Simon Taylor, Barrister at Law.

Perera v Bold Properties (trading as Bold Living) – where a price escalation clause in domestic building contract was found to be void in law

Summary

1. In Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99, His Honour Barlow KC DCJ found a price escalation clause, used by a building company Bold Properties (Qld) Pty Ltd (trading as Bold Living), to be void in law and thus severable from the Contract. The result was that the domestic building contract remained on foot at a fixed price and the builder was unable to use the price escalation clause.

2.  There are a number of interesting legal issues which arise from this case. Firstly, the case demonstrates the need to draft price escalation clauses with certainty. A price escalation clause which is not determined by reference to objective criteria may be found void for uncertainty.[1] Further, a price escalation clause which is exercisable upon the builder’s sole discretion might increase the uncertainty.

3.  Secondly, this decision appears to be the first known case in Australia in which a homeowner has successfully argued that a price escalation clause was “unfair” within the meaning of the Australian Consumer Law (the “ACL”). It follows that drafters of price escalation clauses contained in domestic building contracts should carefully consider the provisions of ACL.

4.  Thirdly, this decision also addresses the importance of the warning statement which is required in accordance with section 14 to Schedule 1B to the Queensland Building Construction Commission Act (the “QBCC Act”). That provision requires a builder to not only identify the clauses which affect the price but also briefly explain how those identified clauses operate. Failure to provide a brief explanation as to how the clause operates may deem the relevant contractual provision void pursuant to s 108D of the QBCC Act.   

5. Significantly, the court noted that the pro forma warning statement within the HIA QC1 Building Construction Contract appeared to be inadequate because the warning did not sufficiently explain how the identified clause works. In short, it is not enough to simply identify the clause which affects the price, an explanation of how the clause operates is also required within the warning statement.

6. It would thus alarmingly appear that most of the standard industry building contracts in Queensland which contain the pro forma warning statement are insufficient to comply with the legislation and thus those contracts ought to be urgently reviewed.

Background facts

7.  The decision of Perera v Bold Properties involved a discreet contract dispute between a homeowner and builder Bold Properties (trading as Bold Living). The issue for determination went to the operation of Special Condition 7 which had been added to a standard form HIA Contract which entitled the builder to escalate the price of a fixed price contract if work had not been commenced by a certain date.

8.  The special condition in question was drafted in the following terms:  

“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 builders 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.”

9.   The builder sought to exercise its right under the above special condition for a variety of reasons including industry delay, shortage of trades and increased costs arising from COVID-19.

10. The homeowners commenced proceedings by Originating Application seeking inter alia a declaration that the special condition was void in law. They succeeded on three grounds, with the offending condition being severed from the Contract with the fixed contract remaining in place.

Where the price escalation clause was legally uncertain

11.  The homeowners firstly argued that there was no formula, index or any other identified and objective basis in the Contract for the homeowners (or any person) to have known what the base price might be in the future. Thus, it was contended, that the clause was void for uncertainty.

12. The homeowners additionally argued the relevant special condition provided that the right of price adjustment was to be exercised upon the builder’s “sole discretion” which added additional uncertainty into the provision, as it would allow the builder to determine arbitrarily whether or not it would rely on the provision.

13.  The Court agreed with the homeowners by finding that the price escalation clause permitted the builder to change its price without any express criteria or any explanation as to how the “base price” was to be calculated.  To that end, His Honour Barlow KC DCJ stated:

“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.”

14. The decision demonstrates the importance for price escalation clauses to have reference to an objective market standard and a benchmark or reference point used to determine the price adjustments in a contract.

15.  Examples of objective market standards used in price escalation clauses include well-known price indices, such as the Consumer Price Index (CPI), Producer Price Index (PPI), or specific commodity price indices. These indices provide quantifiable data on price movements and serve as reliable benchmarks for adjusting contract prices based on changes in inflation, cost of raw materials, or other market factors.

16.  The decision further demonstrates the risks in allowing a price escalation clause to be exercised upon one party’s sole discretion. Although that was only one issue in this case, such a discretion might attract additional uncertainty to the operation of a price escalation clause. The drafters of price escalation clauses should seek advice on these issues.  

Where the price escalation clause was not identified or explained within the warning statement as required by the QBCC Act

17.  The homeowners secondly argued that there was no warning on the first page of the Schedule to the Contract which referred to Special Condition 7 in accordance with section 14 to Schedule 1B to the QBCC Act. The Court agreed.

18. Relevantly the builder 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.

19. The Court went further to state that even if Special Condition 7 had been included in the warning, the warning itself appeared deficient with the requirements of the legislation because whilst it identified certain clauses, it did not provide a brief explanation of the effect of the identified provisions.

20. His Honour Barlow KC DCJ provided an example of what the warning might have properly stated in order to comply with the legislation:  

“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.”

21.  As stated above, the example given by the Court goes beyond the pro forma warning contained in most standard domestic building contracts. That potentially gives rise to an argument that neither a builder nor homeowner are able to rely upon clauses which vary the price. For that reason, it is suggested that legal practitioners urgently give thought to the contents of the warning statement to ensure compliance with the QBCC Act.  

Where the price escalation clause was “unfair” within the meaning of the ACL

22.  The homeowners thirdly argued that special condition 7 was “unfair” within the meaning of ss 25 of the Australian Consumer Law, because it allowed the builder to alter the price, in a less than transparent manner, without granting the homeowners a right of termination.

23.  The Court agreed that special condition 7 was unfair for the following reasons:

(a) the clause was not included in the warning at the start of the contract, along with other clauses said to allow for a change in the contract price;

(b)  the clause did not identify or disclose how any increase in price was to be calculated;

(c)  the clause seemingly gave an unconstrained right to the builder to adjust the contract price by an arbitrary amount in the case of delay, irrespective of whether that delay was caused by the builder;

(d)  the clause did not refer to any increase in costs, nor any specified basis for an increase in the contract price other than a price for similar contracts that it may set in its discretion without regard to any specified criteria;

(e) the clause did not provide a countervailing right to the applicants to terminate following a price increase. Instead, it essentially locked the homeowners into the new price and the only way for them to depart from that was to repudiate the contract and open themselves to a claim for damages;

(f) the homeowners had already paid consideration under a separate agreement to lock in the base price;

(g)  the clause went beyond what was reasonably necessary to protect the builder’s interest because as it was drafted, it could rely upon any delay, including its own;

(h)  the builder had other means to protect itself including delay damages and seeking an extension of time to start the works for reasons outside of its control.  

24.  This decision highlights the risks in drafting a price escalation clause which is unconstrained. On this issue, His Honour Barlow KC DCJ stated at [87]:

“While I do agree that the respondent would have a legitimate interest in being able to vary the price if delays caused either by the applicants or external factors resulted in the costs to the respondent increasing, the provision goes beyond what is reasonably necessary. As drafted, it allows the respondent to rely on any delay whatsoever, including its own. As noted by the applicants in their submissions, such a broadly drafted clause would allow the respondent to enter into numerous contracts at once, then do nothing to commence works under some or all of the contracts and then to increase the price under the contracts once buyers have been locked in. Had the provision been drafted in a more careful and limited manner, such as by providing that the builder could only rely on delays if it is not at fault or has not contributed towards that delay and that the increase can only be determined by reference to cost increases that have occurred between the contract date and commencement, it might be more likely that the provision protected the respondent’s legitimate interests.” [emphasis added]

25.  The above extract demonstrates the importance of drafting and in this case, confining the operation of a price escalation clause to a legitimate interest. If a provision goes beyond what is reasonably necessary, then there is a risk that it is “unfair” within the meaning of the ACL. The drafters of price escalation clauses should seek advice on the operation of the ACL.  

Conclusion

26.  The facts of Perera v Bold Properties relate to a fixed price, domestic building contract in Queensland. The facts are unique, and parties should seek legal advice before relying upon it.

27.   The decision demonstrates that a number of considerations need to be carefully considered when drafting a price escalation clause.

28.   The decision further demonstrates that the pro forma warning statement contained in most industry form contracts are insufficient to meet the requirements of s 14 to Schedule 1B to the QBCC Act.

29.   This information is general in nature to offer assistance to prospective clients and is for reference purposes only. It does not constitute legal advice.

30. Simon Taylor is a Barrister specialising in commercial law, domestic building disputes and disputes with the Queensland Building and Construction Commission.

[1] See also Perpetual Nominees Ltd v Parist Holdings Pty Ltd [2005] NSWSC 1345 at [30] citing Kabwand Pty Ltd v National Australia Bank Ltd (1989) ATPR 40-950; and Perpetual Trustee Company Ltd v Nikoloff [2020] WASC 389 at [49]-[61].