Article written by Andrew Shields, Director of Shields Legal.
Price Escalation: What You Need To Know
On 12 June 2023, His Honour Barlow KC DCJ gave his decision in Perera v Bold Properties (trading as Bold Living) where he found that a price escalation clause, used by a building company, Bold Living, was void and could be severed from the Contract. The result was that even though the clause was void, the contract remained on foot at the agreed fixed price and the builder was unable to use the price escalation clause.
The background was that homeowners entered into a new home contract with a builder, Bold Living, for a fixed sum of $645,370, in August 2022. The homeowners had paid a non-refundable deposit to secure the price. The contract contained a price escalation clause under special condition 7, which stated: “In the event that commencement has not taken place by the anticipated start date (as noted in item 14) the builder reserves the right, at the builder’s sole discretion, to increase the contract price to the current base price of the house type, which is the subject of this contract and identified in the Contract Tender, to the builder’s current base price for that house type.”
Two months later on 13 October 2022, Bold Living advised the homeowners that it intended to increase the contract price by $51,342, stating in correspondence:
“As you may know, the Building and Construction Industry has been subject to significant cost increases over the last 12-18 months as a result of inflationary industry demand, Insurance Repair, work shortages in various key building trades, the recent wet weather and disruptions to the industries supply chain as an unfortunate consequence of the COVID 19 pandemic. Due to the instability of the market and continual price increase that the industry is seeing, it is not viable for builders to hold their prices for an extended period of time.”
The homeowners objected to the price increase and commenced proceedings seeking in part a declaration that special condition 7 was void in law. They succeeded on three grounds, with the offending condition being severed from the contract and the fixed contract remaining in place.
If you are either a builder or a homeowner this could impact you and I discuss how this may happen below.
Builder
If you are a builder and have entered into new home construction contract over the past couple of years using either a HIA, Master Builders or even a QBCC new home construction contract you might have a problem, particularly if you are trying to increase the contract price of a fixed price contract by way of a price escalation clause or even if you are seeking to charge homeowners delay damages under a delay damages clause.
In the Perera case the homeowners argued, first, that the condition was void for uncertainty; second, the special condition was void for non-compliance with Schedule 1B of the Queensland Building and Construction Act 1991 (Qld) (“QBCC Act”) and third, that the special condition represented an ‘unfair term’ for the purposes of the Australian Consumer Law (“ACL”). They succeeded on all three points, and here’s why.
Uncertainty
The District Court found that special condition 7 was void for uncertainty because of:
The ability of the builder to change the contract price, which was an essential term of the contract, without any express criteria by which a price increase may be determined (and may be checked by the owner); and
The builder’s entitlement to change the contract price at its “sole discretion”.
In His Honour’s words: “Special condition 7, in purporting to allow the respondent to increase the price based on unstated objective criteria, effectively purported to enable the respondent to change an essential term – the
price –without any reference to any such criteria. That makes the clause and its potential effect uncertain. It is therefore unenforceable.”
Non-compliance with the QBCC Act
Section 14 of schedule 1B of the QBCC Act relevantly requires domestic building contracts valued over $20,000 to contain the following: “(3) The contract must contain all of the following: (e) the contract price or the method for calculating it, including the building contractor’s reasonable estimate; (6) If the contract price may be changed under a provision of the contract, the contract must also contain – (a) a warning to that effect; and (b) a brief explanation of the effect of the provision allowing change to the contract price. (7) The warning and explanation mentioned in subsection (6) must be in a prominent position on the first page of the contract schedule.”
It should also be noted that section 18D of the QBCC Act prohibits contracting out of the QBCC Act. Bold Living had attempted to modify the pro forma warning by the use of a special condition which was not on the first page of the schedule, but instead found later in the contractual documents. The Court held that this was an ineffective means of satisfying the legislative requirement to warn consumers because the warning was not contained on the first page of the schedule.
His Honour went further to state that even if it were lawful to amend the warning, which it was not, the warning in respect of special condition 7 was insufficient for the purposes of the legislation because “it does not refer to that condition but to all special conditions, and it does not explain the effect of the condition.”
In respect of explaining what the warning should have read to comply with the legislation, His Honour provided the following example: “Clause 20: where a written variation is made to the works or to the manner of carrying out the works (see definition of “variation” in clause 38.1) the contract price may increase or decrease.
Special condition 7: if commencement begins after the anticipated start date, the builder may increase the base price component of the contract price to the builder’s then current base price for the same house type and increase the contract price by the same amount.”
Unfair Contract Term
The homeowners also argued that special condition 7 was “unfair” within the meaning of section 25 of the ACL, because it allowed the builder to alter the price, in a less than transparent manner, without granting the homeowners a right of termination.
The Court found that special condition 7 was not transparent as it failed to give the homeowners any guidance on how a higher price might be determined. Additionally, there was no indication of how the base price and any increases were calculated.
However, while it was not transparent this was not enough to make the condition unfair, it also had to be determined that this lack of transparency contributed to a significant imbalance in the parties’ rights and obligations and would cause a detriment to the homeowners if relied upon by the builder.
His Honour found that special condition 7 was drafted in such a way as to provide the builder “with a seemingly unconstrained right to adjust the contract price by an arbitrary amount in the case of delay, irrespective of whether that delay was caused by the applicant (the homeowners), the respondent (the builder) or factors outside either party’s control.” The Court found that the provision drafted by the builder went beyond what is necessary and without any objective criteria for changing the price, it was a price set at the “entire discretion” of the builder.
Additionally, special condition 7 did not provide the homeowners with a right to terminate following the price increase and locked them into the new price unless they wished to repudiate the contract and open them up to a claim for damages.
On the basis of the above the Court found that special condition 7:
resulted in a significant imbalance of power between the parties and was in breach of section 24(1)(a) of the ACL;
caused a significant detriment to the homeowners and in breach of section 24(1)(c) of the ACL; and
was not reasonably necessary to protect the builder’s legitimate interests.
Owner
While the decision in Perera is definitely a win for homeowners, in that it will prevent a builder from claiming an increase to the contract price as a result of increased building costs or from potentially claiming delay damages under a contract, unless the contract address all the issues raised by His Honour, it may also lead to problems if a homeowner seeks a negative variation to the contract price.
Takeaways
Since Perera the QBCC has updated its warning notice in its “New Home Construction Contract” to take into account the need for a direct explanation of some of their clauses. While Master Builder’s Queensland has advised members that:
“The case (Perera) is a reminder to all builders that both the clauses themselves, and the statutory warnings in the contract, need to be carefully drafted to comply with all legislative requirements, and that Master Builders recommends that all builders have any proposed cost escalation clause prepared by a lawyer,”
And HIA QLD advised Members in an email on 27 July 2023, that “A recent decision of the Queensland District Court has caused HIA to review and amend our residential building contracts...:
“How has HIA changed our contracts?
As a result of the decision HIA has amended the Contract Price Warning to include a more detailed explanation of:
the contract clauses that may change the contract price; and
the effect of that change, i.e., whether the change would increase the price, or increase or decrease the price.”
Based on the District Court’s decision in Perera v Bold Properties it is even more important than ever that you get legal advice if you have any questions about the construction contract you are about to give a homeowner (if you’re a builder) or the construction contract you are about to enter (if you’re a homeowner).
Additionally, if you are involved in legal proceedings or anticipate being involved in legal proceedings, the findings in Perera will, at the very least, be important if those proceedings relate to contract price increases and/or delay damages.
Please give us a call if we can help or you need assistance, as we are always looking to protect your interests.
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