Details of payment as penalty for delay
The Western Australian Supreme Court of Appeal was called upon to decide on a provision of NIL DOLLARS liquidated damage in a contract between Mr. Mladenis, the principal, and J-Corp Pty Ltd, the contractor. The proprietor claimed damages from the builder for delay in completion of his project. This paper will deal with the review of J-Corp v Mladenis case that is related to the legal clause, 11.9, of Australian Construction Law (2010) where J-Corp disclaimed paying damages to Mladenis due to delay in completing the construction.
A clause containing details of payment as penalty for delay to the proprietor by the contractor for delays in construction is often incorporated in construction contracts. The liquidated damage is a genuine estimate of the proprietor’s loss for delay. If the builder does not complete the construction by the prescribed time limit, the proprietor does not have to prove actual damage and this clause, in a way, serves to protect the proprietor’s interests. In the same context, this clause also limits the contractor’s liability to unliquidated damages. This clause may also be manipulated and used to exclude the builder from any liability. To incorporate this feature in the contract as standard procedure most construction contract forms include a liability clause with the rate of liquidated damages set at nil dollars. The case of J-Corp Pty Ltd v Mladenis highlights the manner in which the builder uses the clause of liquidated damages in order to exclude himself from any liability arising out of non completion of the contract in the stipulated time frame. The case serves as a timely reminder of the need for the parties to be clear and concise while drafting liquidated damages clause in the contract.
In J-Corp Pty Ltd v Mladenis  WASCA 157, Mr. Mladenis sought to claim damages for delay in construction and breach of contract by J-Corp. The contractor, J-Corp, asserted that they were not bound to pay any damages as stated in the contract. The case focuses on whether adding "nil" as a value for liquidated damages in a contract infers no damages at all be it liquidated or unliquidated damages or that it just means there are no liquidated damages.
Facts of the case
J-Corp Pty Ltd and Mladenis drew up a standard contract to construct a house on Mladenis' property. Clause 11.1 of the contract referred to the contractor being obliged to begin work within 21 days of issuing licenses and complete the building project within 52 weeks of the commencement of construction. Clause 11.2 provided that the contractor was not to be held responsible for delays over which it had no control. However, under clause 11.9 if the contractor should breach the obligation by not completing the construction on time, J-Corp Pty Ltd would be liable to pay Mladenis liquidated damages at the rate of $0.00/ day for each day that the building remained incomplete.
Also in addition to the above clauses, there were certain other provisions in clauses viz. 11.2, 11.3, 13.4 and 15.4 which are relevant to the case. Clause 11.2 stated that J-Corp would not be responsible for any delay over which it had no control and listed various categories under cl 11.2. Clause 11.3 stated that in the event of any delay caused by Mladenis or his agents, the builder i.e. J-Corp may add the cost incurred due to such delays in the contract price. Clause 13.4 stated that in the event of any breach being committed by J-Corp to the provisions of the contract, Mladenis could terminate the contract. Clause 15.4 stated that in the event of termination of the contract by either of the two parties, the party who is terminating the contract shall bear the damages incurred by the other party including the loss of profit.
What was the issue?
The construction contract between J-Corp Pty Ltd and Mladenis specified NIL DOLLARS per day rate of liquidated damages. When the project got delayed, the proprietor, in this instance, Mladenis, sought to recover damages from J-Corp Pty Ltd, for the delay. J-Corp argued that the contract did not hold the company liable for any damages caused by delay.
Both parties gave their consent that the proceedings of the case in a court of law would be based on the fact that clause 11.9 was added into the contract without being communicated to Mladenis and without being negotiated between the two parties. This suggested that the decision in the case was drawn entirely on the basis of the court’s construction of the contract. The preliminary question of law was whether clause 11.9 in its proper interpretation had the effect of excluding Mladenis from his right to claim damages under common law for the losses suffered because of J-Corp’s breach of contract.
The primary judge held that the insertion of clause 11.9 in the contract signifies that Mladenis was excluded from any remedies in respect of liquidated damages being suffered by him in the event of breach of contract by J corp. However, the provisions of the contract do not clearly express any intention to exclude a claim for unliquidated damages by Mladenis. Also, it was quite evident from clause 11.2 that J-Corp would be liable for common law damages for delay over which it had control.
Finally the primary judge arrived at the conclusion that clause 11.9 should be construed against J-Corp, as it being the party who is seeking benefit out of an ambiguous term in the contract which was solely prepared by it.
The Court of Appeal, Western Australia, held that the clause of nil dollars ($00.00) per day, pertaining to the liquidated damages in the contract, did not demonstrate an intension to exclude Mladenis entitlement to damages in the event of delay. The effect of clause 11.9 was that J Corp would not be liable to pay any amount by way of liquidated damages, but J-Corp could be held liable to pay a claim in unliquidated damages suffered by Mladenis because of the delay in completion of the project i.e. while liquidated damages were excluded as the remedy available to the plaintiff, it can still recover the unliquidated damages.
It was also held that the arrangement of the terms and provisions in the contract was unequal. Clause 11.3 provided that J-Corp can vary the price of the contract in order to include any cost incurred by reasons of delays on the part of Mladenis. In contrast to this, Mladenis would be unable to claim any damages that occurred due to delays on the part J Corp. The only remedy available to Mladenis in the event of delay is to terminate the contract under clause 13.4 which require substantial breach of contract and in that case also Mladenis would have to bear the damages incurred by J-Corp including the loss of the profit (clause 15.4).
The verdict of the case signifies that the contract should have mentioned in clear and unambiguous terms an intention to exclude the principal from claiming his common law right to damages. There is a presumption that each party is entitled to all those remedies for breach of contract that would arise by operation of common law. Parties are free to rebut this presumption by clearly stating the impact that any such exclusion in the contract may have on rights of the parties.
Comments on legal principles
The decision of the court in this case sets a rationale that while drafting the contract both parties need to be aware of the clauses of the contract and there has to be clarity about how much liability lies with the contractor in case of delays. Some very interesting facts have come to light in the context of this case:
The same provisions under two different contracts can lead to very different results. Therefore, contractual provisions have to be interpreted in reference to the particular contract in question. In this case too, the court did not consider that general principles could be drawn from earlier cases with similar scope to draw upon any conclusion.
The rationale behind putting the clause of liquidated damages in a contract is to provide a genuine pre-estimate of loss suffered by the principle due to non-completion of the contract on due date. However, in the case it was held that a ‘nil’ amount could hardly be seen as a genuine pre-estimate of Mladenis’ loss.
The court had drawn the conclusion that the provision of liquidated damages as included in a contract is in the nature of exclusion or limitation of liability. Therefore, it was required to be analysed separately. Ideally the court should start the proceedings of the case by presuming that both the parties to the contract intend to avail all the respective legal rights and remedies in case of breach of contract and then analyse whether that contract include clear and unequivocal words showcasing an intension to exclude some or all of those remedies. However, in the case it was held that inclusion of ‘nil dollars’ as liquidated damages in the provision of the contract does not necessarily signify that there was a clear intension on the part of the builder to exclude principle’s right to claim unliquidated damages.
If the proprietor intends to claim damages for delay in work, the parties should include a nominal positive amount in lieu of liquidated damages within the contract. Both parties should be clear and concise while drafting the liquidated damage clause.
On the basis of the decision under this particular case it is however very difficult to draw generalizations as to how the use of word ‘nil’ will be used in the context of liquidated damages in future. There is a trend towards such kind of provisions being analysed restrictively although, retaining the principle’s rights in lieu of unliquidated damages. The proceedings under such cases will always depend upon the context and to what the court can discern as to the parties common interest. So in order to escape the arguments, the parties should not use the terminology ‘nil’ without expressing their clear intentions.
The case also propounds a very crucial fact that it would seem unlikely that a principle would intend to give up all his remedies in case of late completion of the contract because that would leave the principle at the mercy of the contractor in respect of the reasonable time the contractor chooses to complete the contract. At the time of non completion of the contact on time, the principle might have to contend himself by alleging that the contractor failed to complete the work due to reasons which are hard to establish.
The fundamental idea is that all it takes to avoid such tussle between the contractor and the principle is CLEAR DRAFTING of the provision in contract.