Liquidated Damages Clauses in Australia: The Penalty Doctrine and Building Contract Delays (2026)

This guide is based on High Court judgments, the Australian Consumer Law and the Queensland and Victorian building laws listed under Sources. Last checked 9 November 2026.

Liquidated damages at a glance

What is a liquidated damages clause?

“Liquidated” means fixed or agreed. A liquidated damages clause sets the amount payable for a particular breach in advance, so neither side has to prove the actual loss later. In construction it usually looks like this:

• “If the Builder fails to reach practical completion by the Date for Practical Completion, the Builder must pay the Owner liquidated damages at the rate of $X per day until practical completion.”

The label does not decide anything. A clause called “liquidated damages” can still be a penalty, and a clause called a “penalty” can be valid. The High Court noted an old shipbuilding case where a clause expressly called a “penalty” for late delivery was held not to be one (Paciocco at [46]).

How liquidated damages work in building and construction contracts

Most delay clauses work through four linked terms. Read them together:

1. The date for completion. A fixed date, or a number of days from the start.
2. The rate. Dollars per day or per week, sometimes with a cap.
3. Extensions of time. The events that push the completion date back, such as variations, bad weather or delay by the owner, and the notice the contractor must give to claim one.
4. How it is paid. Deducted from the next progress payment, taken from retention or security, or claimed separately.

The rate means little on its own. If extensions are easy to claim, it may never apply.

The penalty doctrine: when is liquidated damages a penalty?

Australian law treats an agreed sum as a penalty in limited cases.

What a penalty is

In Andrews v ANZ, the High Court said that “a stipulation prima facie imposes a penalty” if, in substance, it is collateral to a primary stipulation and, on the failure of the primary stipulation, imposes “an additional detriment, the penalty,” on the first party for the benefit of the other. It is “in the nature of a security for and in terrorem of the satisfaction of the primary stipulation” (Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 at [10]). In terrorem means to frighten into compliance.

The Court in Andrews also declared that fees that were not charged upon a breach of contract were not, for that reason alone, incapable of being penalties (Order 3).

The test today

The traditional starting point is the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79. His first test, quoted by the High Court, is that a sum will be a penalty if it is “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach” (Paciocco at [33]). Ringrow put the standard application this way: the law of penalties is attracted where a contract stipulates an agreed sum on breach “which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach” (Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 at [10]).

In Paciocco, Kiefel J framed the question as “whether a provision for the payment of a sum of money on default is out of all proportion to the interests of the party which it is the purpose of the provision to protect”, adding that “This interest may be of a business or financial nature” (Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 at [29]).

The standard is high. As the High Court put it in Ringrow: “It is not enough that it should be lacking in proportion. It must be ‘out of all proportion'” (quoted in Paciocco at [54]). The question is also judged at the time the contract was made, “not as at the time of the breach” (Dunlop, as quoted in Ringrow at [11]).

The bank fees example

Paciocco concerned credit card late payment fees of $35 and $20, where the bank’s actual costs from a late payment were about $3. By majority, the High Court dismissed the customers’ appeals and held that the late payment fees were not penalties (Paciocco, catchwords and at [211]). A fixed amount well above the direct cost of a breach can still be valid if it protects a legitimate interest and is not out of all proportion to it.

What happens if it is a penalty?

The clause is not simply thrown out. “If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation” (Andrews at [10]). In practice the party who relied on the clause recovers its actual loss, not the agreed amount.

Liquidated damages and unfair contract terms

Separately from the penalty doctrine, the unfair contract terms rules in the Australian Consumer Law apply to standard form consumer contracts and small business contracts. A home building contract signed by an individual for their own home can be a consumer contract, and a builder’s printed contract used with many customers may well be a standard form contract. If you allege a contract is standard form, it is presumed to be unless the other side proves otherwise (ACL s 27(1)).

One of the law’s examples of a term that may be unfair is “a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract” (s 25(c)). A contract that charges the owner for delay while the builder pays nothing for finishing late is worth a close look. An unfair term is void (s 23(1)). Only a court decides whether a term is unfair.

Home owners: what the delay clause is really worth

In a home building contract, liquidated damages usually protect the owner: the builder pays a daily or weekly amount for finishing late. Before you sign, check:

• The rate against your real costs. Rent, storage, extra loan interest and the cost of moving twice. A rate set far below those costs gives you little if the job runs months late.
• Whether the rate is your only remedy for delay. Read whether the contract says so.
• The completion date and allowances. In Victoria, the contract must state when the work will be finished (or the number of days once started), and the builder must allow for inclement weather, weekends and holidays and other reasonable delays and set out the days allowed for each (Domestic Building Contracts Act 1995 (Vic) ss 31(1)(i), 32).
• The extension-of-time clause. In Queensland, under a regulated contract a builder may claim an extension only for delay that was not reasonably foreseeable and beyond its control, caused by the owner, or caused by a compliant variation. The claim must be in writing within 10 business days of the builder becoming aware (or when it ought to have) of the cause and extent of the delay, and the extension applies only if the owner approves the claim in writing (QBCC Act Sch 1B s 42).
• Your right to end the contract. In Victoria, an owner may end a major domestic building contract if it has not been completed within 1.5 times the period it was to be completed by, for a reason the builder could not reasonably have foreseen (DBCA s 41).

Other states have their own home building laws. The building contract review guide sets out the rules by state.

Contractors and subcontractors: what to check

If you are the one who would pay liquidated damages, the same clause looks different. Check:

• the rate and whether there is a cap, such as a percentage of the contract price;
• the notice requirements and time limits for claiming an extension of time, which can shut out valid claims if missed;
• whether delays caused by the other party, variations or late information automatically extend the date;
• whether the contract also lets the other side claim general damages for delay on top of the rate.

The subcontractor agreement guide covers the wider contract.

What our review checks

The building contract review is written for home owners. Upload your residential building contract (for example an HIA or Master Builders form), choose your state, and get a plain-English report, usually about 5 minutes after you pay. On delay it:

• finds the completion date or period, the delay allowances and the liquidated damages rate
• checks the extension-of-time clause against your state’s rules where they exist
• flags one-sided delay charges against the owner
• notes whether the contract treats the rate as your only remedy for delay
• gives you the specific questions and changes to put to the builder

The report explains what the contract says and what your state’s law provides. It is not legal advice from a lawyer, and it does not say a clause “is void” or “is a penalty”. You decide what to sign.

Get my building contract reviewed – $79

Questions people ask

What are liquidated damages in a contract?

An amount agreed in advance that one party pays if it breaches the contract, most often a daily or weekly rate for finishing late. It saves the other party having to prove its actual loss.

Are liquidated damages enforceable in Australia?

Yes, unless the amount is a penalty. The High Court asks whether the amount is out of all proportion to the interests the clause protects, judged when the contract was made. An amount that is merely higher than the actual loss is not enough to make it a penalty.

What is the difference between liquidated damages and a penalty?

Liquidated damages protect a legitimate interest at a level that is not out of all proportion to it. A penalty is an extra detriment imposed to frighten a party into performing, out of all proportion to the interest protected. The label used in the contract does not decide which it is.

What happens if a liquidated damages clause is a penalty?

It is enforced only to the extent of the compensation for the actual loss (Andrews v ANZ [2012] HCA 30 at [10]). The party relying on the clause recovers its actual loss rather than the agreed amount.

How are liquidated damages calculated in a building contract?

Usually as a daily or weekly rate from the date for completion until practical completion, adjusted for any extensions of time. The contract sets the rate. For owners, compare it with your real costs of delay, such as rent and storage.

Can a builder avoid liquidated damages with an extension of time?

An extension moves the completion date, so liquidated damages start later. In Queensland, under a regulated contract the builder must claim in writing within 10 business days and the extension applies only if the owner approves the claim in writing (QBCC Act Sch 1B s 42). Check your contract’s extension clause and your state’s rules.

Do liquidated damages have to be a genuine pre-estimate of loss?

That is the traditional description, but the current High Court test is wider. It asks whether the amount is out of all proportion to the legitimate interests the clause protects, which can include business or financial interests beyond the direct loss (Paciocco v ANZ [2016] HCA 28 at [29]).

Can a liquidated damages clause be an unfair contract term?

It can, in a standard form consumer or small business contract. A term that penalises one party but not the other for a breach is one of the law’s examples of a term that may be unfair (ACL s 25(c)). Only a court decides.

Are liquidated damages the only thing I can claim for delay?

That depends on the contract. Some contracts say the rate is the only remedy for delay. Read the clause before you sign, and if the rate is low compared with your real costs, ask for it to be increased.

Is the building contract review legal advice?

No. It is a plain-English report that explains what your building contract says and what your state’s law provides. Claim Done is not a law firm.

Related guides

• Building contract review by state: deposit caps, insurance and cooling-off
• Signing a HIA or MBA building contract? 12 things to check first
• Builder charging extra for variations you never agreed to
• Unfair contract terms for small business: the rules since 9 November 2023

Claim Done is not a law firm and does not give legal advice; this page is general information about Australian law as at 9 November 2026. Whether a clause is a penalty or an unfair term is for a court or tribunal to decide.

Sources (checked 9 November 2026)

• Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 (Order 3; at [10])
• Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 (catchwords; at [29], [33], [46], [54], [211])
• Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 (at [10]-[11])
• Competition and Consumer Act 2010 (Cth), Schedule 2 (Australian Consumer Law), Compilation No. 167 (ss 23-27)
• Queensland Building and Construction Commission Act 1991 (Qld) (Sch 1B s 42)
• Domestic Building Contracts Act 1995 (Vic), Version 094 (ss 31, 32, 41)