A liquidated damages clause is not the exclusive remedy for delay and does not stand in the way of an Owner’s entitlement to prove damages for delays
Case Note: Carbone v Fowler Homes Pty Ltd; Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192
This decision provides clarity that the effect of a liquidated damages clause does not prevent Owners from establishing proven loss due to a Builder’s delay to claim damages.
Introduction
On 6 August 2024, the Court of Appeal of the Supreme Court of New South Wales handed down its decision in Carbone v Fowler Homes Pty Ltd; Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192. The key issue in the case was a claim for liquidated damages by Owners for a breach of a residential building contract due to a Builder’s delayed completion.
In particular, the case on appeal considered whether the primary judge should have determined a claim for damages for a breach of contract arising out of the Owners’ pleadings or the scope of issues litigated. If the claim for damages was found, had the Owners established any amount of damages due to the Builder’s breach. If so, did the liquidated damages clause apply to limit the quantification of loss to the nominal amount of $1 per day and prevent the Owners from establishing loss caused by the Builder’s delay.
Background
The appellants, Guiseppe and Matthew Carbone (Owners) entered separate contracts, with identical terms in the standard NSW Residential Building Contract for New Dwellings issued by the Housing Industry Association (HIA)(together the Contracts) with Fowler Homes Pty Ltd (Builder) for the construction of residential buildings (Building Works) on their respective lands in Oran Park, New South Wales.
The Contract included a Building Period of no more than forty-eight (48) weeks after the building period commenced (Building Period) where practical completion was to be achieved within the Building Period. In August 2018 the Building Works commenced with practical completion to be in July 2019.
The liquidated damages clause nominated an amount of $1 per day as a consequence for delays to practical completion by the Builder.
The Owners/Appellants case with respect to a claim for damages
The case on appeal, amongst other items, relates to the Owners contention that its pleaded case in its statement of claim or the trial was run on the basis that made a claim for damages based on a breach of contract. The Owners asserted that it had suffered loss of rent, based on the likely rent that the completed dwellings would achieve as well as evidence of comparable leases. With respect to the quantification of damages, the Owners contended in the first instance that the liquidated damages clause was not pleaded, because if it had been relied upon it would have been contended that it was unenforceable. In the alternative, the Owners said that if the liquidated damages clause was properly constructed it did not prevent a claim for damages due to delays that is proved by the Owners.
The Builder’s case with respect to a claim for damages
The Builder’s position disagreed that the Owner’s pleadings nor the case that was run by the Owner extended to include a claim for damages for breach of contract. The Builder was also of the view that the Owner did not suffer a loss of rent. The Builder’s position was that if the Court found that loss was suffered by the Owners, the loss should be quantified to the liquidated damages clause at $1 per day.
The Supreme Court’s decision: A liquidated damages clause does not prevent a proven loss for delays
With respect to the question of if the Owners claim included damages for a breach of contract, the Court held that primary judge was wrong to decline to consider the claim for damages for breach of contract. Subsequently, in terms of the Owners’ loss the Court noted accepted that some loss was suffered by the Owners, and that the primary judge was wrong to determine that the Owners failed to establish loss.
The Court then dealt with the liquidated damages clause to quantify the loss. The Court agreed with the Owners alternative submission that the liquidated damages clause did not prevent it from proving damages for delays. In this submission, the Owners relied on Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021 (Capello), following Ball J’s reasoning at paragraph [32] that:
………
It follows from what I have said that the better interpretation of the liquidated damages clause is the one that avoids that consequence. On that interpretation, the liquidated damages clause in this case should not be interpreted as providing an exclusive remedy for delay. Rather, by specifying the amount of liquidated damages at $1 per working day, the parties intended not to provide for a substantive right to claim liquidated damages and intended instead to leave the plaintiffs a right to claim damages they could prove they had actually suffered. The position, of course, may well be different if the clause had provided for the payment of a substantial amount by way of liquidated damages.
The Court relied on similar reasoning in the Western Australian Court of Appeal decision in J-Corp Pty Ltd v Mladenis [2009] WASCA 157, that liquidated damages and unliquidated damages for delay are two distinct forms of damages and there is no clear intention to exclude an entitlement to claim and prove unliquidated damages where there is a liquidated damages clause in a contract.
The Court agreed with the reasons of Ball J in Capello, where Leeming JA at paragraph [106] observed:
I see no reason for the clause in a HIA contract, which already contains a provision giving an automatic extension in favour of a builder for every day’s delay in making progress payments, and other provisions for delay outside its control, 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’s orders
In summary and with respect to the quantification of damages for a loss of rent, judgment on the appeal was found in favour of Matthew Carbone in the sum of $31,500. This amount plus a provisional amount of $20,000 ultimately led to an amount of $73,259 in favour of Matthew Carbone. The Court however was unpersuaded with respect to Guiseppe Carbone’s entitlement for damages with respect to loss of rent as it was held the Builder was not in breach of the contract as it was entitled to a deemed extension.
Key Takeaways
- For Owners: a liquidated damages clause is not an exclusive remedy for a delay damages due to a breach of contract. However, if the Owner does not seek to rely on the nominal amount in a liquidated damages clause for delay damages, an Owner must prove and establish the damages for delay. In this instance, it is important that precise evidence of damages suffered is required otherwise there is a risk that damages may be refused as it is too speculative.
- For Builders: there are provisions in contracts in favour of a Builder to seek remedies for delays caused by an Owner e.g. delays for progress payments, delays for other factors outside the Builder’s control. Understanding these remedies at the outset paired with good contract management practices, are ways to ensure that any delays to practical completion are properly dealt with under the Contract, as this would likely affect any potential delay claims by an Owner for liquidated damages or unliquidated damages (although this is to be proved by the Owner).
- For legal practitioners: If acting for an Owner with respect to a residential building dispute involving a claim for unliquidated delay damages, ensure that pleadings properly particularise the loss suffered and be mindful that damages can be refused if the evidence adduced is too speculative as to the loss.