The penalty doctrine and delay to practical completion caused by trivial events: Grocon Constructors (Qld) Pty Ltd v Juniper Developer No. 2 Pty Ltd & Anor  QSC 102, 23 April 2015, P. Lyons J
A modified AS4300-1995 contract defined practical completion to include an exhaustive list of both significant and trivial items of work. The builder argued that because the failure to attend to trivial items of work could trigger the liquidated damages clause, the clause was penal. The Queensland Supreme Court disagreed.
The owner (“Juniper”) and the builder (“Grocon”) entered into a modified AS4300-1995 standard form contract to build a large development in 4 separable portions in Surfers Paradise. Grocon sued Juniper for unpaid money for work and other related delay costs, and Juniper counterclaimed for $33.6 million in liquidated damages.
The liquidated damages claim (cl 35.7) was triggered by the failure to achieve practical completion. The definition of practical completion for each separable portion included, amongst other things:
- the works be free from all identifiable omissions and defects;
- all rubbish, surplus material and minor items of plant and equipment have been removed;
- 2 sets of keys for the works fitted with plastic tags having approved label inserts have been supplied and all construction locks replaced with final locks;
- all appliances and fittings have been installed;
- defective light globes have been replaced; and
- the whole of the Works have been professionally cleaned.
The liquidated damages for each separable portion varied and were significant, and increased with time, and ranged from $8,500 per day to $59,000 per day.
Grocon argued that trivial defects (for example, one of the keys being fitted with a tag with a non-approved label insert) could result in its liability under the liquidated damages clause for each day the relevant fault was not remedied. Relying on the principles in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 75, at 86 – 87 (“Dunlop”), Grocon submitted that the liquidated damages clause was a penalty:
- because there is a presumption that a clause is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more of several events, some of which may occasion serious and others but trifling damage; and
- because minor failures could lead to Grocon incurring substantial liquidated damages, which were extravagantly out of proportion to the damages that would be suffered for a trivial defect.
Lyons J distinguished the singular breach of failing to reach completion with the multiple breaches set out in the practical completion clause, and held that the liquidated damages clause operated only on failure to reach practical completion, not on the various individual breaches set out in the practical completion clause. His Honour noted that each individual breach in the practical completion clause could lead to damages; however, the liquidated damages clause was not concerned with the consequences of those breaches, but only with the consequence of not achieving practical completion by the required date. His Honour relied on the decisions of Law v Local Board of Redditch  1 QB 127 and Philips Hong-Kong Ltd v Attorney-General of Hong Kong  1 HKLR 269, both of which concerned delay being potentially caused by many different circumstances, but in which the respective courts held that there was no penalty because only a single obligation leading to liquidated damages was breached – that is, to achieve practical completion.
His Honour also distinguished the matter of Paciocco v Australia and New Zealand Banking Group Limited  FCAFC 50 (“Paciocco”) by noting that in Paciocco (the bank fee class action) there was a requirement to make payment on time, the failure of which led to a fee being incurred. In Paciocco, this clause could be breached many times in many ways, including by the failure to pay small sums, and therefore the Dunlop presumption would apply. However, in this matter the liquidated damages clause could only be engaged once – that is, on the failure to achieve practical completion – and therefore the presumption did not apply.
On the question of the comparison between the liquidated damages and the anticipated loss, Lyons J held that the contractual provisions gave Grocon control of the site up to practical completion, such that Juniper could only give vacant possession to purchasers on practical completion. Because the failure to achieve practical completion would prevent Juniper settling its sale contracts, His Honour held that the liquidated damages was not caught by the penalty doctrine.
Lyons J also noted that the parties were not commercially unsophisticated, nor were they subject to any inequality of bargaining power when entering into the contract. His Honour did not clarify the significance of this consideration in the finding that the clause was not penal.
Lyons J also noted that the way the liquidated damages clause operated, differentially for each of the separable portions, using a daily rate, and with changes in the daily rate over time, all support the conclusion that the clause is a liquidated damages clause.
There was a dispute about what extrinsic evidence is admissible to demonstrate whether the clause was a penalty. In Dunlop, Lord Dunedin noted that whether the clause is penal is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged at the time of the making the contract. Juniper argued that relevant and admissible evidence included evidence of negotiations and the luxury nature of the development to demonstrate the following:
- the sophistication of the parties;
- the nature of the relationship between the parties;
- the degree of contractual freedom which the parties should be permitted to exercise; and
- whether it is unconscionable to enforce the liquidated damages clause.
Grocon argued that the only admissible evidence was evidence that would be admissible on any other question relating to the construction of the contract.
Referring to the origin of the penalty doctrine in the court’s equitable jurisdiction and the decision in Paciocco, His Honour held that the full context of the relevant clause is required, which means that extrinsic evidence may be used, even where the evidence would not be admissible for determining the meaning of the clause.
This decision makes it clear that the various conditions precedent operating on a practical completion clause in a contract are unlikely to impact the question whether the liquidated damages clause is a penalty. This is because liquidated damages are imposed on the occurrence of one event, being delay, not on the many individual events that could delay practical completion. To adopt the terminology in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, when analysing whether a collateral stipulation like a liquidated damages clause is penal, the question is what is the primary stipulation? Here it is a single obligation that can only be breached once, leading to a stepped liquidated damages payment. By way of contrast, in Paciocco the relevant clause requiring payment could be breached many times, and each breach leads to the payment of one fixed lump sum.
The decision explains that a wide variety of evidence can be adduced to demonstrate that various matters, identified by Lyons J, are determinative of whether a clause is penal. For instance, there is authority that the sophistication of the parties is a relevant consideration (see, for example, Yarra Capital Group Pty Ltd v Sklash Pty Ltd  VSCA 109), and therefore evidence of the legal representation of the parties, the personnel engaged in the negotiations and the extent of the negotiations are admissible.