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Case sounds warning on price escalation clauses

A ruling in the District Court in Brisbane has cast doubt over the enforceability of “price escalation” clauses in building contracts in Queensland.

In the June 12 decision of Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99, which involved a builder’s clients challenging the validity of such a clause to increase the price of their contract, Judge Ken Barlow KC declared that clause void and unenforceable.

Mr and Mrs Perera (‘Perera’) entered into a new home contract with builder Bold Properties (Qld) (‘Bold’) for a fixed sum of $645,370, in August 2022. Perera had paid a non-refundable deposit to secure the price.

Two months later, Bold advised Perera it intended to increase the contract price by $51,342 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.”

Bold cited inflated industry demand, insurance repair work, shortages of tradespeople, wet weather and COVID-19 disruption as the drivers of the increase, concluding it was “not viable for builders to hold their prices for an extended period of time”.

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Perera refused to pay and building did not begin in December as agreed. Perera challenged the validity of special condition 7 on three grounds:

  1. uncertainty, under common law,
  2. an insufficient price escalation warning, as required by the Queensland Building and Construction Commission Act 1991 (Qld), and
  3. unfairness, contrary to the Competition and Consumer Act 2010 (Cth).

They also contended that Bold did not properly invoke the condition and could not rely on it, even if it was valid.

In his decision, Judge Barlow agreed with all three of Perera’s arguments, ruling special condition 7 was void and unenforceable, and Bold therefore was not entitled to increase the contract price. The contract remained on foot but Judge Barlow made no order for specific performance.

In recent years, builders have relied on price escalation clauses (also called cost escalation clauses) to counter price rises caused by shortages of materials and labour.

Master Builders Queensland warned that although such clauses were not expressly prohibited by Schedule 1B of the Queensland Building and Construction Commission Act 1991 (Qld), they must be carefully drafted to be legally enforceable. 

The case 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,” Master Builders Members Legal’s principal lawyer Julian Lane said.

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A spokesperson for the Queensland Building and Construction Commission (QBCC) said it was not appropriate for the commission to comment on the specifics of the case, given it was a civil matter.

“The commission notes, however, that the contractual provision in question was a unique special condition inserted into the contract and the court determined, among other findings, that the legislatively required warning on the front page of the contract did not comply with the relevant provisions of the Queensland Building and Construction Commission Act 1991 (Qld),” they said.

“The special condition in question is not a standard clause in QBCC contracts.

“The QBCC strongly encourages all builders and home owners to be aware of their contractual and legislative obligations and stay up to date with any amendments.”

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