The Builder's Breach and the Homeowner's Loss
A homeowner, Ms. Chen, contracts with BuildCo to renovate her kitchen for $50,000, with completion by 1 June. The contract includes a liquidated damages clause of $200 per day for delay. BuildCo finishes on 1 August, 61 days late. The delay was caused by a shortage of tiles, which BuildCo could have avoided by ordering earlier. Ms. Chen had planned to rent out her kitchen for a cooking show from 15 June to 15 July, earning $10,000, but the contract did not mention this. Because the kitchen was unusable, she also spent $3,000 on takeout meals. BuildCo argues the liquidated damages clause is a penalty and that the lost rental income is too remote. Ms. Chen seeks to recover the liquidated damages, the $10,000 lost income, and the $3,000 takeout expenses.
1. Advise Ms. Chen on whether the liquidated damages clause is enforceable.
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The clause is likely enforceable as liquidated damages. The test from Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 and more recently Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 is whether the sum is a genuine pre-estimate of loss or, post-Makdessi, whether it is out of all proportion to the innocent party's legitimate interest in performance. Here, $200 per day is not extravagant; it is a reasonable estimate of the loss of use of a kitchen, given that Ms. Chen might have to eat out or suffer inconvenience. The clause is not a penalty merely because the actual loss is difficult to prove. The delay was 61 days, so the liquidated damages would be $12,200. However, the court will not enforce the clause if it is unconscionable or if the breach is of a different kind. Since the delay is the very thing the clause addresses, it is likely valid. BuildCo's argument that it is a penalty fails because the sum is not out of all proportion to the legitimate interest in timely completion. Therefore, Ms. Chen can recover $12,200 as liquidated damages.
2. Discuss whether Ms. Chen can recover the $10,000 lost rental income and the $3,000 takeout expenses as damages for breach of contract.
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The $10,000 lost rental income is likely too remote. Under Hadley v Baxendale (1854) 9 Ex 341, damages are recoverable if they arise naturally from the breach or were in the contemplation of both parties at the time of contract. BuildCo did not know about the cooking show, and such loss is not a natural consequence of a delayed kitchen renovation. Unless Ms. Chen can show that BuildCo had actual knowledge of the rental plan, the claim fails. The $3,000 takeout expenses are also likely too remote for the same reason, but they might be considered a natural consequence of not having a kitchen. However, the test is whether the loss was reasonably foreseeable. It is foreseeable that a homeowner without a kitchen will incur additional food costs, but the amount may be subject to the duty to mitigate. Ms. Chen could have bought groceries and prepared simple meals, so the $3,000 might be reduced. Moreover, the liquidated damages clause may be the exclusive remedy for delay; if so, she cannot recover additional damages for the same delay. The clause does not expressly state it is exclusive, but courts often treat liquidated damages as the agreed remedy. Thus, Ms. Chen's best claim is for the liquidated damages; the other claims are likely to fail or be reduced.