Nicholas Tsirogiannis

This article considers the recent NSW Court of Appeal decision of Carbone v Fowler Homes [2024] NSWCA 192 (Carbone) in which the court held that a liquidated damages clause which provided $1 per day did not prevent the owner from claiming common law damages for late completion. In arriving at its conclusion, the court emphasised that clear language was required before the entirety of a party’s basic right is treated as having been abrogated.

In this article, we examine the reasoning and the authority relied on by the court and, in summary, make the following observations:

• while the outcome reached by the court was correct, there are some challenges with the reasoning it adopted;
• it appeared to suggest that even where there is a valid liquidated damages clause, common law damages will be available unless clear language is used;
• that conclusion is inconsistent with long established and recent authority;
• in Carbone, unlike the other cases relied on by the court, the parties had not expressly agreed the amount of liquidated damages. They left the relevant item in the schedule blank and, through the wording of the standard form contract, the amount was set at $1 per day;
• accordingly, it was open to the court to reach the same conclusion but on a different basis – ie, given that the parties had not expressly agreed the rate of liquidated damages, it is likely that they had not turned their mind to the question of liquidated damages at all. Therefore, it was very unlikely that they had agreed that common law damages would not be available in those circumstances; and
• if it had adopted that reasoning, the reasoning would have been more consistent with long established Australian and English authority.

Finally, this article argues that express words should not be required to exclude the right to common law damages if a valid and enforceable liquidated damages clause has been agreed and included in a contract. The inclusion of such a clause is itself clear intention that the parties have pre-agreed what damages will be payable rather than relying on the remedy at common law.

The relevant facts of Carbone 
The parties had entered into a domestic building contract based on the standard form “NSW Residential Building Contract for New Dwellings”  issued by the Housing Industry Association (HIA). The contract provided that if the  building  works did not reach  practical completion by the end of the agreed 48-week period  (as extended), the  owner  was entitled to liquidated damages in the amount of $1 per day. That was brought about because cl 32.1 of the contract made provision for liquidated damages in the amount specified in item 11 in the schedule which was expressed to be  “$.00 per working day”. The HIA standard form provided  “if nothing stated, then $1”.

Therefore, the court ultimately had to decide whether the parties had excluded common law damages in circumstances where they did not complete the item in the schedule which provided for liquidated damages. In light of these facts, it is hardly surprising that the court concluded that common law damages were still available. The parties appear to have not turned their mind to liquidated damages, let alone excluding common law damages. While the right outcome was achieved, what is more of interest is the court’s reasoning and the authority it relied on. We explore them in detail below.

What authority did the court rely on in Carbone? 
The Court of Appeal referred to a number of Australian authorities to support its conclusion. The first authority was Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137 (Baese) which involved a standard form domestic building contract and an appendix to the contract which provided “nil” per day for liquidated damages. In that case, the court held that clear words were required before it would be held that a liquidated damages clause was the entirety of the proprietor’s rights. The reasoning used in that case is examined in greater detail below.

The second case was J-Corp v Mladenis [2009] WASCA 157 (J-Corp) which involved a domestic building contract that also provided for “NIL DOLLARS ($00.00)” per day as liquidated damages. The court undertook a detailed review of the relevant authorities and stated at [35]:

It is immaterial that the amount of the actual loss turns out to be less than the amount specified. Equally, if the actual loss turns out to be greater than the amount of the liquidated damages, the claimant cannot ignore the liquidated damages clause and sue for unliquidated damages: Diestal v Stevenson [1906] 2 KB 345; Talley v Wolsley-Neech (1978) 38 P & CR 45 (CA). That is, ordinarily a valid liquidated damages clause fixes the amount that is recoverable in the event of a breach, regardless of whether the claimant’s actual loss is greater or less than the amount specified. (emphasis added)

Ultimately, the court reached the same conclusion as the court in Baese but provided different reasoning.  At [50] to [51], the court stated:

The insertion of ‘NIL DOLLARS ($00.00)’ in cl 11.9 in the Contract does not, therefore, necessarily evince an intention that the respondents are to have no remedy in damages in the event of delay. It is consistent with an intention to make it clear that the provision in the standard form contract allowing for liquidated damages is to have no effect and that the respondents are to be left with the burden of proving such damage as they may be able to establish.

I do not consider there is any inconsistency between the terms of cl 11.9 and a right in the respondents to claim unliquidated damages for delay. The position may well be different where a contract provides for the liability of the builder for liquidated damages in a positive amount, it being unlikely that the parties would have intended that the proprietor should have the benefit of both liquidated and unliquidated damages for the same delay. But that is not this case. In this case, the effect of cl 11.9 is that the appellant is not liable to pay any amount by way of liquidated damages. (emphasis added)

The third and final case was Cappello v Hammond & Simmonds Pty Ltd [2020] NSWSC 1021 (Cappello) which also involved a domestic building contract. In that case, the parties used a HIA standard form contract and the parties had inserted $1 per working day. The court came to the same conclusion and stated at [32]:

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. (emphasis added)

What needs to be noted, however, is that the contract in Cappello was a domestic building contract that was subject to the Home Building Act 1989 (NSW) (Act) and therefore the liquidated damages provision was interpreted in that context. Section 18G of the Act provided 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. 

Section 18B(1)(d) of the Act implied into the contract a warranty that the work will be completed within the time stipulated in the contract. The court stated at [31] that:

In my opinion, a provision of a contract which limits a party to claiming nominal damages for a breach of that  warranty has the effect of restricting the rights of  that person  in respect of  such  a  warranty since it substitutes for a substantial right  for its breach a nominal one. 

Accordingly, the court had to weigh up an interpretation of the liquidated damages clause that provided for an exclusive remedy (which would have rendered it void as a result of Act) and one that still allowed for the recovery of common law damages (which meant it would not fall foul of the Act). Not surprisingly, the court favoured the interpretation under which the liquidated damages clause was not void. Ironically, if the court had favoured the alternative interpretation, the outcome would have been the same. If the liquidated damages clause was held to be void as a result of the Act, then the owner would have nevertheless been entitled to common law damages for late completion.

After considering these cases, the NSW Court of Appeal in Carbone agreed with the court’s reasoning in Cappello and was not persuaded that J-Corp was distinguishable. The court stated at [105]:

The point of a liquidated damages clause in a trifling amount, whether it be $0 or $1 per day, is that this is utterly negligible compared to the contract price, and for that reason the law treats the parties’  bargain carefully, requiring clear language before the entirety of a party’s basic right is treated as having been abrogated. (emphasis added)

Can any statement of principle be drawn from Carbone and the other cases? 
The principle that can be drawn from these cases is that if the parties only provide for a nominal sum or “nil” for liquidated damages then there is a risk that an owner may still be able to recover common law damages. That is particularly the case if the contract is in relation to a domestic building contract and there is consumer protection legislation that applies to the contract as was the case in Cappello and Carbone.

Is it consistent with previous authority? 
The above proposition though could be seen as somewhat inconsistent with the long-established principle that where the parties have agreed that liquidated damages are payable in relation to a breach and the liquidated damages clause is enforceable, then common law damages are not recoverable.[1] Is it possible to reconcile them?

The court in J-Corp reconciled this by saying that, by inserting “Nil” into the contract, the parties agreed that the liquidated damages were to be no effect – in other words, there were no liquidated damages agreed. If that is the case, then naturally common law damages are available unless the contract expressly and clearly provides otherwise. Therefore, J-Corp arguably aligns with well-established principle and authority.

In Cappello, the courts moved the dial further by concluding that by inserting $1 the parties did not agree to a substantive right to claim liquidated damages and therefore common law damages were still available.  While it was obiter, it did suggest if the liquidated damages were a substantial amount the position may be different. This seems to be the first case where a court introduced a requirement for the liquidated damages to be substantial. However, as noted above, the court was clearly influenced by the fact that, as a result of the Act, the liquidated damages clause would have been void if it was held to be an exclusive remedy.

The reasoning in Baese is a little bit more case specific and has been subject to some criticism.[2] Giles J concluded that the liquidated damages clause “was not an exhaustive statement of the proprietor’s entitlement in the event of failure to bring the works to practical completion by the date for practical completion”.[3] His Honour placed significant emphasis on the fact that, under the Contract, the Architect had a discretion on whether to give a notice triggering the payment of liquidated damages and was not compelled to do so. In other words, it was not mandatory. He concluded that it was unlikely the parties agreed that, if the Architect did not give that notice, the Proprietor would entirely lose an entitlement to damages for delay.

The challenge with that line of reasoning is that:

• under the contract, the Architect acted as the agent of the Proprietor and therefore could have been directed by the Proprietor to issue the notice. If the Architect failed to follow the Proprietor’s direction, the Proprietor would have a claim against the Architect for breach of the contract that existed between the two parties. In other words, the Proprietor would not be left without a remedy if, as a result of the Architect’s inaction, the Proprietor was not able to claim liquidated damages; and
• it suggests that the Proprietor can have two options available to it in a contract: common law damages or liquidated damages and, which one is available to it, all depends on whether the Architect gives notice triggering the liquidated damages clause. It is hard to see how that reasoning was consistent with previous authority, in particular the principle that the plaintiff either has agreed to liquidate its damage or it has common law damages available to it.

Finally, in Carbone, the reasoning doesn’t quite follow J-Corp and Cappello notwithstanding it cites both cases with approval and treats them as the most relevant authority. Unlike in J-Corp, the court didn’t conclude that the parties had not agreed that the liquidated damages clause was to be of no effect or, like Cappello, conclude that the parties hadn’t agreed to a substantive right to claim liquidated damages. The court instead emphasised that where the liquidated damages are utterly negligible compared to the contract price, clear language is required before the entirety of a party’s basic right is treated as having been abrogated.

This reasoning and statement appear to go beyond both J-Corp and Cappello as they suggest that a court can consider whether the amount agreed is negligible compared to the contract price and, depending on the outcome of that, conclude whether common law damages are available. That reading of Carbone is inconsistent with long established authority – ie, if the parties have agreed the amount of damages payable in event of a breach, then subject, of course, to the doctrine of penalties, the innocent party can only recover the agreed amount of liquidated damages and not any common law damages.[4]

Some unresolved questions 

The court in Carbone quickly dismissed the argument put forward on behalf of the Fowler Homes that the decision in J-Corp was distinguishable even though the contract there provided for “Nil Dollars” as opposed to the $1 that the contract (by default) provided in Carbone.  As noted above, the parties didn’t appear to turn their mind to the question of liquidated damages unlike in J-Corp where the parties physically inserted an amount, albeit being “Nil Dollars”. Accordingly, it is arguable that the facts in Carbone presented an even stronger argument than J-Corp that common law damages were available given that the parties didn’t expressly address the issue of liquidated damages. While the court didn’t ultimately decide the question, it did state it was not persuaded that the “agreed” amount was $1 notwithstanding that the parties had proceeded on that basis.

Given that it appears that the parties had not turned their mind to the question of liquidated damages, it was very much open to the court to have held that the parties had not reached any agreement as to liquidated damages, or, to borrow from Cappello, had not agreed a substantive right to liquidated damages. It would have therefore followed that common law damages would still be available in those circumstances. Put another way, if the parties had not turned their mind to liquidated damages, then they are very unlikely to have agreed that common law damages would be unavailable. That reasoning would be preferable as it would have been more consistent with long established authority. It also makes sense at a logical level: if the parties haven’t even inserted an amount for liquidated damages, it is hard to argue that the parties had, at the same time, agreed that common law damages would not be available.

Finally, it was interesting to note that the court did not arrive at its decision through the application of the Act. Unfortunately, it appears that the way the case was pleaded, and ultimately run, did not allow it to do so. Like in Cappello, if it had been pleaded differently, it would have allowed the court to arrive at its conclusion having regard to section 18G of the Act rather than just through the application of general principles.

Are express words required to exclude common law damages? 

Another aspect of Carbone and indeed Baese warrants some further discussion and analysis. As noted above, the court in Carbone emphasised that clear words were required to abrogate a party’s basic right, citing Bease. While as a general proposition that is absolute correct, its application to common law damages where liquidated damages have been agreed by the parties is a little more nuanced. For example, where there is a valid and enforceable liquidated damages regime in a contract, there does not appear to be any judicial authority (outside the domestic building contract context) for the proposition that the plaintiff can also recover common law damages or that the parties have to expressly state that common law damages are not available. It is implied that common law damages are unavailable in those circumstances. In NLS Pty Ltd v Hughes (1966) 120 CLR 583, Barwick CJ stated at 589:

…to hold that the amount of the bond or money is a genuine pre-estimate of the damages does involve an implied limitation upon the liability to pay damages. (emphasis added)

It is interesting to note that this important passage by Barwick CJ was not referred to in any of the above cases. It was, however, cited with approval in IPN Medical Centres Pty Ltd v Van Houten & Anor [2015] QSC 204 and which was subsequently applied in the recent case of Hacer Group Pty Ltd v Euro Façade Tech Export [2022] VSC 373. In the latter case, the Victorian Supreme Court held that liquidated damages provided by the contract for delay in achieving completion were the exclusive remedy for delay. It did so notwithstanding that there were no express words to that effect.

That outcome is hardly surprising given that the House of Lords held, almost a hundred years ago, that where the parties have agreed to liquidate their damages, the innocent party cannot recover anything beyond those damages even where the actual loss significantly exceeds the actual damages. That case was Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20 (Cellulose Acetate Silk) where the parties agreed that 20 pounds was payable for each week of delay. The court acknowledged that the actual loss was almost ten times that amount but still held the parties to their bargain.

Another aspect that was not addressed by Baese and Carbone is what they meant by clear words. On one view, the insertion of a liquidated damages clause itself should be clear that the parties are agreeing upfront the damages payable in the event of breach and not relying on proving common law damages. What purpose would be served by agreeing upfront the damages payable if the owner could then claim additional loss for the same breach? It just doesn’t make sense. Would the outcome in Carbone have been different if the schedule provided for $500 per day instead of the default amount of $1? It is unlikely that the court would have concluded in those circumstances that, in addition to the $500 per day, the owner could also recover common law damages. Whilst the court did not express it in this way, it seems that the absence of clear words was not the real issue in Carbone, it was the fact that the parties hadn’t come to an express agreement on liquidated damages. They just left the schedule blank and therefore the court was reluctant to deprive the owner of a remedy.

One final aspect of the reasoning in Carbone requires some further analysis. While it is a subtle point, it is one that may not have been put to the court by the parties. By the contract providing (by default) that the liquidated damages were $1 per day, the owner wasn’t giving up any common law rights at all. While the means of recovery is different, common law damages and liquidated damages are compensation for the same thing – ie, breach of contract. The former needs to be proven in a court of law and is awarded by the court while the latter is pre-agreeing the damage that will be recoverable and inserting it into the contract between the parties. Therefore, by providing for liquidated damages in the contract, the owner has not in substance given anything up, it still has a remedy for the loss flowing by the breach but the means of recovering is different. Therefore, the court “requiring clear language before the entirety of a party’s basic right is treated as having been abrogated” was not strictly correct. No rights were abrogated, the right still existed. It was just a smaller amount than if the means of recovery was common law damages.

Should $1 be enough? 

In the absence of consumer protection legislation such as the Act, will $1 or some other nominal sum be sufficient to exclude common law damages? Based on the long-established authority such as Cellulose Acetate Silk, the answer is likely to be yes. However, at least in Australia, the courts have shown a tendency to step in where they consider the owner’s rights have been given away for virtually nothing in return, albeit those cases did involve domestic building contracts. Accordingly, the answer to this question cannot be given with the greatest deal of confidence.

Should it be enough? Provided there are no vitiating factors in the formation of the contract, there is no reason why it shouldn’t be enough. In other areas, such as consideration, the law does not concern itself with the adequacy of the sum paid. If a peppercorn is enough in exchange for a promise then why shouldn’t a peppercorn be sufficient payment for being late on a construction project? The parties should be free to agree what they want. As Slesser LJ stated in the Court of Appeal decision in Widnes Foundry (1925) Ltd v Cellulose Acetate Silk Co Ltd [1931] 2 KB 393 at 414-5 (in reference to the liquidated damages in that case being substantially less than the actual loss), the “question of the amount being unconscionable, exorbitant, or extravagant does not arise”.

Another way to look at this issue is through the lens of limiting liability. The courts have long recognised that parties can exclude or limit liability. For example, it is very common to see in construction contracts clauses limiting the contractor’s liability for liquidated damages to a percentage of the contract price. Often that percentage is as low as 10% percent of the contract price and therefore it is possible in those circumstances that the owner only recovers a small portion of its loss if the contractor is very late in completing the project. The courts don’t interfere in the parties’ bargain in those circumstances and nor should they. Arguably, that is no different to the parties agreeing to limit the contractor’s liability by setting the daily rate for delay at a much lower rate than the actual loss. If the clause is valid and there are no vitiating factors, the courts should uphold the bargain. It should be irrelevant if it is $1 or $100 per day. The parties have agreed that only that amount will be payable and should be held to it.

What are the implications? 

For domestic building contracts, it reinforces the position that the insertion of a nominal sum or zero/nil or leaving the item for liquidated damages blank is likely to leave the door open for the owner to be able to recover common law damages.

For commercial or large infrastructure projects, there are unlikely to be any real implications. It is hard not to conclude that the court in Carbone did treat the situation with extra caution given that it was a domestic building contract, used a standard form document and the parties left the item for liquidated damages blank. In any event, in the majority of cases on commercial or large infrastructure projects, the liquidated damages are more than likely to be greater than a nominal sum and the contract is unlikely to be subject to domestic building legislation as was the case in Cappello and Carbone. Even if the amount is small in comparison to the actual damages suffered, given the parties will be well advised and sophisticated organisations, the court is much more likely to hold them to their bargain.

Does the contract on commercial or large infrastructure projects need to provide that the liquidated damages are the owner’s sole remedy for delay?  While there is no harm in doing so, it is highly unlikely that a court will go against the overwhelming and long-established authority and hold that common law damages are available where the liquidated damages provided in a contract appear to be a genuine pre-estimate of that loss.

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[1] J-Corp v Mladenis [2009] WASCA 157 at [35]; H McGregor and J Edelman, McGregor on Damages (20th Edition) Sweet & Maxwell at 16-023; NC Seddon and RA Bigwood, Cheshire and Fifoot Law of Contract (12th Edition) LexisNexis, Australia at 1278-9.

[2] See, for example, JB Dorter and JJA Sharkey (2022) Building and Construction Contracts in Australia (2nd Edition) Thomson Lawbook Co, Sydney, Australia at 4750-2 [9.730].

[3] Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137 at 140.

[4] J-Corp v Mladenis [2009] WASCA 157 at [35].