MTECC News 22.01 ||| The two Ps of a liquidated damages defence: Prevention and Penalties – Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd  NSWSC 290
This matter concerned a builder and subcontractor that entered subcontracts in which the subcontractor was to supply stone to four building projects. The builder served a termination notice on the subcontractor alleging failure to complete by the dates for completion. The notice stated the builder would seek liquidated damages for delay at $3,500 per day and the cost to complete. The subcontractor at trial defended the claim for liquidated damages, arguing preventing conduct by the builder in achieving completion and as a consequence time was set at large, alternatively that the liquidated damages claimed were penal.
The issue with the prevention argument was the clause for extension of time, which provided a unilateral power on the builder to extend time, included an “absolute” discretion to extend time, as follows:
Growthbuilt may in its absolute discretion at any time and for any reason, without prejudice to its rights or the Subcontractor’s obligations under this Subcontract, extend the Date for Completion, but Growthbuilt is under no obligation to extend, or to consider whether it should extend, the Date for Completion.
Henry J surveyed the relevant authorities on the effect of unilateral extension of time clauses on the ability of a subcontractor to claim prevention, including Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82, Turner Corporation Ltd (Receiver & Manager Appointed) v Austotel Pty Ltd (1997) 13 BCL 378, Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd  NSWCA 211 and Champion Homes Sales Pty Ltd v DCT Projects Pty Ltd  NSWSC 616. Her Honour held that the four subcontracts between the builder and subcontractor modified the application of the prevention principle such that the subcontractor was precluded from arguing that delays caused by the builder obliged the builder to extend the dates for completion, or that time for performance under the subcontracts had been set at large in answer to the liquidated damages claim (at ). In support of this, Her Honour distinguished the clauses in Probuild and Peninsula Balmain, holding that the discretionary power to extend the completion dates that is described as “absolute” is contained in a clause that expressly excludes any obligation on Growthbuilt to exercise the power to extend or to consider whether to do so (at ). Also, citing Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd  NSWCA 184, Henry J said that an obligation of reasonableness and good faith in the exercise of a unilateral contractual power (implied at law in New South Wales as an incident of a particular type of commercial contract) would not be implied in this case as it would be inconsistent with the terms of the subcontract, particularly cl. 11 (at  & ).
The penalty argument was limited to one subcontract worth $60,000 for a claim for liquidated damages at a rate of $3,500 per day. There was evidence adduced in cross examination that the owners of the building, related to the director of the builder, would not sue the builder for delays. The builder argued that there were other costs that would be incurred by the builder including holding costs, preliminaries, site establishment costs and costs associated with the loss of opportunity to deploy resources, and the risk of litigation.
Henry J considered the rate to be on “the high side”, but (referring to Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231 (Arab Bank) noted the test of whether a particular provision is punitive or penal in character is not whether the sum stipulated would be considered to be merely disproportionate compared to the likely damage, but whether it has been demonstrated to be extravagant or unconscionably disproportionate (at ). Her Honour’s reasons include:
- at the date of the subcontract, it may be expected that the builder anticipated delay on that project might cause delay, cost and lost opportunity to the builder (at );
- the builder might be required to pay ongoing site related costs and overheads from delay that were not compensated in its head contract (at );
- the subcontractor, who had the onus of proof on the penalty issue, did not cross examine the director of the builder about the various costs that it would incur from delay, nor did it cross examine on other legitimate interests that the builder might seek to protect, or whether the costs the builder expected to incur were disproportionate to the daily liquidated damages rate (at  & );
- the subcontractor agreed in cl. 12 of the subcontract that the amount payable was a genuine pre-estimate, which was not a conclusive factor but not an irrelevant factor (at ); and
- the doctrine of freedom of contract remains important (referring to Arab Bank at  and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525 at ) and there was no evidence that the subcontractor was not capable of understanding and protecting its interests, had been pressured into agreeing to the clause or suffered any “disability” (at ).
The takeaway lessons from this case are:
- participants in a project need to be aware of the kind of extension of time clause in their contract, including whether the unilateral power to extend time includes an absolute discretion (as in this case) or is silent on this (as in Probuild and Peninsula Balmain), as this will be critical to a prevention argument if no extension of time is applied for by a contractor or subcontractor;
- subcontractors and contractors should take care to ensure they make appropriate extension of time applications, so as not to be forced into prevention arguments where the phrasing of the unilateral extension of time clauses become the focus of the litigation;
- it is very difficult to overcome a liquidated damages clause, particularly when the parties are sophisticated commercial entities, so care needs to be taken when agreeing the extension of time and liquidated damages terms, including the applicable rate; and
- the onus of proof that a clause is a penalty is on the party arguing that, which likely will require tactical decisions about whether to seek production of, and cross-examine on, the relevant costs anticipated at the date of the contract.