In residential building contracts, the homeowner may be entitled to liquidated damages when a builder fails to complete construction works by the agreed date and does not have a valid extension of time (EOT). These damages serve as compensation for the delay and can be enforced under the terms of the contract and through proceedings in the NSW Civil and Administrative Tribunal (NCAT), or the Victorian Civil and Administrative Tribunal (VCAT).
This article explains how liquidated damages work, when homeowners can claim them, and what to consider if you’re facing delays in your home building project.
What Are Liquidated Damages?
Liquidated damages are a contractually pre-agreed amount of compensation that a party must pay the other party, usually the builder to the homeowner, for each day the project remains incomplete over the specified completion date in the contract, unless a valid EOT has been granted.
Enforceability
For the liquidated damages to be enforceable, the rate of liquidated damages must represent a genuine pre-estimate of the homeowner’s likely damages loss (such as rent, interest, or alternative accommodation costs as held in Dunlop Pneumatic Tyre Co Ltd v New Garage [1915] AC 79. The agreed amount cannot be extravagant unconscionable or out of all proportion to the interest protected, otherwise, the Court or Tribunal may deem it as a penalty and refuse enforcement as held in Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71.
When Do Liquidated Damages Apply?
Liquidated damages generally accrue from the contractual completion date until the earlier of:
- the date of practical completion, meaning the work is substantially complete and fit for occupation;
- the date the contract is lawfully terminated; and
- the date the homeowner takes possession of the site.
If none of these events occur and the delay continues, damages continue to accumulate, unless the builder successfully claims a valid EOT.
EOT – A Key Factor
Before a homeowner can enforce a liquidated damages claim, any valid EOTs must be deducted from the total delay period, which are often granted for events outside the builder’s control, such as:
- adverse weather;
- trade or material shortages; and/or
- owner-caused delays or variations.
Enforcing Liquidated Damages Through NCAT
Key features of NCAT proceedings include:
- homeowners can seek orders for compensation, including liquidated damages;
- NCAT may award work orders (e.g. requiring the builder to complete the job) instead of monetary damages; or
- claims must be made within the statutory warranty periods.
Key Considerations for Homeowners
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Termination Impact
If the homeowner terminates the contract lawfully, accrued rights to liquidated damages up to the date of termination are preserved. However, if the builder lawfully terminates due to the homeowner’s breach or repudiation, the homeowner may lose the right to claim damages for incomplete work. Understanding who terminated and whether the termination was valid is crucial in determining rights to compensation.
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Practical Limitations
When seeking liquidated damages, homeowners must:
- demonstrate that the delay was not due to valid EOT causes, such as adverse weather or owner-caused delays;
- provide a clear and accurate calculation of the damages claimed; and
- choose between liquidated and unliquidated damages, as claiming both for the same period is not allowed.
Where liquidated damages are challenged as a penalty, the homeowner may need to prove that the amount was reasonable based on their expected loss at the time of contract formation.
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Documentation Requirements
Like all building disputes, documentation is essential. The homeowners, and the builder where applicable, should keep the following documents:
- detailed records of communications regarding delay notices and EOT claims;
- evidence of financial loss, such as rental agreements, bank statements, or receipts for temporary housing;
- formal notices and certifications, including practical completion documentation if applicable.
Whether you are still in the construction phase or dealing with a delayed handover, knowing your rights to liquidated damages can help protect your financial interests and ensure accountability. These claims are technical and time-sensitive, so seeking legal advice early can make all the difference.
Feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our social media accounts.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us.
