Explaining damages for building contract breaches

Explaining damages for building contract breaches

Paul Cott explains some of the myriad ways building contracts can be breached and what actions to take should you find yourself in the unfortunate circumstance.

There are multiple ways that a building owner or builder (including subcontractors and others such as architects for example, among others) can breach a building contract.

Some of the main ways that such breaches can occur include the following: not paying monies owed on time or at all, ‘locking out’ builders from sites, not supplying specified goods and/or services, stopping or suspending work on a project, conducting defective works and interfering with works among others.


Apart from obtaining from a court or a tribunal (VCAT in Victoria) an order for specific performance (an order directing a party to perform its contractual obligations) or an injunction (an order prohibiting or compelling a party to do something) a key remedy a party can obtain in circumstances as described above is damages.

Often the type of, and the extent of the remedy awarded, depends on how significant the breach is, how many breaches there are, and whether the breaches are ‘as to’ fundamental terms (such as terms as to payment or as to time for completion) of the contract or less fundamental ones.

Damages are awarded with the objective of providing recompense or reimbursement to someone for actual financial loss incurred as a result of, or caused by (in law) another party’s breach of contract. They are not, as is commonly thought, awarded to provide punishment for someone having done something wrong. They are not meant to be ‘penal’ or ‘punitive’ in character, even though, commonly, the innocent party sees the ‘guilty’ party as deserving of punishment (even if, in a moral sense, they are).In the building (and generally) contract setting, damages are meant to put the innocent party in the same position as they would have been in if the contract breach had not occurred.

Measure of damages – how much?

Courts and/or tribunals calculate the amount of damages to be awarded by how much, as above, a party is said to have lost as a result of the contract breach. They will award an amount which will, or which will likely, as close as it is possible to do so, bring a party back into the position they would have been in had the contract not been breached.

Any damages awarded must flow as a natural result of the breach and not as a consequence of something else or what someone did or did not do. Basically, what we are saying is that the losses being claimed for must be ‘caused by’ the breach by the other party to the contract.

Note that it is possible for both parties to a building contract, if they are both at fault in the sense of breaching the contract either simultaneously or separately, to be awarded damages (and on the converse, have damages awarded against them).

Just because a court or a tribunal finds it very difficult, even nigh on impossible to calculate what actual damages will be awarded (for example, it will nearly always be required to factor in contingencies into such calculations, so in that sense awarding damages is to some extent based on a prediction as to future events, damages being based on what would have been the situation less a breach) does not mean damages will not be payable.

Of course, a party can only claim damages for a particular item of loss (such as having to pay someone else to rectify defective works) once and for all i.e. there is no ‘double dipping’ allowed.

Another important principle to bear in mind is that in case of a breach by another party to a contract, the innocent party has a duty to what is called ‘mitigate their damages’. To put that in simple terms, the innocent party cannot take advantage of the breach and stand by and let the damages increase. That person must ‘protect themselves’ against further loss if they can.

Liquidated damages

Sometimes, and commonly in the domestic building context, the parties to a building contract have a clause which provides for a set amount of damages (say on a weekly basis) which are in a sense automatically available upon the happening of a certain event (e.g. commonly, delay).

They are in a sense the ‘converse’ to where damages are ‘at large’ and so unlimited. There is however an important circumstance where they will not, despite being written into the contract, apply. That is where the damages are deemed to be a ‘penalty.’

Broadly, a liquidated damages clause (where a penalty) will actually be struck down or taken out of the contract (and so ignored) where the deemed purpose, because of the amount at which it applies, is excessive in comparison to the estimated damages which a party may suffer and so is not to compensate but to punish the breaching party. This backs up the aim of damages which are to compensate for a loss rather than punish someone for wrongdoing.

Seek advice

There are traps for the unwary in this area, particularly in the discreet area of termination of a contract. Getting the process or the procedure in the area of contractual termination can be fraught with difficulty. Terminating a contract when you are not entitled to, or doing it incorrectly such as not providing enough time to remedy the default that led to the potential right to terminate, can land you in VCAT or in the County Court (primarily) facing a large damages claim. But I digress.

One of the key messages of this article is that when damages are ‘at large’ and so almost unlimited (depending on the exact circumstances) it may often surprise one what items of financial loss can be compensated for. It is important however, at the outset, to only be claiming compensation for a loss where there has in fact been an actual breach. That is the first step required in an analysis of a situation.

Seek advice when in doubt in this area as particular complexities can exist. This is particularly so where an innocent party (i.e. a building owner) may have a choice between damages for rectification costs or damages for the reduction in value of the property as a result of defective works. If possible, seek that advice early.

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