Could a contract contain a price escalation clause and still be fair?
Updated: 4 minutes ago
Latest update 28/04/2024 | Last update 23/10/2023 | First published 23/10/2023 on TradeBox's website, 30/08/2023 on Aitchison Reid's client newsletter
This guidance article was provided to TradeBox Australia by Aitchison Reid Building and Construction Lawyers, and written by its director, Fionna.
For the last 4-5 weeks, I’ve sent you emails about how the price escalation clause in the Perera v Bold Properties (QLD) Pty Ltd[1] (Perera v Bold) [case] was unfair, uncertain and not in accordance with the QBCC Act.
So, you are probably thinking that there is no way you could ever have a price escalation clause. Let alone in a domestic building contract. Right?
Well, what if I told you, you still can?
In fact, I am so certain of this, that in the domestic building contract that I craft for TradeBox Australia, there is a price escalation clause (clause 2.3) and a Material Price Increase Specific Clauses Schedule.[2]
That’s right, the TradeBox domestic trade contract terms have a price escalation clause baked in at clause 2.3 ('TBX clause 2.3'), which allows the price to be increased if the work is delayed more than 30 days past the start date.
So it's very similar to the clause in the Perera v Bold case, in that the clause is triggered by a delay of work on site.
I should add that these price escalation clauses still remain (only slightly modified), after I made my Perera v Bold case changes to that contract for TradeBox.
So why do I think the clause I crafted is okay and valid and the one in Perera v Bold is not?
I’ll explain:
Warning on the front page
Firstly, TBX clause 2.3 allows a variation to be agreed. The variation clause number and TBX clause 2.3 are mentioned in the contract's front page warning and there is a brief explanation for the variation clause. I note that the court commented that clauses giving rise to a variation did not need to mentioned on the front page, however TBX clause 2.3 is stated on the front page anyway.
Objective criteria
You will recall in the Perera v Bold case the clause allowed Bold to arbitrarily set the new contract price at its sole discretion.
The court held that the price escalation clause “goes beyond what is necessary and without any objective criteria for changing the price”.
So, what does TBX clause 2.3 do? It states that:
the variation only occurs if there is an increase in material or labour costs;
the request for a variation must include evidence of the increase from another party such as a supplier; and
the claim for the variation can only be for the price increase plus margin.
This also gives certainty about what the variation will be for and how it will be calculated.
Cause of the delay
You will recall that Bold actually caused the 120 day delay, then sought to rely on the price escalation clause to increase the price.
TBX clause 2.3 states that the TradeBox contractor cannot be the sole cause of the delay. Again, this is part of making the clause fair.
Termination
You may recall that despite Bold increasing the contract price by $51,342, the owners had no way of avoiding paying the increase, apart from repudiating (renouncing) the contract and then ironically having to pay Bold damages for repudiating the contract. TBX clause 2.3 allows either party to terminate the contract if a variation cannot be agreed between the parties. I know what you are thinking, why can’t you just force the homeowner to pay? Isn’t that what a good business person [does]? My theory with all contracts is that, it's never in anyone’s interest if one party can’t afford the contract:
If the contractor can’t afford to do the work, it isn’t in the homeowner’s interests because the work produced is likely to be a lesser quality; and
If the homeowner can’t afford to do the work, it’s not in the contractor’s interests because then you have a payer who can’t pay.
In fact, at the very beginning of the Material Price Increase Specific Clauses Schedule ('Material Price Increase SC Schedule') there is a commentary section that includes:
“The schedule allows you and us to decide if the work is still affordable to continue with this agreement, given the price increases. It is not in your interests if we cannot afford to carry out the work and it is not in our interests if you cannot afford to pay for the work.”
The Material Price Increase SC Schedule is different from TBX clause 2.3 because it has been crafted in case the start date is more than 61 days after the agreement date. In other words, it is crafted for those occasions where an agreement is entered into more than two months before the start date.
Again, like TBX clause 2.3, it provides a process for the parties to work through to see if they can agree to a new price. It is objective and clear and gives an opportunity for either party to terminate if they just can’t agree a deal.
Take aways
Price escalation clauses are still possible. However, they need to be crafted very carefully to make sure that the clause is fair, certain and fulfils the requirements of the QBCC Act (if the clause is in a domestic building contract). Crafting these terms takes a lot of care and professional skill to get right. Believe me, I have spent hours crafting the TradeBox price escalation clauses to make sure that they fulfill the requirements. Therefore, I highly recommend that you do not try and do it yourself. Just like your trade is a craft, drafting trade terms and contracts is a craft too.
End notes
[1] [2023] QDC 99
[2] A schedule that includes additional clauses to the TradeBox terms that is optional, and can be added to the terms in TradeBox's Focus and Ultimate subscriptions.
Please note
This article was written by Fionna C A Reid, director of law practice Aitchison Reid Building and Construction Lawyers (Aitchison Reid) for TradeBox Australia (TradeBox), so that TradeBox can share the article as guidance with tradies and subbies. Use of this article is subject to TradeBox’s terms and conditions of use stated here: https://www.tradebox.com.au/terms-and-conditions-our-ar-content
Aitchison Reid, like TradeBox, is based in Queensland.
This article has been drafted in reference to building and construction trade businesses in Queensland only.
TradeBox is not a law practice. This article is not legal advice and is for guidance purposes only. Seek advice on matters of interest arising from the commentary, information and guidance in this article.
Aitchison Reid’s content for this article was released to TradeBox in August 2023. Individual liability limited by a scheme approved under professional standards legislation.
