In our June 2015 update, we reported on the decision of Justice P Lyons in the Supreme Court in Grocon Constructors (Qld) Pty Ltd v Juniper Developer No. 2 Pty Ltd & Anor [2015] QSC 102.
Recently, the Queensland Court of Appeal handed down its decision on Grocon’s appeal of the primary judge’s decision: Grocon Constructors (Qld) Pty Ltd v Juniper Developer No 2 Pty Ltd [2015] QCA 291.
The Court of Appeal was required to reconsider the question of when a liquidated damages clause will be void as a penalty.
The Court of Appeal applied the long line of authority established by the High Court in Dunlop Pneumatic Tyre Co Ltd v New Garage andMotor Co Ltd [2015] and confirmed the primary judge’s decision that the liquidated damages clause in the contract was not “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved’”.
Facts
Juniper, as principal, and Grocon, as contractor, contracted for the construction of a mixed-use residential and retail development at Surfers Paradise.
The Contract divided the works into four separable portions. In respect of each separable portion, Grocon was liable for LDs for delay in reaching practical completion (PC) by the required date. PC was defined in the Contract by an extensive list of requirements to be completed by Grocon.
Juniper and Grocon fell into dispute about delays to the works. Juniper claimed LDs against Grocon in the sum of $33.6 million. Grocon argued that the LDs clause was penal and therefore void.
At first instance, Peter Lyons J held that the LDs clause was not void as a penalty. Grocon appealed against that decision.
Arguments on appeal
Grocon’s appeal made 2 main contentions as to error by the primary judge:
1. The LDs clause did not operate upon breach of a ‘single’ obligation, as concluded by Justice P Lyons, but upon a breach of any one of multiple obligations, some of which were only trivial.
2. The quantum of LDs for which Grocon was contractually liable was ‘extravagant and unconscionable’ in comparison with the potential loss to Juniper as a result of Grocon failing to achieve PC by the required date.
Issue 1: Single obligation
Grocon argued that in order to achieve PC, it was required to satisfy all of the requirements listed in the definition of PC in the Contract, with the effect that even the most minor defects, such as a single defective light globe, would trigger its liability for LDs.
Therefore, as its liability for LDs arose upon breach of any one of multiple obligations, some of which were trivial and could not lead to serious damage, Grocon argued that a presumption arose that the LDs clause was penal.
Grocon further argued that, even if the LDs clause operated upon breach of a single obligation, a presumption that the LDs clause was penal still arose, because the quantum of LDs was excessive compared to the trivial omissions which could give rise to a breach of its obligation to achieve PC by the required date.
McMeekin J, who delivered the lead judgment of the Court, rejected these arguments.
His Honour acknowledged that if Grocon’s liability for LDs was triggered by an omission as trifling as a missing lightbulb or a small missing area of landscaping, then there would be a strong argument that the LDs clause was penal.
However, His Honour held that the contractual provisions did not operate in this way, because:
1. Grocon’s obligation under the Contract to achieve PC by a particular date was a single obligation: that is, to reach PC by the date for PC; and
2. PC could be achieved notwithstanding Grocon’s failure to attend to trivial matters, or extremely minor defects in the works.
It was critical that the contract reserved a discretion in the Superintendent to issue a certificate of practical completion in circumstances where such minor defects did not render the works unfit for their intended use (amongst other things).
Issue 2: ‘extravagant and unconscionable’
Grocon further argued that the quantum of LDs imposed by the Contract was ‘extravagant and unconscionable’ in comparison with the loss that Juniper would potentially suffer if Grocon was delayed in achieving PC.
In support of this argument, Grocon first submitted that its failure to reach PC by the required date would not have necessarily caused any delay to Juniper in selling the residential units.
The essence of Grocon’s argument was that, pursuant to the Contract, it did not ever have possession of the site, but rather only had a licence to undertake works on site. Therefore, it was unable to prevent Juniper from giving possession of the residential units to the purchasers of same.
The Court rejected this argument and held that, pursuant to the Contract, it was clear that Grocon had possession of the site until PC was achieved and that a failure to reach PC would prevent possession being given by Juniper to purchasers under the sale contracts.
Grocon further submitted that, given the rates for LDs stipulated in the contract markedly increased the longer that PC was delayed, and in some cases doubled from one week to the next, they could not be a genuine pre-estimate of loss.
The Court also rejected this argument. His Honour considered that the rates stipulated in the Contract might substantially understate the true loss, and the doubling might have been unfairly delayed from Juniper’s perspective.
His Honour then concluded that the LDs clause was not ‘extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved’ because a delay in achieving PC had the probable consequence of delaying Juniper’s capacity to settle the sale of the residential units and obtain access to its revenue stream, with potentially significant adverse financial consequences.
Grocon had failed to meet the burden of proof that the amounts were extravagant and unreasonable, in circumstances where the actual losses were difficult, if not impossible, to quantify.
In coming to this conclusion, the Court placed significant weight on the fact that both Juniper and Grocon were sophisticated commercial parties who were in receipt of expert legal advice and had equal bargaining power when negotiating the Contract.
Conclusion
The decision of the Court does not represent any change to the established test for determining whether a liquidated damages clause will be considered void as a penalty is whether it is ‘extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved’.
However, the key ‘take-aways’ are the following:
1. An obligation to achieve PC by a particular date will be considered a single obligation, even if PC contains very detailed requirements for completed works.
2. Increasing the rates for LDs as the delay to PC continues does not necessarily preclude the rates from being considered a genuine pre- estimate of loss.
3. The courts will be slow to interfere with contractual provisions negotiated by sophisticated commercial parties in receipt of expert advice and each with equal bargaining power.