Constructive Notes ®
April
2014
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Liquidated Damages: A sole remedy for delay?
By Patrick Mead, Partner
In the first of the March 2014 editions of Constructive
Notes, the writer observed that oftentimes exclusion of
liability clauses and liability caps are mechanisms which
operate in tandem with provisions in relation to Liquidated
Damages (which are not considered to be exclusory,
operating in theory for the benefit of both parties to the
contract) to create a finely balanced risk regime.
Services Ltd v Maschinenfabrik Ernst Hese GmbH [2008]
EWHC 6 (TCC)] is relevant in this regard. This decision
by the Honourable Justice Ramsey of the High Court
of Justice (Queens Bench Division, Technology and
Construction Court) went to the Court of Appeal, but it
is only the part of the judgment dealing with vicarious
liability that was reversed on appeal.
It was further noted that other than in respect of a provision
for Liquidated Damages (which was likely to be capped
as a percentage of the Contract Sum), the contractor
may insist upon a complete exclusion of damages for
loss of profit, loss or use or business interruption, or
alternatively seek to cap any such exposure to the limit of
any applicable insurances.
In this case, Biffa sought to argue that a valid and
enforceable liquidated damages clause was an exclusive
remedy for breach only of the obligation to complete on
time. It was argued that it was not applicable to breach
of other obligations, which whilst causing delay, were not
obligations dealing with the need to complete on time. It
was argued that such breaches allow an entitlement to
unliquidated damages.
A question can then arise as to whether the remedy of
Liquidated Damages is the Principal’s sole remedy for
delay, however caused, or whether there is scope to
argue for an entitlement to further damages (leaving to
one side the efficacy of the consequential loss exclusion)
on the basis that defective design (where this is the
responsibility of the contractor) or workmanship which
caused or contributed to the delay constitute a separate
and discrete breach of contract.
Biffa submitted that the wording of the contract [‘…shall
not relieve the Contractor from its obligation to complete
the works or from any other of its obligations and liabilities
under the contract and shall be without prejudice to any
other right or remedy of the Employer’] opened up a claim
by Biffa against WEH for damages for delay where that
delay was not simply a breach which it referred to as
‘simple’ delay.
The English case of Biffa Waste Services Ltd v
Maschinenfabrik Ernst Hese GmbH.50 [Biffa Waste
This was however rejected by the Judge who accepted
the defendant’s submission that the distinction between a
Constructive Notes - April 2014
© Carter Newell 2014
‘simple delay’ and breaches of other terms of the contract
leading to delay was not one which was properly made.
The Judge considered that if liquidated damages were
the only monies payable for failure to complete, that must
exclude other remedies for payment of damages.
At paragraph 114, the Judge said:
‘I do not consider that it is possible to draw a distinction
between a ‘simple’ failure to complete and a failure to
complete caused by breach of another obligation. If
there is a failure to complete then liquidated damages
are ‘the only monies’ due for such default. If there is a
breach of another obligation and that breach causes
a failure to complete then liquidated damages are still
the only monies due for that default, that is a breach
of contract causing a failure to complete on time’.
And then, [at 115]:
‘Secondly, I do not accept that a liquidated damages
clause which only applied to a case where there was
simply a failure to complete on time without a breach
of any other provision would make commercial sense.
The purpose of the liquidated damages clause is, as
Lord Upjohn said in the Suisse Atlantique case, for
the benefit of both parties: ‘the party establishing
breach by the other need prove no damage in fact;
the other must pay that, no less and no more.’….
A party wishing to avoid liquidated damages and
argue for no loss or a smaller sum would attempt
to find some other breach of an implied or express
term to hang the delay on. A party seeking to uphold
the clause would be trying to disprove that another
breach was the cause of the delay’.
And then, [at 117]:
‘I consider that my view is consistent with the
decision of His Honour Judge Gilliland QC in Piggott
Foundations Ltd v. Shepherd Construction Ltd [1993]
67 BLR 48 at 68 where he held that there was a
liquidated damages provision and that this provision
‘prevents the defendant from seeking to avoid the
overall limitation of damages to £40,000 by claiming
as a head of general damages for the breach of any
other provisions or obligation under the contract such
damages which have resulted from the failure of the
plaintiff to complete the piling work within the period
of 10 weeks.’ The same consistency is implicit in the
decision of His Honour Judge Fox-Andrews QC in
Surrey Health Borough Council v. Lovell Construction
Ltd (1988) 42 BLR 25 where at 37 he found that the
liquidated damages were an exhaustive remedy for
delay where a building had been damaged by a fire’.
It has been written that the ‘irresistible conclusion’ is that
a valid enforceable liquidated delay damages clause
presents an exclusive or exhaustive remedy for delay,
regardless of what breach of what obligation has caused
(partly or wholly) the delay.1
This ‘complete remedy’ analysis [so described] is
summarised in Keating on Construction Contracts (8th
Edition at paragraph 9-006) which was referred by The
Judge [at 118]:
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‘It is suggested that the solution is primarily a question
of the construction of the contract in question. If, as in
most (if not all) cases, the clause is clearly expressed
to be or, as a matter of proper construction appears to
be, a complete remedy for delayed completion then
it matters not why the contractor failed to complete
by the due date. . . The fact that the delay is due to
a breach of contract by the contractor as opposed to
merely going slow, cannot affect the nature or quality
of the loss which the liquidated damages is intended
to compensate. In reality, in such situations, there are
two breaches: the carrying out of the defective work.
. . and the failure to complete by the due date. Neither
the employer nor the contractor can avoid liquidated
damages by simply relying on the first breach.’2
The writer believes that this decision and these
comments have to be understood in the context of an
attempt to recover damages outside of the Liquidated
Damages regime on the basis of a breach unrelated to
time, but still referable to the period of delay. It seems
clear that damages for breach of warranties or failure to
achieve performance guarantees may still be otherwise
recoverable, subject to whatever remedies might be
specifically provided for in the Contract.
Further, under a D & C Contract where co-extensive
tortious duties may arise, a clear intent that Liquidated
Damages are to operate as a sole remedy to the exclusion
of general law damages may be necessary to confine
recovery in the manner suggested in the Biffa case.
It also seems unlikely in this Country that a Liquidated
Damages clause of itself would be effective to limit
damages in circumstances where the proscribed conduct
is found to be in breach of Schedule 2 of s 18 of the
Australian Corporations Act 2001 (Cth) or associated
provisions of the Competition and Consumer Act 2010
(Cth).
Interestingly, in the Biffa case, the Judge went on to
consider whether the recovery of Liquidated Damages
precluded the recovery of costs incurred in reasonable
mitigation of the delay.
The Judge noted [at 121] that the cost of taking reasonable
mitigating steps is generally recoverable as part of the
damages for the breach (citing The World Beauty [1970]
144 at 156 per Winn L J).
The Judge went on to say:
‘As stated above, Liquidated Damages are an
exhaustive remedy for delay. That exhaustive
remedy therefore includes any damages which could
be recovered damages for failure to complete.’
A further aspect – Insurance Policy Exclusions
Insurance policies sometimes contain an exclusion of
loss said to be referable to the imposition of Liquidated
Damages. If however, the cause of the delay that
gives rise to the Principal’s entitlement to levy Liquidated
Damages is otherwise indemnifiable, this might be seen
to operate harshly on an Insured.
If in fact such a provision is penal in nature, it is likely
to be struck down on the basis that it does not reflect a
genuine pre-estimate of damage. If on the other hand,
it is upheld and found to be enforceable as a remedy,
then it arguably has the potential to operate not just
for the benefit of both parties to the contract, but also
for the benefit of insured and insurer, operating as a
cap on recoverable loss (often as a percentage of the
contract sum) and further in certain circumstances as
a sole remedy in the event of delay occasioned by the
insured’s breach.
1
Dr Hamish Lal in his article ‘Liquidated Damages’ (2009) 25
Const. L.J. 567 – 690 [586].
2
Keating on Construction Contracts, 2006, [9-006].
Author
Patrick Mead
Partner
P: 3000 8353
E: rstevens@carternewell.com
Excluding consequential loss – Do you really know
what you are not getting?
By Mark Kenney, Special Counsel
In an article in the first of the March 2014 editions of
Constructive Notes, consideration was given to the
operation of exclusory or limiting provisions directed to
economic, indirect or consequential loss. We have all
seen simple clauses in contracts to the effect of ‘neither
party is liable to the other for any consequential or indirect
loss’. The presumption of most is that this will exclude
damages that are too distant or unknown, but what if
anything, does it really exclude?
As a basic premise, when one party breaches a contract,
the other party is entitled to damages that flow from that
breach. Over time this principle has narrowed to what is
commonly referred to as the ‘two limb approach’.1 The
two limbs outline what types of damages can be claimed,
all others being considered too remote. The first limb
is those damages that arise naturally from a breach of
contract (obvious and direct). The second limb is those
damages that are non-direct but that would be within
the reasonable contemplation of the parties at the time
of contracting. Understandably, this second limb, which
is where consequential type losses would potentially sit,
has been the subject of considerable dispute over the last
150 years.
In Australia, the High Court decision in Darlington v
Delco2 confirms that at the time of contracting, parties
can include clauses excluding certain damages, however
these clauses must be construed according to their
natural and ordinary meaning.
However it is not a simple just excluding ‘consequential
loss’.
Unfortunately, there is still no consensus in Australia as to
what the natural meaning of consequential loss actually
is. There are conflicting decisions in three jurisdictions:
Victoria, South Australia and Western Australia, none of
which are strictly binding on Queensland or New South
Wales.
In Victoria,3 the test is what an ordinary reasonable
business person would consider consequential loss i.e.
everything beyond the normal measure of damages such
as lost profit.
In South Australia,4 a very broad approach has been taken
using a literal interpretation of the word ‘consequential’
so that consequential loss means any loss that was
consequent or following, immediate or eventual, flowing
from a breach of contract. This could exclude even direct
or first limb losses.
In Western Australia,5 the position is different again.
Here, the Court rejected the Victorian position (beyond
the normal measure) and also excluded strict reliance on
the second limb test. Instead, it reinforced the original
view in Darlington v Delco that consequential loss
exclusion clauses should be construed on a case by case
basis according to their natural and ordinary meaning as
determined in the context of the relevant contract when
read as a whole.
In summary, there is still an obligation to give clauses
their natural meaning but there is no consensus on what
this meaning is for consequential loss. The solution is
comparatively simple though. Whenever you want to
deal with consequential losses, then define that term in
the contract so that the meaning is clear.
There are some simple steps to consider every time this
process is undertaken.
1. Decide what specific types of indirect or consequential
loss you want to exclude and then list them in the
definition e.g. loss of profit, loss of future contracts,
losses from business interruption, loss of business
opportunity and so on. If included, then the meaning
will be clear. If you do not include a specific loss then
the meaning will be open to dispute later. For example
simply broadly stating that ‘Consequential Loss
means any and all indirect or consequential losses’ is
of next to no real assistance.
2. Consider if there are any specific exclusions from the
general classes of consequential loss that you list. The
most common is delay liquidated damages. When
liquidated damages are calculated, they will take into
account a variety of factors, some of which could fall
within your definition of consequential loss, such as
business interruption. To avoid ambiguity, simply
Constructive Notes - April 2014
© Carter Newell 2014
make it clear that the exclusion of consequential loss
does not apply to liquidated damages. Liquidated
damages will then be a separate head of loss that
is a genuine pre-estimate of losses associated with
delay that does not fall within the consequential loss
exclusion.
3. Consider insurance implications. There is no sense
in requiring the other party to have a policy that
names you and has coverage of $20 million if you
then exclude their liability for a large part of what
the policy covers. Rather than having an argument
with an insurer over whether it is only required to
indemnify parties for their contractual liability, which
excludes consequential loss, consider whether it
is necessary or appropriate to carve out insurance
coverage from the consequential loss exclusion. In
that way the other party will reduce its direct personal
liability but you will both still have the protection of the
insurance policy. As most consequential loss clauses
are mutual, excluding liability of both parties, you
should also always check with your own insurance
broker before doing so to ensure that this does not
diminish coverage under your own policies.
common to carve out from the consequential loss
exclusion, the indemnities relating to personal injury
and death, so that these remain in force, irrespective
of whether elements of the indemnity would usually
be considered as consequential losses.
In short, think about what obligations you want to limit
and what rights you want to protect and then draft a
specific consequential loss definition and an exclusion
clause that meets those requirements. When doing
so also consider how this works in the context of the
whole contract. If you do not do this, then you run the
risk of dispute and then leaving it to the Court to make a
decision on how the definition of consequential loss and
the relevant clause is meant to be interpreted. As we
can see above, there is currently no certainty as to how
courts in Queensland or New South Wales will do so.
Hadley v Baxendale (1854) 9 Exch 341.
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500.
3
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA
26.
4
Alstom Ltd v Yokogawa Australia Pty Ltd & Anor (No 7) [2012] SASC 49.
5
Regional Power v Pacific Hydro [No 2] [2013] WASC 356.
1
2
Author
4. Consider how the consequential loss exclusion
impacts or interacts with other clauses of the
contract, in particular indemnities or warranties. Be
aware that a specific exclusion of consequential
loss may reduce a more general right of indemnity
or ability to enforce a warranty. For example, it is
Mark Kenney
Special Counsel
P: 3000 8474
E: mkenney@carternewell.com
STOP PRESS – the first significant changes to the Security of Payment legislation are
announced today
Following the extensive review of the Building and Construction Industry Payments Act (BCIPA) last year, the
Queensland State government has today announced three key changes to BCIPA all effective from 1 September
2014.
▪ There will now be a single adjudication registry within the Queensland Building and Construction Commission (QBCC),
who will maintain a registry of active adjudicators. This will mean the end of referring applications to individual
Authorised Nominating Authorities, however the precise details of the new process are not yet available. The QBCC are
also currently obtaining feedback from industry about how the skills and performance of Adjudicators can be improved
and it is expected that this will flow into the process for appointment of adjudicators to be adopted by the QBCC.
▪ Timeframes under BCIPA have been amended to reflect the size and complexity of claims. There will now be longer
periods to provide payment schedules and to respond to adjudication applications on claims over $750,000 or that
involve latent conditions or time related costs. Further the period where time does not run under BCIPA over Christmas
has been extended to reflect the longer industry shutdown periods.
▪ Adjudication responses will not be limited to the material raised in a payment schedule – an adjudication response can
now include all relevant material and the claimant will be given a right of reply.
How will this change things now ? Not at all, the current process will remain unchanged until 1 September 2014. Carter
Newell is well resourced to handle BCIPA matters at all levels specialising in large scale and complex claims and brings
particular expertise to this area with Partners, Patrick Mead and David Rodighiero and Special Counsel, John Grant
and Luke Preston all Registered Adjudicators under BCIPA (QLD).
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The material contained in this newsletter is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of
any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
© Carter Newell Lawyers 2014
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