Liquidated damages reaffirmed

Liquidated damages (‘LD’) provisions provide a useful risk management tool for contractors and principals, and are widely used within construction contracts. Specifying the damages that will result from a breach gives certainty, and allows risk to be better priced into contracts. However, a LD provision will be unenforceable if it in effect imposes a penalty on the party in breach. It is important that the provision’s wording and the quantum are carefully considered.

In Grocon Constructors (Qld) Pty Ltd v Juniper Developer No 2 Pty Ltd & Anor [2015] QSC 102, the Queensland Supreme Court reaffirmed the long-standing 1914 House of Lords test. The question remains: was the sum was “a genuine covenanted pre-estimate of damage” or was it “extravagant and unconscionable in amount in comparison with the greatest loss that conceivably be proved to have followed from the breach”?

It is interesting to note that subject to this test, the Court stated that the sum recoverable may be greater than the loss suffered, without being deemed an unenforceable penalty.

Here, the LD provision was triggered by Grocon’s failure to meet the practical completion deadline. Practical completion could be withheld for range of reasons – from trivial particulars to serious defaults. Grocon argued that the LD amount was calculated to compensate Juniper for the loss of revenue from not being able to immediately on-sell, but it could have been triggered by a trivial default like failing to adequately remove rubbish. The LDs would be entirely disproportionate to the breach. However, the emphasis was on the consequences of the breach – the breach here being Grocon’s failure to complete construction by the deadline. Therefore, this argument was rejected and the LDs were payable.

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