The recent decision in Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99 (‘Perera v Bold Properties’) has ruffled quite a few feathers in the construction industry. And it’s set an important precedent on how price escalation clauses will be treated in Queensland’s legal framework going forward.
If you use price escalation clauses in your contracts, here’s what you need to know.
In this article:
- What are price escalation clauses?
- Lessons from Perera v Bold Properties
a. Drafting is critical
b. Warning statements are required
c. Explanatory information must be provided
d. Penalties for non-compliance - A call to action for the construction industry
What are price escalation clauses?
First things first – what are price escalation clauses?
Price escalation clauses are contractual stipulations that allow the parties to make adjustments to an agreed contract price under certain conditions. The contract writer, often with the advice of construction lawyers, generally includes these provisions to protect against events that could inflate the costs of goods, services or construction. These events might include sudden surges in raw material prices, unexpected labour cost increases or even fluctuations in exchange rates.
So, at the end of the day, price escalation clauses are designed to protect profit.
In the construction industry, builders can face several variables that might be used to trigger a price escalation clause. For example, the volatile prices of steel, cement or lumber. Or the costs of supply delays.
A price escalation clause helps shield builders from these unpredictable economic swings. It allows them to adjust contract prices and, in return, they can often offer a client a more competitive initial quote.
Lessons from Perera v Bold Properties
Perera v Bold Properties gave us some insight into how the courts view price escalation clauses.
Drafting is critical
The court did not determine that all price escalation clauses are inherently unfair. Instead, it determined that it’s the precise formulation and execution of these clauses that are vital. They must be drafted with clarity, fairness and in compliance with existing legal frameworks to be enforceable.
On the other hand, an ambiguous escalation clause that isn’t aligned to tangible criteria and written to be fair to both parties, could be labelled void. Granting one party the unbridled discretion to invoke this clause exacerbates the chances that it will be. In fact, this is precisely what happened in Perera v Bold Properties.
Warning statements are required
The decision in Perera v Bold Properties also highlights the warning statement required under the law. In section 14 to Schedule 1B of the Queensland Building Construction Commission Act (QBCC Act), contracts that contain price escalation clauses must indicate this in a prominent warning on the first page of the contract schedule.
This is to make it absolutely clear to anyone reading the contract that it contains a provision that allows for a contract price change.
Explanatory information must be provided
The case decision also makes it clear that a warning statement isn’t enough. The person creating the contract – generally the builder – must also take the time to explain to the other parties how price change clauses work.
Penalties for non-compliance
If the court finds that you’ve included an unfair or ambiguous clause in your contract, or that you haven’t met your duty to provide a warning statement or explain what the clauses mean to the other party, they could render the clause void. This could significantly affect your ability to meet the requirements of your contract… and make a profit.
A call to action for the construction industry
Perera v Bold Properties has a far reaching impact on contracting in the construction industry (and in general). Given that many standard industry building contracts in Queensland adopt the pro forma warning statement, there’s a looming concern that the majority of these won’t meet legislative requirements. An immediate review of these contracts is of vital importance.
Ensuring you’re in compliance
If you haven’t taken a close look at how your own pricing clauses are drafted, or if you use standard contracts or pro forma warnings, now is a good time to do that. Ambiguous, unclear clauses could be null and void, which could leave you and your business in a difficult position.
Our team at Victor Legal is on the forefront of legal developments. We’re focused on ensuring that our clients remain informed, compliant and resilient in an evolving legal landscape, including with respect to your price escalation clauses.
Contact us today and we’ll help ensure that all your contracts are written in compliance with all legislation and to give you the best outcomes possible.
