Price Hikes v Legal Rights – The Lawfulness of Price Escalation Clauses

Price increases in “fixed fee contracts” have become common in today’s market, especially in the building and construction sector, where the cost of materials is ever rising and labour shortages plague the industry. In the recent case of Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99, the court considered the enforceability and lawfulness of a price escalation clause contained within a Queensland building contract, with the court ruling that the clause in question was void and unenforceable. In this article, our commercial law team explores the background and implications of this case and the key takeaways for consumers and builders.

BACKGROUND – BUILDING CONTRACTS

The facts of this case were relatively straightforward. On 11 August 2022, Mr and Mrs Perera (‘the Applicants’) entered into a QBCC New Home Construction Contract with Bold Properties (QLD) Pty Ltd, trading as Bold Living (‘the Builder’) for the construction of a new home for the fixed price of $645,730.00. The Applicants also paid a non-refundable deposit to secure this fixed price.

However, on 13 October 2022, the Builder informed the Applicants that the anticipated start date for the construction works would be delayed. Further, the Builder said that due to inflationary industry demand, labour shortages and the COVID-19 pandemic (amongst other things), it would require a further $51,432.00, being an increase of almost 8% to the contract price. In seeking to increase the contract price, the Builder relied on the following Special Condition 7 drafted in the Contract:

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.

The Applicants did not agree to pay the additional sum, although they still wanted to proceed with the building contract, and when the Builder subsequently failed to commence the building works, the Applicants commenced proceedings.

CONTENTIONS

The Applicants contended that Special Condition 7, which the Builder relied upon to increase the contract price under the Contract, was void (i.e. of no legal effect) for three reasons, namely:

1. Uncertainty;
2. Non-compliance with the  Queensland Building and Construction Commission Act 1991 (‘QBCC Act’) and warnings; and
3. Unfairness

Each of these matters is further considered below in relation to the court’s judgement.

DECISION OF THE COURT

Uncertainty

First, It was argued that Special Condition 7 was void for uncertainty given the lack of any formula, index or other identified basis for calculating an increase. Meaning that the Builder could increase the contract price at their sole discretion and according to arbitrary standards. The court agreed and noted that Special Condition 7 purported to enable the Builder to change an essential term of the Contract without reference to any appropriate benchmark or method of adjustment. The potential effect of this special condition was, therefore, uncertain by virtue of the lack of an objective criterion.

QBCC Act Requirements

Under the QBCC Act, a contract must contain a statutory warning on the first page of the contract schedule. This provision of the QBCC Act cannot be contracted out of. The warning must identify and briefly explain all relevant clauses that affect the contract price, which the Builder had failed to do in relation to Special Condition 7. The court found that since the Builder had not included a warning about the price escalation clause, they were in breach of the QBCC Act. Moreover, even if the Builder had included Special Condition 7 in the pro forma warning, the court considered that the pro forma warning would likely have been deficient since it merely identified those clauses which affected the contract price and did not provide any further explanation.

Unfair Contract Terms

Finally, the Applicants relied on the Australian Consumer Law (‘ACL’) to claim that Special Condition 7 was an unfair contract term. The court analysed the clause and noted that it was ‘unfair’ within the meaning of the ACL for a number of reasons, including:

• The lack of transparency about how any increase was to be calculated;
• The consideration already paid by the Applicants to lock in the fixed price (i.e. the non-refundable deposit);
•  It allowed the Builder to rely on its own delay to increase the contract price; and
• A unilateral right to terminate the Contract following a price increase was not provided to the Applicants.

Essentially, the court considered the way Special Condition 7 was drafted was too broad and unconstrained, and for that reason, went beyond what was reasonably necessary to protect the Builder’s interests. For further information about unfair contract terms, their application and changes to this area of law coming later this year, click here.

OUTCOME

As already indicated (and to no surprise), the court held that Special Condition 7 was void at law and unenforceable by the Builder. The Contract would remain on foot, however, no order for specific performance was granted.

This case highlighted a number of issues with building contracts, including the fact that most standard pro forma warnings contained in Queensland building contracts are insufficient. It also appears to be the first instance where a price escalation clause has been successfully argued as unfair under the ACL.

RAMSDEN LAWYERS – HOW WE CAN HELP WITH BUILDING CONTRACTS

Price escalation clauses, warnings, and other clauses in building contracts that are not properly drafted or compliant with the requisite building code or act may be deemed void. For this reason, builders and consumers must seek appropriate legal advice before entering a contract or risk signing a document that contains potentially unenforceable provisions.

If you seek legal advice or assistance with your building contract or conveyance, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice should be sought about your circumstances.