Juniper Buries Penalty Argument - Queensland Supreme Court Upholds Liquidated Damages Clause

WHAT YOU NEED TO KNOW

•  The Queensland Supreme Court has upheld a liquidated damages clause in a design and construct contract, rejecting an argument that it was an unenforceable penalty.
• In doing so the Court explained the operation of the penalty doctrine as recently expanded by the High Court in Andrews v ANZ.
• Critical to the decision was that the developer was denied access to the site if practical completion was not achieved, so that it could not complete apartment sales and was therefore exposed to the real risk of loss. 

Background

Juniper was the developer of a residential apartment complex in Surfers Paradise. It entered into a design and construct contract, whereby Grocon was appointed head contractor for the project. The General Conditions of Contract were based on the standard form AS4300-1995, with modifications. 

The work was divided into four Separable Portions which each had a particular Date for Practical Completion. Practical Completion was defined to include a variety of requirements such as the instalment of all services and installations, the provision of two sets of keys for works fitted and the finalisation of all landscaping. By Clause 35.7, Grocon was liable for liquidated damages if there was a delay in reaching Practical Completion in respect of any Separable Portion. There were provisions governing how the liquidated damages would apply if there were delays on more than one portion of the works. Grocon's maximum liability could not exceed 10% of the contract sum. 

Grocon sued Juniper for more than $10 million for unpaid money under the contract, variations and interest. Juniper counterclaimed for liquidated damages in the sum of $33.6 million or, in the alternative, for $28.5 million in damages for delay. To facilitate the resolution of the matter, the Court was asked to determine before trial the question whether the liquidated damages clause was a penalty. 

Judgment

The Court decided that the liquidated damages provision was not a penalty and was therefore enforceable

Does a liquidated damages clause necessarily attract the penalty doctrine?

 With reference to the High Court's decision in Andrews v ANZ, Grocon submitted that the penalty doctrine was engaged, because: 

•  the contract contained a primary stipulation in favour of Juniper for the timely achievement of practical completion; and
• the liquidated damages clause operated as a collateral or accessory stipulation imposing an additional detriment on Grocon, in the event of failure to satisfy the primary stipulation. 

In particular, Grocon argued that the imposition of liquidated damages necessarily met the requirement of "additional detriment" or "additional or different liability" as defined in Andrews.

Justice Lyons found that the High Court in Andrews was not using these terms in any broad sense but rather to indicate a liability or detriment which would satisfy the traditional test of extravagance and unconscionability stated in Dunlop Tyre Co Ltd v New Garage and Motor. "Additional detriment" referred to a detriment of greater magnitude or significance than the promisor would have suffered but for the penalty clause. The fact that the obligation to pay liquidated damages was different from an obligation to pay common law damages for breach of contract was not sufficient to engage the penalty doctrine. 

Justice Lyons found the law in Australia to be that unless a party seeking to invoke the penalty doctrine demonstrates that the amount payable is extravagant and unconscionable in comparison with the greatest loss that could have been suffered from the breach, the doctrine will not be applied.

Does Practical Completion comprise one event or multiple events? 

Grocon relied on the presumption stated by Lord Dunedin in paragraph 4(c) of Dunlop, namely that a clause is presumed to be a penalty when 

     a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage.

Grocon argued that the presumption applied here because numerous different events, some quite trifling, could cause a delay in Practical Completion. For example, a failure to have an approved tag attached to one set of keys could cause a delay in Practical Completion for which Juniper could claim liquidated damages. 

An important integer in this argument was the question whether Juniper would be entitled to possession upon a failure to achieve Practical Completion by the due date. That was important because it was common ground that, for so long as Juniper was not entitled to possession, it would be unable to complete contracts for the sale of apartments in the development and would therefore suffer material financial loss.

On this point, the Court found in favour of Juniper. It found that, on a proper construction of the contract, Juniper was not entitled to possession of the site, while there was a delay in Practical Completion. Grocon's rights and obligations with respect to the site were inconsistent with the notion that Juniper would have vacant possession at the date when Practical Completion was due. 

Returning to the Dunlop presumption, Juniper argued that the presumption did not apply in this case, because practical completion (for each Separable Portion) was a single event. Justice Lyons agreed: he found that the failure to achieve Practical Completion breached only a single obligation – to achieve a particular stage in the project, by a time determined under the contract – and, therefore, the presumption did not apply

In reaching this conclusion, Justice Lyons adopted the approach of the Hong Kong Court of Appeal in Philips Hong Kong Ltd v AttorneyGeneral. His Honour distinguished the recent decision of the Full Federal Court in Paciocco v ANZ, where Allsop CJ had found that the presumption could apply in the case of a customer's failure to make timely payments on their credit card. 

Other factors 

Justice Lyons accepted Juniper's submission that extrinsic evidence was admissible to determine whether the liquidated damages clause was a penalty. While extrinsic evidence could not usually be relied on to interpret the contract, Justice Lyons found that those limitations would not necessarily apply to the task of characterising a provision as either a penalty or a genuine pre-estimate of damage. 

As a result, the Court was able to take into account: 

• evidence of negotiations between the parties;
• the fact that Grocon was provided with information about the significant costs which Juniper may incur if apartment sales were delayed;
• the luxury nature of the development. 

Conclusion 

The Court concluded that Grocon had not discharged the onus of proving that the liquidated damages clause in this case was a penalty. Grocon's delay in achieving Practical Completion, even for a minor matter, had the potential to prevent Juniper from settling contracts of sale with purchasers, which would cause Juniper to suffer significant loss. The liquidated damages provision was therefore better understood as a genuine pre-estimate of damage and so enforceable. 

The Court's reasoning seems sound and is likely to apply more generally, at least where design and construct contracts preclude the principal from regaining possession of the site for so long as Practical Completion is not achieved.