Unfair Contract Terms: lessons from Perera v Bold Properties in ‘construction’ of price escalation clause

With amendments to the Competition and Consumer Act 2010 (Cth) coming into effect in November 2023 and expanding the remit of unfair contracts legislation to a wider range of construction contracts, it is important for contractors to be aware of provisions that might be considered ‘unfair contract terms’ under this legislation. 

In June 2023, the Queensland District Court handed down the decision of Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99, reaffirming that a contract term allowing one party unilateral rights to adjust the contract price will be considered an unfair contract term and severed from the contract. Viewing this decision from the construction contractor’s perspective, this might require a reassessment of expansive or unilateral rights under contracts, even though that might run counter to conventional logic to bargain for as much contractual protection as possible in a difficult market.

While the decision in Perera relates to a domestic building contract, the principles at hand are likely to have broader application, including in the commercial building space. 

Facts

In Perera, the applicant homeowners (Homeowners), entered into a $645,370 fixed price contract (Contract) with the respondent Bold Property (QLD) Pty Ltd (Builder) on 11 August 2022 for the construction of a house.  The Contract contained Special Condition 7, which set out:

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.

On 13 October 2022, the Builder contacted the Homeowners and advised that the Builder would be delayed in commencing works on site due to delays on other projects. The Builder foreshadowed a $51,342 increase to the Contract price. 

When the Homeowners’ solicitor questioned the basis for the price increase, the Builder asserted that the current ‘base price’ for the house type had increased by $82,683 since the date the Contract was executed, though it was willing to accept an increase of the lesser amount of $51,342.

The Builder offered to terminate the Contract by agreement, however, the Homeowners wished to proceed with the construction of their house under the Contract and brought an application seeking a declaration that Special Condition 7 was void.

Uncertainty

The court noted that Special Condition 7 did provide some form of criterion to measure a price increase, being the “builder’s current base price” (for dwellings with the specifications the same as the Homeowners’).  However, the method for calculating this increase was not set out or referred to in the contract or other documents.  The court also noted from evidence provided by the Builder that the adjustment to the “base contract price” following execution of the contract involved a profit margin more favourable to the Builder than under the original contract.  This was distinguished from, for example, an interest rate increase clause which allowed a lender a right to vary interest on a loan, where the interest rate variation was applied to all customers and was an objective market standard applied at all times.

In view of these factors, the court determined that Special Condition 7 was void for uncertainty.

Unfair contract term

Both parties accepted that this was a standard form consumer contract, and s 23 and 24 of the ACL¹ applied.

Judge Barlow KC was then required to consider whether Special Condition 7 was in fact an ‘unfair contract term’, being a term which:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.² 

In Determining whether the term was 'unfair' in line with the factors above, the court was required to consider other relevant matters, including the extent to which the term was transparent, and the contract as a whole.³

The court found that Special Condition 7 was not transparent, which was indicative but not conclusive of an unfair contract term.  It gave the Builder:

…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 respondent or factors outside either party’s control.⁴

While the price adjustment was calculated to reflect the Builder’s legitimate increase in the cost of providing the services, Special Condition 7 went beyond what was reasonably necessary and did not contain objective criteria for changing the contract price.  Special Condition 7 also did not provide a right for the Homeowners to terminate, meaning the Homeowners in theory would be locked into the Builder’s adjusted price unless they wished to repudiate the contract and open themselves to a claim for damages.  Judge Barlow found that:

…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.⁵

On that basis, Special Condition 7 was also found to be void as an unfair contract term pursuant to the ACL. 

Lessons to take away

Builders who enter into fixed price contracts are generally bound to undertake and complete projects running at a serious loss without the option to walk away. Given this, there are obvious incentives to secure contractual protection and recompense against the unprecedented cost escalation that we are seeing in the current market.

As we noted in the article Pricing rise and fall: where will we be in 2023? published in December 2022, some ways a cost adjustment mechanism can be built into a contract include:

• cost-plus contracts;
• provisional sums for materials genuinely at risk of cost fluctuation;
• a price adjustment clause that sets out a clear mechanism for adjusting the price (e.g. an adjustment mechanism).

However, these rights and mechanisms must be carefully drafted to ensure that they will be enforceable in view of the unfair contract legislation.

For instance, if a price adjustment clause is the chosen method of protection and the unfair contract legislation applies, the Court’s reasoning in Perera suggests that the mechanism for calculating the new price must be clearly articulated and limited as necessary to reflect the legitimate interests the clause is seeking to protect (usually the risk of increases in market prices for labour and materials).  A widely used mechanism for price adjustment that might avoid the inadequacies of Special Condition 7 in the Contract in Perera can be found in Schedule 7 of the New South Wales GC21 General Conditions of Contract (Edition 2) (a copy of which can be downloaded here). 

With the amendments to the unfair contract terms regime coming into effect for contracts executed or renewed from November 2023 onward (and capturing a wider spectrum of contracts due to the expansion of the definitions of a ‘small business’ and ‘small business contract’) and the building industry being plagued by labour shortages, delays and increased costs of materials, it is more important than ever for contractors to be reminded that the ‘construction’ of your contract (including price adjustment clauses) will be closely scrutinised by a court. 

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Mark Kenney

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Millicent Aylward

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