Home Building Tips for Builders in NSW
Liquidated Damages
Where the builder has failed to complete the building works within the time specified in the contract (even when genuine extensions of time are taken into account), most contracts will require the builder to pay the client compensation for not finishing the project on time. This compensation is referred to as ‘liquidated damages’.
Liquidated damages are supposed to be a genuine pre-estimate of the financial loss suffered by the client, and this amount will be payable even if the client actually suffers financial loss that is more or less than the amount of liquidated damages that was set when the contract was signed.
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It is common for clients to set liquidated damages at either:
- the amount of rent being paid by the client to live away from the site whilst the building work is being carried out; or
- the amount of rent that the client could earn if the premises were leased; or
- some other reasonable amount.
Example 1:
If liquidated damages are set at $250 per week, and the builder completes the project 3 weeks late, the builder must pay the client compensation in the amount of $750 (3 x $250).
Example 2:
If liquidated damages are set at $250 per week, the client is renting another property at $300 per week, and the builder completes the project 3 weeks late, the builder still only needs to pay the client compensation in the amount of $750, even though the client has suffered an actual loss of $900.
Where liquidated damages are set at a level that is unreasonably high (i.e not a genuine pre-estimate of loss), it is likely that the law will hold such an amount void, and instead impose the actual financial loss suffered by the client as damages. In determining whether liquidated damages are unreasonable, the law compares the amount of liquidated damages with the maximum loss that the client could ever suffer.
Example 3:
If liquidated damages are set at $5,000 a week, the client is renting another property at $300 per week, and the builder completes the project 3 weeks late, given that the level of liquidated damages will most likely be void (as it is unreasonably high), the builder will need to pay the client compensation in the amount of $900, being the actual loss suffered by the client.
USEFUL TIPS
- Never cross out the part of the contract that specifies the amount of liquidated damages
- Never write “$0” as liquidated damages
- Always insert a figure as liquidated damages, even if it is $10 per week
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