Major Projects & Construction 5 Minute Fix 117: combustible cladding, price escalation clauses, security of payment

Price escalation clauses in Queensland home building contract found void

The District Court of Queensland has held that a price escalation clause in a home building contract that purported to allow a builder to increase the contract price at its sole discretion was void and unenforceable because its terms were uncertain and an appropriate warning about the clause had not been given to the owner as required by the Queensland Building and Construction Commission Act 1991 (Qld).

In Perera v Bold Properties [2023] QDC 99, the owners and the builder entered into a New Home Contract. The contract contained a special condition that permitted the builder to increase the contract price at the builder's sole discretion to "the builder's current base price for that house type" if building works did not commence by the anticipated start date. Predictably, the builder invoked the cost escalation clause to increase the contract price. Consequently, the owners the owners sought a declaration that the price escalation clause was void for uncertainty. The boilerplate severance clause meant that the void clause could be severed, protecting the remainder of the contract from invalidity.

Unsurprisingly, the Court found the relevant clause to be void for uncertainty because it gave the builder the sole discretion to determine the contract price – a "vital matter". The Court emphasised the one-sided nature of the clause and pointed to the following factors:

• the builder could trigger the cost escalation clause even though it was responsible for the failure to meet the anticipated start date;
• the contract did not indicate how the "current base price" would be determined;
• the clause allowed the builder to unilaterally increase the contract price without any reference to objective criteria (such as interest rate changes); and
• the builder could fix a price with "no correlation" to the original price or its "expected profit margin".

The Court also found that the contract failed to include an adequate price escalation warning as required by the QBCC Act, rendering the cost escalation clause void.

The decision turns on its facts. However, the issue of whether a clause is void for uncertainty can also arise in more complex price escalation clauses. For example, problems can occur where parties have tied price increases to published indices, but the index is later renamed or discontinued. The decision highlights that uncertainty issues can arise when no objectively ascertainable benchmark exists for measuring price increases.

We cover the decision in more depth in our Insights article.  

Misleading and deceptive conduct claim as a defence to a summary judgment application under the NSW SOP Act

Marques Group Pty Ltd v Parkview Constructions Pty Ltd [2023] NSWSC 625 concerned a subcontractor's application to seek summary judgment in the amounts stated in payment schedules as a statutory debt under the Building and Construction Industry Security of Payment Act 1999 (NSW).

The contractor defended the subcontractor's application on the basis that the subcontractor's payment claims were vitiated by misleading and deceptive conduct under section 18 of the Australian Consumer Law. The contractor argued that the subcontractor engaged in misleading and deceptive conduct because its subcontractor's statement and statutory declaration contained misleading and deceptive statements as to its solvency and payment of employees. The contractor alleged the subcontractor had not paid redundancy funds, superannuation contributions or some subcontractors.

Accordingly, the Court was required to consider whether the Contractor's defence based on alleged misleading and deceptive conduct concerning the subcontractor's solvency was "so clearly untenable" that it could not possibly succeed. Ultimately, while Justice Rees acknowledged that this defence was "inherently unattractive" and appeared to "run contrary to the SOPA scheme", her Honour held that the defence was not so clearly untenable that it could not possibly succeed. Accordingly, Justice Rees dismissed the subcontractor's summary judgment application. We will keep you up-to-date when the matter proceeds to trial.

ACT Court of Appeal considers whether a payment claim has been validly served if issued to an email address not used for previous payment claims

The ACT Court of Appeal recently considered whether a payment claim had been validly served if it was issued to an email address not previously used for previous payment claims under the ACT SOP Act.

In Canberra Building and Maintenance Pty Ltd v WNA Construction Pty Ltd [2023] ACTSC 153, a subcontractor was told by a contractor's employee not to send him any further invoices because he had ceased working for the contractor.

Following this conversation, the subcontractor issued its final invoice to an email address with a domain name consistent with the contractor's name. The contractor failed to pay the amount stated in the final invoice or issue a payment schedule in response to the subcontractor's final invoice.

The contractor subsequently disputed the validity of the final invoice on the basis that the final invoice did not adequately identify the construction work to which it related and that it had not been validly served on the contractor because the subcontractor had served the payment claim to an email address that was different to which earlier invoices had been sent.

While the subcontractor’s evidence about why the subcontractor chose the specific email address was vague, the ACT Court of Appeal was prepared to accept that the subcontractor had been told to use that email address by the contractor. The Court also found that the subcontractor's invoice adequately identified the construction work to which it related. It followed that the subcontractor had validly served a valid payment claim on the contractor and as such, the contractor was liable for the amount stated in the final invoice and interest.

Evidentiary burden rests on builder to establish combustible cladding replacement is unreasonable

The NSW Court of Appeal recently considered whether the building owner (Owners Corporation) or the builder bore the evidential burden of establishing that the reinstatement of non-compliant combustible cladding was reasonable (or unreasonable). The court concluded that the burden fell on the builder.

Owners SP 92450 v JKN Para 1 Pty Ltd [2023] NSWCA 114 involved a claim by the owners against the developer and builder of a mixed-used 28-storey building in Parramatta known as "The Rise" for the cost (in excess of $5 million) of removing and replacing all of the cladding used on the building's façade because it was not compliant with the Building Code of Australia (BCA), in breach of a contractual warranty imposed by statute. Compliance with the BCA could be achieved through the deemed to satisfy (DtS) provisions of the BCA, requiring external walls to be "non-combustible", or an "alternative solution" that satisfied relevant performance requirements of the BCA, or a combination of both. The builder admitted that the original installed cladding did not meet the DtS requirements, and it was not disputed that no alternative solution had been prepared prior to the issue of the construction certificate.

On the question of the compensable loss, the primary judge was not satisfied that reinstatement of the cladding at such substantial cost would be a reasonable course to adopt because there was an onus on the Owners Corporation to establish that an alternative solution "could not then [the time of the construction certificate] or now be performed". His Honour found that the Owners Corporation had not met that onus.

The Court of Appeal held that the primary judge was in error about the onus falling on the Owners Corporation. The Court referred to the common law principle that where a party sustains a loss due to a breach of contract, the party is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. The Court also observed that, in the case of assessing damages for defective construction work, the application of that principle has led to the long-standing rule articulated by the High Court of Australia in Bellgrove v Eldridge (1954) 90 CLR 613 that the prima facie measure of damages is the cost of reinstatement, to be displaced only in fairly exceptional circumstances where reinstatement would be unreasonable. This position, the Court concluded, implies that there is an onus on a defendant to displace a claim for reinstatement costs by establishing that it is unreasonable.

As a result, the Court considered that once the Owners Corporation established non-compliance with the BCA, the Owners Corporation was not required to go further by proving that the builder could not have complied with the BCA by hypothetical alternative solutions. Rather, it was for the builder to establish the that and, in this respect, there was an unchallenged finding by the primary judge that the builder had not established the availability of any alternative solution. As well, in this instance, on the question of the reasonableness of reinstatement, the Court also relied on the fact that, as a result of the non-compliance with the minimum standards in the BCA for safety from fire, there was a real risk of damage occurring in the future from fire in the building or harm for the safety of occupants. These were risks that reasonableness did not require the Owners Corporation to carry.