The $330 Million LD Clause Nobody Read

Last week, I sat across from a subcontractor who had just received a deduction notice from their head contractor. The amount was significant. The reason given was liquidated damages passed down from the principal, applied in full, directly to them.

They had not missed their programme. They had not caused the delay. But they were still being charged for it.

When I asked if they had reviewed the LD clause before signing, they said what most people say: "We just assumed it was standard."

That assumption cost them more than they made on the job.

This is not just a small contractor problem

Before we get into how this happens, it is worth pausing on something still unfolding right here in New Zealand.

Last year, SkyCity Entertainment Group filed legal proceedings against Fletcher Building seeking liquidated damages of over $330 million for delays to the New Zealand International Convention Centre. The NZICC was originally due for completion in January 2019. By the time legal proceedings were filed in June 2025, the project was more than six and a half years late.

Fletcher confirmed it had already paid significant liquidated damages to SkyCity under the building works contract and is now defending itself against SkyCity's claim for further damages beyond the capped amount in that contract.

Read that again.

One of New Zealand's largest contractors, on one of New Zealand's most prominent projects, is in active litigation that turns on a single question: what does the LD cap say, and does it hold?

If that conversation is happening at that level, it is happening at every level of the supply chain below it.

What a back-to-back clause actually means

Most subcontracts contain some version of this language: the subcontractor agrees to be bound by the same terms and conditions as the head contract, to the extent applicable, the masterbuilders subcontract template has this clause by default.

It sounds reasonable. It even sounds fair. The idea is that if the head contractor is liable to the principal, that liability flows down to whoever caused it.

The problem is how it gets applied in practice.

In the situation I was dealing with, the head contract carried liquidated damages of $15,000 per day. The subcontractor's scope was one part of a multi-trade programme. When the project reached practical completion late, the principal assessed LDs and deducted from the head contractor's final payment. The head contractor then issued a back-to-back deduction with the full daily rate, applied across the entire delay period, directly to the subcontractor.

There was no assessment of causation. No apportionment. No consideration of whether other trades, design changes, or principal-caused delays had contributed to the overall delay. Just a flat pass-through of the full amount.

That is what back-to-back can look like when the clause has no limits and nobody negotiated it.

The clause that changes everything

Liquidated damages clauses are not inherently unfair. They exist to give certainty, where both parties know upfront what a day of delay costs. They replace the need to prove actual loss, which in large projects can be genuinely complex and expensive to establish.

New Zealand courts have consistently upheld LD clauses where the rate represents a genuine pre-estimate of the loss the principal is likely to suffer. The courts will not rescue you from a clause you agreed to, provided it was commercially reasonable at the time of signing.

But in a subcontract context, a few things matter enormously and are almost never discussed at the tender stage.

The first is whether the LD rate is proportionate to your scope. A $15,000 per day rate in a head contract reflects the principal's exposure across an entire project. Your scope might represent 10% of that project. Accepting the full daily rate back-to-back means you are absorbing 100% of a loss you could only ever have caused a fraction of.

The second is whether there is a cap. The Fletcher Building situation illustrates precisely why this matters. Fletcher's position is that SkyCity's $330 million claim exceeds the capped amount in the building works contract. That cap, negotiated at the time of contracting, is now the most important sentence in the entire agreement. If your subcontract contains no equivalent protection, there is no ceiling on your exposure.

The third is what triggers the clause. In the recent caselaw, the court examined how LD clauses interact with other contractual provisions when delay involves multiple contributing factors. The case is a reminder that how a clause is triggered and what conditions must be met before it applies, is just as important as the rate itself.

Why nobody negotiates it

I have reviewed hundreds of subcontracts. The LD clause is almost never the one that gets pushed back on. Subcontractors spend their energy negotiating payment terms, scope inclusions, retention rates. The LD clause sits quietly in the back of the document, written in dense language, and gets signed without comment.

Part of this is because it feels theoretical. At the time of signing, nobody believes they are going to be late. The programme looks achievable. The relationship feels collaborative. The idea of being charged $15,000 a day feels remote.

Part of it is also commercial pressure. Subcontractors often feel they cannot push back on risk clauses without losing the job. And sometimes that is true. But there is a significant difference between a clause you tried to negotiate and were refused, and a clause you never raised at all. One gives you a paper trail. The other gives you nothing.

Fletcher Building — a tier one contractor with experienced commercial and legal teams — is currently in dispute over the precise wording of a cap in its LD clause. If that clause matters enough to fight over at $330 million, it matters enough to read carefully at $330,000.

What you can do before you sign

You do not need to refuse every back-to-back LD clause. But you do need to read it, understand it, and where possible, improve it.

Look for three things specifically.

1. A causation requirement. The clause should state that LDs are only applicable where the subcontractor's delay caused or materially contributed to the head contractor's liability under the head contract. Without this, you can be charged for delays that have nothing to do with you.

2. An apportionment mechanism. If multiple subcontractors contributed to a delay, there should be language allowing the exposure to be shared proportionately rather than applied in full to any single party.

3. A cap on total liability. This is the most important. If the clause is uncapped, ask for a cap expressed as a percentage of your subcontract value — 5% to 10% is a common and reasonable position to negotiate toward.

If the head contractor refuses all three, that tells you something about how they intend to manage risk on the project. That information is worth having before you start work, not after.

The sentence that mattered

In the case I was working on, we went back through the subcontract carefully and found that the head contractor had not complied with the notice requirements in their own LD clause. The clause required written notice within a specific timeframe of any intention to apply liquidated damages. That notice had not been given.

The deduction was ultimately reversed.

But the subcontractor spent weeks in dispute, incurred costs they will not fully recover, and came very close to accepting a deduction they were not obligated to pay, simply because nobody had read the clause closely enough at the start.

One sentence. Buried on page 34. That was the sentence that mattered most on that entire project.

If it matters at $330 million, it matters at your level too. Read it before you sign.

If you are reviewing a subcontract and are unsure about the LD provisions, I offer contract review services specifically for this. You can find out more at emmolinamay.com.

Have a good weekend.

Emmolina

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Emmolina May is a Registered Quantity Surveyor, contract specialist, and dispute resolution practitioner based in New Zealand. She helps contractors and subcontractors review contracts before they sign, build smarter procurement strategies, and resolve disputes when things go wrong on site. If you'd like support on your next project, get in touch.