Last reviewed and updated: May 2026. By Mark Harley, Principal Solicitor, Boss Lawyers.
This is part two of a six-part series on credit applications and the terms and conditions that accompany them. In part one, we examined personal guarantees. Here, we turn to liquidated damages clauses — a common but frequently misunderstood provision in commercial contracts.
What Are Liquidated Damages?
A liquidated damages clause is a contractual provision that specifies in advance the amount of compensation payable if one party breaches the contract — typically by failing to perform on time or at all. Rather than requiring the innocent party to prove their actual loss after the fact, the parties agree upfront on a pre-determined sum.
Liquidated damages clauses appear frequently in:
- Construction and building contracts
- Supply agreements and manufacturing contracts
- Commercial leases
- IT and software development contracts
- Credit applications and terms and conditions documents
Are Liquidated Damages Clauses Enforceable in Queensland?
Australian courts will enforce a liquidated damages clause if it represents a genuine pre-estimate of the loss that would flow from the breach at the time the contract was entered into. The High Court of Australia confirmed this approach in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, which reaffirmed that the key question is whether the clause is a genuine pre-estimate of loss or an unenforceable penalty.
A clause will be characterised as a penalty — and therefore unenforceable — if it is “out of all proportion” to the legitimate interests of the innocent party. Courts look at the circumstances at the time of contracting, not the actual loss suffered.
This is a critical distinction for Queensland businesses. If your terms and conditions contain a liquidated damages clause that is set at an arbitrary or excessively high figure, you risk a court refusing to enforce it entirely.
Drafting Effective Liquidated Damages Clauses
To maximise the prospects of enforcement, liquidated damages clauses should:
- Be a genuine pre-estimate of loss: The amount should reflect the likely consequences of the breach at the time of contracting. Document your reasoning at the time of drafting — this evidence can be important if the clause is later challenged.
- Be clear and unambiguous: Specify the triggering event (e.g., late delivery, failure to meet specification), the rate of damages (e.g., $X per day), and any cap on total liability.
- Distinguish from penalties: Avoid language suggesting the clause is punitive rather than compensatory. Do not describe the payment as a “fine” or “penalty.”
- Consider the proportionality principle: The Queensland Supreme Court will scrutinise whether the clause is proportionate to the legitimate commercial interest it protects.
What Happens When a Liquidated Damages Clause Is Void?
If a court finds that a liquidated damages clause is an unenforceable penalty, the innocent party is not left without a remedy — but they must then prove their actual loss in the ordinary way. This can be more expensive and uncertain than relying on a pre-agreed figure. Worse still, if the actual loss turns out to be higher than the void liquidated damages clause, the innocent party cannot fall back on the clause — they simply sue for their proven loss.
This underscores why careful drafting matters from the outset.
Liquidated Damages in Construction Contracts
In Queensland’s building and construction sector, liquidated damages are particularly common — and particularly litigated. Disputes often arise over:
- Whether time for completion has been extended under a time extension clause
- Whether the principal has prevented the contractor from achieving practical completion (the “prevention principle”)
- Whether the liquidated damages rate is a genuine pre-estimate
- Whether the liquidated damages clause covers all heads of loss (or whether the principal can also claim general damages)
These issues frequently end up in adjudication under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) or in the Queensland Supreme Court.
What This Means for Your Business
If you supply goods or services to other businesses, your terms and conditions are a critical risk management tool. A well-drafted liquidated damages clause gives you certainty and avoids the cost of proving actual loss. A poorly drafted one may be void — or worse, unenforceable when you need it most.
Boss Lawyers regularly acts for businesses in Queensland in commercial disputes involving liquidated damages clauses — both in drafting and review, and in litigation when those clauses are contested. Whether you are a creditor seeking to enforce your terms or a debtor challenging a clause, we can provide strategic, practical advice.
How Boss Lawyers Can Help
Our team has extensive experience in commercial contract disputes, including liquidated damages, penalties, and terms and conditions in credit applications. We regularly act for businesses across Queensland in contract drafting, review, and enforcement — from the initial negotiation stage through to Supreme Court litigation if required.
For advice on liquidated damages clauses, contract enforcement, and debt recovery in Brisbane, contact Boss Lawyers on 1300 267 711 or complete our online enquiry form today.
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This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
