could be deducted from the progress claim by the Contractor and further the Contract would not imply such a clause in the Contract.

One could include in a Contract, an express term which deals with the application for Liquidated damages clause however, the Contract would have to clearly state the circumstances in which there could be an offset based on a claim for Liquidated damages and the process of how it would be determined.

Different circumstances will apply following termination.

It is critical in our view, that care should be taken in considering the Liquidated damages clause and to, as best as one can, set out in express terms in the Contract as to the circumstances in which a claim for Liquidated damages can be made. The Principal needs to be able to offset possible claims for Liquidated damages where works are not completed in the time provided for completion in the Contract.

Watson & Watson Lawyers are experienced in all aspects of building and construction matters.  Please contact Richard Watson, Accredited Specialist Commercial Litigation specialising in Building and Construction or his Personal Assistant Shereen Da Gloria to discuss your matter and seek appropriate and 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.