THE PENALTIES DOCTRINE IN INTERNATIONAL CONSTRUCTION CONTRACTING: WHERE TO FROM HERE?
Summary Written by: Sarah Redding, Clerk at the Building Disputes Tribunal
On 24 August 2016, Professor Doug Jones presented a lecture to members of the Society of Construction Law (New Zealand) on the penalties doctrine in international construction contracting.
In his address, Professor Jones discussed the status of the penalties doctrine in international construction contracting with reference to liquidated damages, common law in a variety of jurisdictions, construction contracts, policy considerations underlying current application of the penalties doctrine in New Zealand, and potential directions in which the doctrine may develop in the future.
A brief summary of Professor Jones’ lecture follows. A copy of the full lecture can be accessed here.Key Points
It is common practice for parties to include liquidated damages clauses in construction contracts due to the variable and often unpredictable nature of the construction industry. By incorporating a fixed sum payment in the event of non-compliance, parties can avoid the considerable time and expense involved in proving loss, which can be notoriously difficult in the construction sector. Such advance agreement also protects the principal’s interest in timely performance (or compensation for delay), while also putting the contractor on notice to the extent of damages it will be liable for in the event of delayed completion of the contract works. However, the doctrine of penalties continues to limit parties’ ability to agree to liquidated damages.
Professor Jones explores two UK authorities of particular relevance to the construction industry, Clydebank1 and Dunlop2, where the Courts upheld liquidated damages clauses, recognising the importance of such clauses where precise pre-estimation of loss is impossible. In their assessment, the Court in Clydebank asked what the nature and extent of the innocent party’s interest in performance of the relevant obligation was - an approach which was further revolutionised by the UK Supreme Court in Cavendish3.
The Court in Cavendish went beyond any ‘pre-estimate of loss’ as considered in Clydebank, and instead looked at commercial justification for the clause and balanced the liquidated damages