What Are Liquidated Damages In Australian Law?

A liquidated damages clause (also commonly known as an agreed damages clause) is a provision in a contract that specifies a predetermined penalty for breaching a contract. Known as damages, these fixed amounts must be paid if a breach occurs.

Liquidated damages (LDs) refer to situations where the penalty amount or rate is established in advance. Conversely, unliquidated damages are those not predetermined or quantified within the contract.

Liquidated damages may also be referred to as: 

  • Pre-estimated damages clause 
  • Agreed remedies/damages clause
  • Liquidated and ascertained damages clause 
  • Stipulated damages clause 

If you believe a contract you are party to has been breached and either you owe or are owed liquidated damages, it’s essential to get professional guidance. At Aditum, we offer a free consultation and our experienced contract lawyers can help you know exactly where you stand legally. Read the rest of this article to learn all about liquidated damages in Australia. 

Example Of Contracts That Might Include A Liquidated Damages Clause

The liquidated damages clause is common in contracts that have high costs and serious consequences for one or more of the parties if the terms are breached. They are often found in building and construction contracts. It outlines the damages the contractor should pay the client for breaching the contract or missing the agreed-upon completion date. 

Outsourcing, employment, and IT development contracts may also include a liquidated damages clause. If the contractor or employee breaches the contract, they might be liable to pay for damages or losses incurred by the client. 

Why Use Liquidated Damages Clauses?

Liquidated damages clauses have several advantages to both parties in a contract. These include: 

  • Saves time and money. Instead of court action, the clause outlines the payable damages in case of a contract breach. 
  • Acts as a motivating factor for the contractor to complete the project on time 
  • Useful in assessing the liabilities and potential costs in a contract 
  • Allows parties to maintain a long-term contract by outlining how to deal with minor breaches 
  • The client doesn’t have to establish claiming elements like actual losses and causes. 

Elements Of A Liquidated Damages Clause 

A liquidated damages clause must have the following elements: 

  • Practical completion: This term means the contractor has finalised all major stages of the project, except minor defects or omissions that can be corrected without major inconveniences. 
  • Date for practical completion: The promised date for practical completion. It can be a specific date, a certain number of days from the contract date, or an easily recognisable event. 
  • Date of practical completion: This is the actual date the contractor reaches practical completion. The contractor must show proof of practical completion by notice, surveyor’s certificate, or other means. 
  • Applicable rate: The fixed rate or amount payable as liquidated damages if the contractor doesn’t meet the agreed terms and dates. 

Difference Between Liquidated & Unliquidated Damages?

The major difference between liquidated and unliquidated damages is how the parties determine the payable amount. In liquidated damages, the parties set a fixed rate or amount before the contract begins. 

On the other hand, unliquidated damages aren’t fixed or predetermined. A client can claim unliquidated damages for unforeseeable losses or damages not captured in the agreed remedies clause. 

Unlike liquidated damages, you must show proof of the losses and how you arrived at the indicated amount for unliquidated claims. Whether you’re the contractor or client, it’s advisable to consult an experienced disputes lawyer when dealing with unliquidated damages. 

How To Calculate Liquidated Damages

There is no set method or formula for calculating liquidated damages. However, the pre-estimate must closely match the damages or losses you would incur in case of a contract breach or missed date for practical completion. 

Ensure you determine the amount before the actual project begins and outline the rate/ fixed amount in the clause. Some considerations when estimating/calculating liquidated damages include: 

  • Insurance costs during the extended deadline period 
  • Additional rent or storage costs incurred 
  • Project costs like supervision and administration costs 
  • Relevant financing costs like loan interests 
  • Lost net profits caused by the delay

Keep your calculations handy in case the contractor goes to court to challenge the pre-estimated damages. 

How To Draft A Liquidated Damages Clause 

As a client or principal, it’s essential to carefully calculate the potential losses/damages of a contract breach before the project begins. Clearly detail the events that would lead to the payments. 

The clause should also include the standards the contractor has to meet for the breach to become invalid. Ensure you have a fallback plan in case the court rules the liquidated damages clause unenforceable. The plan might include a way of recovering general damages. 

If you’re a supplier or contractor, ensure the liquidated damages clause is your only liability. Try limiting the predetermined amount you might have to pay. Work with a legal expert for guidance to avoid liabilities and future financial risks. 

When Is A Liquidated Damages Clause Enforceable? 

A liquidated damages clause is enforceable if it includes all the elements without appearing as a penalty. In this context, a penalty is a form of punishment for breaching or non-observance of the agreements in a contract. 

It differs from a liquidated damages clause since penalties aren’t predetermined. A contractor might challenge a stipulated damages clause, arguing it’s a penalty. 

If the court finds that the client exaggerated the pre-estimated amount to gain an advantage, it may refer to that as a penalty. A liquidated damages clause must be neutral and not intentionally deter the contractor from breaching the contract.

Once the court rules the liquidated damages as a penalty, the clause is unenforceable. This ruling exempts the contractor from making the payment for damages. 

Expert Advice Regarding Liquidated Damages In Australia

Whether you’re a client or contractor, expert legal advice can help you when dealing with liquidated damages clauses. Fortunately, Aditum Lawyers are here to assist. Consult with our experts for all matters related to commercial contracts. 

We have over 30 years of combined experience and have drafted over 1000 contracts and agreements. Contact our team for a free consultation with one of our experts.

Resources & Further Reading 

  1. https://www.consumer.vic.gov.au/housing/building-and-renovating/plan-and-manage-your-building-project/contracts 
  2. https://www.lawhandbook.sa.gov.au/ch10s03s07.php
  3. https://lawpath.com.au/blog/what-are-unliquidated-damages

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal advice. Consult with a qualified commercial lawyer for personalised advice regarding your specific situation.