Australia: Builders beware! Major changes for construction contracts

RECENT JUDGEMENT SPELLS POTENTIAL DISASTER FOR BUILDERS SEEKING TO CLAIM CONTRACT PRICE CHANGES IN RESIDENTIAL CONSTRUCTION FOR THOSE USING INDUSTRY STANDARD CONTRACTS.

The Australian residential construction industry is currently in a very turbulent position. The industry has become a battleground between owners seeking to have their homes built for the initial prices they were quoted and builders seeking to increase the contract price to maintain a profit while facing uncertainty regarding material, labour and other costs. This situation will likely only become more agitated as a result of a recent district court decision which has massive implications for construction contract drafting.

Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99, has provided important clarification concerning how construction contracts that include provisions which allow for increases to a contract price must be drafted to be lawfully compliant and noncompliance may result in builders being unable to claim any additional increase to the contract price sum. In that judgement, a cost escalation clause (special condition 7 of the contract) was deemed void on the basis that: it was uncertain; the accompanying warning (specifically the explanation) did not comply with Schedule 1B, section 14 of the Queensland Building and Construction Commission Act 1991 (QBCC Act); and the term was "unfair" under the ACL. For information concerning cost escalation clauses please refer to our recent article: https://rcrlaw.com.au/cost-escalation-clause-guide/.

THE BACKGROUND OF PERERA V BOLD PROPERTIES

On 11 August 2022, Mr and Mrs Perera (the Applicants), entered into a New Home Contract with Bold Properties (QLD) Pty Ltd (the Respondent) for a fixed sum of $645,370, with a non-refundable deposit paid by the Applicants to secure a fixed base price. The anticipated contract start date was set for 9th December 2022, with the Respondent to commence work no later than 21st December 2022. However, on 13th October 2022, the Respondent informed the Applicants of anticipated delays in achieving "Milestones" and its intent to increase the construction contract price by $51,342 due to increased building material costs and other factors. To justify the price increase, the Respondent relied on "special condition 7", a cost escalation clause which provided that if commencement had not begun by the anticipated date, it could (at its sole discretion) increase the contract price to the "current base price of the house type". This construction contract also included "special condition 11" which sought to replace the warning and explanation contained on the first page of the contract schedule with an amended warning and explanation. The Applicant did not agree to pay the proposed price increase and the respondent refused to commence building. The dispute primarily concerned whether the respondent was able to validly rely upon special condition 7 to claim an increase in the contract price.

FINDINGS AND IMPLICATIONS

Schedule 1B section 14 of the QBCC Act requires that 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. Furthermore, this warning and explanation must be in a prominent position on the first page of the contract schedule.

In this judgement, the warning and explanation were both deemed insufficient to satisfy the requirements of the QBCC Act, resulting in the builder being unable to claim an increase in the contract price. The following conclusions are noteworthy:

Warning on the Front Page: Any term seeking to act as a warning must be fully contained on the first page of the schedule of the contract. The inclusion of a warning within the special conditions, attempting to replace the warning or explanation on the front page, is non-compliant and will result in the QBCC Act requirements not being satisfied.

The explanation for Contract Price Changes: Simply listing clauses that allow for changes in the contract price is insufficient (from our observations this is currently the industry standard method). An adequate explanation must accompany these clauses, extending to all terms that aim to alter the contract price, including variations. Without a sufficient explanation, the contract price cannot be varied based on the clauses within the explanation, and only the original contract price can be claimed.

Special condition 7, which allowed for an increase in the contract price if commencement did not begin by the anticipated date, was declared void to the extent that it permitted a change in the contract price. The implications of this judgment however extend past just potentially preventing contractors from claiming increased costs under cost escalation clauses but potentially also the inability to rely upon any clause that would allow for an increase in the contract price (such as a variation) if the warning and explanation contained on the first page of the contract are not compliant with the QBCC Act. This may spell disaster for those who rely upon template industry standard construction contracts without having those contracts amended to reflect the current requirements. Parties therefore may be incapable of relying upon clauses that would otherwise allow for them to claim for an increase in the contract sum, leaving them potentially only capable of claiming the contract sum as a fixed amount. Furthermore, due to the similar wording of Section 7(5) of the Home Building Act 1989 No 147 (NSW), it is likely the Judgement (unless overturned by a higher Court) will apply to NSW.

TAKEAWAY AND CONCLUSION

The Perera v Bold Properties judgement serves as a crucial reminder of the significance of compliant construction contract drafting, particularly when it comes to clauses that seek to allow for an increase in a contract price. This judgement is likely to have a massive effect on an already turbulent industry and the importance of having your construction contracts examined (even industry-standard contracts) cannot be understated. If you have any concerns that your contracts are not currently compliant or wish to ensure that your contractual interests are protected, please do not hesitate to contact our dedicated team of construction lawyers.