Price Increase Clauses in Building Contracts – Are they Unfair?

Price Increase clauses are clauses in a building and construction contract which allows the builder to ‘unilaterally’ vary the price of the fixed-price residential building contract.

If a condition precedent has been met, such as increased price of materials and labour, then these clauses attempt to charge more money to the owner than what was contracted for.

Usually inserted as a special condition, these clauses are inserted as an attempt by the builder to be able to charge more than the fixed price in the residential building contract.

But are these contract clauses enforceable?  Are they unfair contract terms?  Can the builder really charge whatever they want on top of a fixed price?

The answer is – it depends.

In this article, our building and construction litigation lawyers look at the enforceability of price increase clauses in building contracts.

Price increase clauses can be an unfair contract term in certain circumstances. If found to be unfair, they can be struck out, and be unenforceable.  Speak to our building and construction lawyers today.

Price Increase Clauses in Building Contracts

We have been seeing a lot of HIA contracts, QBCC Contracts, and/or Master Builders contract with unilateral price variation clauses in the special conditions clause.

These can say something like:

Due to COVID-19 [and any number of other reasons] the Builder can increase the price of the materials and labour in this Contract at the Builder’s sole discretion.

They generally say something like this (or words to the same effect).

There are a number of ways in which a builder can increase the price in a fixed price building contract.  These include:

1. Contractual entitlements to increase costs
2. Cost increases and variations
3. Increase in statutory fees/costs
4. Price increase because of delays in building
5. Prime cost or provisional sum items
6. Rise and fall clauses in the contract

Please read our article – Price Increases in Fixed Price Building Contracts Qld

For the purpose of this article, we look at the enforceability of price Increase clauses, most likely included as a special condition.

What is an Unfair Contract Term?

Part 2, Division 1, Subdivision BA, of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act“) relates to unfair contract terms.  It includes the following clauses:

1. 12BF – Unfair terms of consumer contracts and small business contracts
2. 12BG – Meaning of unfair
3. 12BH – Examples of unfair terms
4. 12BI – Terms that define main subject matter of consumer contracts or small business contracts etc. are unaffected
5. 12BK – Standard form contracts
6. 12BL – Contracts to which this Subdivision does not apply
7. 12BM – Contraventions of this Subdivision etc.

These are also found in Schedule 2 of the Competition and Consumer Act 2010 (Cth), which contains the Australian Consumer Law.

The Australian Consumer Law (“the ACL”) is a national law used to protect consumers.

Clause 23 of the ACL relates to unfair contract terms.  Clause 23(1) of the ACL states:

(1)  A term of a consumer contract or small business contract is void if:
(a)  the term is unfair; and
(b)  the contract is a standard form contract.

This raises three (3) threshold issues:

1. What is a consumer contract?
2. What is a standard form contract?
3. What is an unfair contract term?

We will answer these in more detail below in context of price increase clauses.

What is a consumer contract?

Clause 23(3) of the ACL states:

(3)  A consumer contract is a contract for:
(a)  a supply of goods or services; or
(b)  a sale or grant of an interest in land;
to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.

In relation to a residential building contract, they are consumer contracts because the builder is supplying goods and services to an owner for personal, domestic, or household use.

But the consumer residential building contract must also be a standard form contract.

What is a Standard Form Contract?

A standard form contract is a contract that has been prepared by one of the contracting parties, where the other party has little or no input in negotiating the terms.

In relation to building contracts, this is usually where the builder provides a residential building contract and save for a few small items (if any) such as price increase clauses, the owner has to essentially take it or leave it.

Section 27 of the Australian Consumer Law states:

(1)  If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.
(2)  In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following:
(a)  whether one of the parties has all or most of the bargaining power relating to the transaction;
(b)  whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
(c)  whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms eferred to in section 26(1)) in the form in which they were presented;
(d)  whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);
(e)  whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction;
(f)  any other matter prescribed by the regulations.

For the most part, a residential building contract is a standard form contract, because:

1. Other than the design requirements, the owner does not get to negotiate the standard terms and conditions in the contracts.
2. The builder has all or most of the bargaining power in the relationship.
3. The contract was prepared by the builder, and they use pro-forma documents from HIA, QBCC, or Master Builders.
4. The owner is not usually in a position to reject the standard terms of the building contract, or the special conditions.

These types of contracts have also been found to be standard form contracts by the Courts.

In DTM Constructions Pty Ltd trading as QA Developments v Poole [2017] QSC 210, under the subheading “the Contract”, Ann Lyons SJA said at [195]:

On 27 March 2015 QA acquired the standard form building contract from the Housing Industry Association [HIA].

Further, in Bartier v Kounza Investments Pty Ltd & Ors [2003] QSC 390 under the subheading “What Constitutes the Contract?”, McMurdo J says at [4]:

A document in a standard form prepared by the Housing Industry Association [HIA] and entitled “Medium Works Commercial Contract Conditions” was used.

In McGrath Corporation Pty Ltd v Global Construction Management (Qld) Pty Ltd & Anor [2011] QSC 178 under the subheading “The construction management contract”, Daubney J said at [8]:

The general conditions of the Contract were in the Master Builders’ Association standard form CM2-1998, subject to certain amendments and special conditions.

In Surfabear P/L v. G J Drainage & Concrete Construction P/L [2009] QSC 308 under the heading “Background”,

On 10 February 2008, Mr Jorgensen entered into a standard form of a residential building contract as approved by the Master Builders Queensland Association (“the building contract”) for the construction of a new dwelling on the property with the applicant company, Surfabear Pty Ltd.

Whether a residential building contract is a standard form contract is subject to interpretation, but it will likely be found to be a standard form contract.

A legal presumption exists that a residential building contract is a standard form contract.  This means that the builder who prepared the contract has to prove that it is not.

So, a residential building contract is a consumer contract, and it is very likely a standard form contract.  So, the last step is to determine what makes an unfair contract term.

What is an Unfair Contract Term?

Clause 24(1) of the Australian Consumer Law states:

(1)  A term of a consumer contract or small business contract is unfair if:
(a)  it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b)  it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c)  it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Further, Clause 25(f) of the Australian Consumer Law gives an example of an unfair contract term and states:

a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract.

As you can see from the above, a special condition in a building and construction contract allowing the builder to essentially charge whatever they want, will likely tick all of the above.

The Courts must take into account:

(a)  the extent to which the term is transparent;
(b)  the contract as a whole.

In Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99 – citing Perpetual Nominees Ltd v Parist Holdings Pty Ltd [2005] NSWSC 1345 at [30] and Kabwand Pty Ltd v National Australia Bank Ltd [1989] FCA 131, Barlow KC DCJ said at [25]:

In determining whether a contract or term of a contract is void for uncertainty, three relevant principles have been identified … The first is that if parties to a contract do not agree on a fundamental term there will be no contract at all. The second is that there is no contract if its effect is that one party is left to choose whether or not it will perform it, since the obligation is illusory. The third is that there can be no concluded bargain if a vital matter has been left to the determination of one of the parties.

In Ferme v Kimberley Discovery Cruises Pty Ltd [2015] FCCA 2384, Jarrett J said that:

Section 24(1)(a) requires an inquiry into the balance “in the parties’ rights and obligations arising under the contract”. Actual conduct is irrelevant. That the respondent has fulfilled some part of its bargain and protected the applicants in ways that, according to Mr Moffitt’s own evidence, “went beyond the scope of the contract at the company’s own expense” is beside the point. As the applicant submits, the issue is “whether a term of a contract is unfair, not whether the overall conduct of the Respondent is or was unfair”. Section 24(1)(a) directs attention to the rights and obligations arising under the contract. That is a matter for objective assessment according to those terms properly construed.

We have to have a deep dive into the case law surrounding these statutory requirements.

Underlying Policy

The underlying policy of these clauses in the Australian Consumer Law is to prevent abuse by one of the parties, while respecting freedom to contract.  In Jetstar Airways Pty Ltd v Free [2008] VSC 539, Cavanough J said at [112]:

Plainly, individual negotiation of the term is meant to be a factor tending strongly against a finding of unfairness. That is fully consistent with the underlying policy of Part 2B, which respects true freedom of contract and which seeks principally to prevent the abuse of standard form consumer contracts which, by definition, will not have been individually negotiated.

There are also requirements for a significant imbalance.

Significant Imbalance

To show a significant imbalance, the Court must look to the substantive unfairness of the residential building contract as a whole to assess the parties’ rights, both with and without, the impugned clause.

In Director General of Fair Trading v. First National Bank [2001] UKHL 52, Lord Bingham of Cornhill said in relation to significant imbalance, at [17]:

The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty.

This passage was applied in ACCC v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 at [950].

Following Lord Bingham of Cornhill, Lord Steyn said at [37]:

It has been pointed out … that the test “of a significant imbalance of the obligations obviously directs attention to the substantive unfairness of the contract” … It is however, also right to say that there is a large area of overlap between the concepts of good faith and significant imbalance.

Lord Millett then went on to say, at [54]:

A contractual term in a consumer contract is unfair if “contrary to the requirement of good faith [it] causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer”. There can be no one single test of this. It is obviously useful to assess the impact of an impugned term on the parties’ rights and obligations by comparing the effect of the contract with the term and the effect it would have without it.

This House of Lords case has been followed in Australia with approval.

In Jetstar Airways Pty Ltd v Free [2008] VSC 539, Cavanough J said at [105]:

I recognise the perils of attempting to paraphrase statutory language, but, in my view, the context of the word “significant” … shows that it means, principally at least, “significant in magnitude”, or “sufficiently large to be important”, being a meaning not too distant from “substantial”.

Then goes on to say at [115]:

[The Act] clearly proceeds on the basis that the use of some kinds of terms can be proscribed absolutely, regardless of how comprehensively they might be drawn to the consumer’s attention … The legislation proceeds on the assumption that some terms in consumer contracts, especially in standard form consumer contracts, may be inherently unfair.

Then goes on to say at [128] under the subheading “the need to consider the contract as a whole: other factors”:

The main requirement is to consider terms that might reasonably be seen as tending to counterbalance the term in question. The task involves an exercise of judgment against a statutory standard, rather than an exercise of discretion.

In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204, Edelman J found a number of things that can be applied to significant imbalance.  At [52] Edelman J said:

The first point of note about the HeadStart term, which I consider to be a “relevant matter” under s 24(2), is that the HeadStart term is a term from which the consumer could “opt out”. Although the Headstart term required the consumer to permit Chrisco to remove money from the consumer’s account for an order that might never be placed, the consumer had the power to opt out of that obligation.

The goes on to say, at [53]:

The second point of note is that the HeadStart term gave a right to Chrisco to withdraw money from the consumer’s account, after the conclusion of the consumer’s order, without any substantial corresponding right to the consumer. A right is the correlative of a duty. But what duty is imposed upon Chrisco which corresponds to the consumer’s duty to permit Chrisco to withdraw money from his or her account?

See Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 below.

As well as causing a significant imbalance, the contract term must also be unfair.

Unfairness of the Contract Term

The cases have considered the principles of unfairness and have made decisions in relation to this.  These cases have been followed and used in subsequent cases.

In Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50, Allsop CJ said at [363] to [364]:

Although it can be accepted that unjustness and unfairness are of a lower moral or ethical standard than unconscionability … The characterisation of unjustness or unfairness is, of course, evaluative and a task to be carried out with a close attendance to the statutory provisions.

In Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd [2019] FCA 1436, Banks-Smith J said at [160]:

… I have had regard to the suggestion in CLA Trading and First National Bank that it is useful to compare the effect of the contract with the impugned term and the effect it would have without the impugned term. Such an exercise is less appropriate in this instance, where the alleged unfairness of the Contract is not created by a single term but rather is created by a number of terms operating in conjunction to create an overall effect.

In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204, following Jetstar Airways Pty Ltd v Free; and Director General of Fair Trading v First National Bank Plc, Edelman J said at [44]:

Although there was some dispute about (5), a contextual approach to statutory interpretation cannot ignore the matters provided in s 25 which are specifically provided for the purpose of giving examples of potentially unfair terms.

As well as the overall fairness/unfairness, the term must be reasonably necessary to protect legitimate interests of the builder.

Not Reasonably Necessary to Protect Legitimate Interests

Interestingly, there is a rebuttable presumption in section 24(4) of the ACL that a term of a consumer contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the builder.  Section 24(4) states:

For the purposes of subsection (1)(b), a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.

If the builder does not make any submissions on this point to prove that the term was reasonably necessary to protect its legitimate interests, then the requirement of an unfair term will be satisfied.

In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204, Edelman J said at [43]:

In his eloquent submissions, senior counsel for Chrisco emphasised a number of matters concerning the construction of s 24, all of which I accept … (2) the onus is upon the applicant to prove the matters in ss 24(1)(a) and 24(1)(c) but it is upon the respondent in relation to s 24(1)(b).

So, a builder will need to make submissions in relation whether the unfair unilateral price increase clause is reasonably necessary to protect its legitimate interests.

In Australian Competition and Consumer Commission v Ashley & Martin Pty Ltd [2019] FCA 1436, Banks-Smith J said at [48] and [51]:

It is not appropriate to attempt to define ‘legitimate interest’. It will depend upon the nature of the particular business of the relevant supplier and the context of the contract as a whole … The question of what is ‘reasonably necessary’ will also involve consideration of the particular circumstances of the business.

The Court then goes on to say, at [55]:

What is ‘reasonably necessary’ might also involve an analysis of the proportionality of the term against the potential loss sufferable.

In Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28, the High Court of Australia discussed what “legitimate interest” means said at [161]:

The facts in Clydebank and Dunlop both sufficiently illustrate that interests of the innocent party beyond the protection of an award of unliquidated damages in the event of a breach of contract can justify a different conclusion. The protection afforded by the stipulation of an obligation to pay a specified sum of money in the event of a breach of contract might be to interests that the innocent party has in contractual performance which are intangible and unquantifiable.

The term also needs to provide a detriment to the owner.

Does the Term Cause a Detriment?

The dictionary defines “detriment” to mean:

Harm or damage.

In Australian Securities and Investments Commission v Bendigo and Adelaide Bank Limited [2020] FCA 716, Gleeson J said at [27]:

More than a mere possibility of detriment is required

In the Explanatory memorandum for the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth) the Legislature said at 5.31 and 5.32:

5.31 By requiring evidence of whether detriment has existed or would exist in the future, the provision requires more than a hypothetical case to be made out by the claimant. In this context, a claimant does not need to have proof of having suffered actual detriment, but that detriment would exist in the future as a result of the application of or reliance on the term.

5.32 In this regard, a term does not need to be enforced in order to be unfair, although the possibility of such enforcement may impact on the decisions made by the party that would be disadvantaged by the term’s practical effect, to that party’s detriment.

In NRM Corporation Pty Ltd v Australian Competition and Consumer Commission [2016] FCAFC 98, the full court of the Federal Court of Australia, while discussing the Appeal from Australian Competition and Consumer Commission v ACN 117 372 915 Pty Limited (in liq) (formerly Advanced Medical Institute Pty Limited) [2015] FCA 368 – said at [200]:

No error, with respect, is exposed in the conclusion of the primary Judge that the first NRM term occasioned a “significant imbalance in the parties’ rights and obligations arising under the contract (s 24(1)(a)), and would cause detriment, whether financial or otherwise, to the patient if it were to be applied or relied upon (s 24(1)(c))” (at para [950]). Nor is any appellable error exposed in his Honour’s further conclusion that these “two factors may be considered together and in light of one of the examples of an unfair term provided by s 25(1)(c)”.

The term must also be transparent.

Transparency of the Term

Section 12BG(3) of the Australian Securities and Investments Commission Act 2001 (Cth) states:

(3)  A term is transparent if the term is:
(a)  expressed in reasonably plain language; and
(b)  legible; and
(c)  presented clearly; and
(d)  readily available to any party affected by the term.

In Australian Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204, Edelman J said at [43]:

In his eloquent submissions, senior counsel for Chrisco emphasised a number of matters concerning the construction of s 24, all of which I accept … (3) s 24(2)(a) only requires the Court to consider transparency in relation to the particular term that is said to be unfair and only in relation to the matters concerning that term in s 24(1)(a) to (c) … (5) as the Explanatory Memorandum to the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth) provided at [5.39], “if a term is not transparent it does not mean that it is unfair and if a term is transparent it does not mean that it is not unfair”.

Interestingly, in relation to a price increase clause in a residential building contract, Edelman J also said at [81]:

The first respect in which the HeadStart term is not plain is that, as the ACCC set out in its amended pleading at [13A], the HeadStart term does not clearly identify the amounts that will be direct debited by Chrisco under the HeadStart term or the means by which those amounts would be determined.

[my emphasis]

This is very similar to the matter of ACCC v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 where North J said at [953]:

The NRM refund term lacked transparency to a significant extent. The basis on which the administration fee was calculated was not disclosed to the patient at all. The method of calculation of the cost of the medication was not disclosed to the patient at all. At the time that the agreement was made, the patient was told about the NRM refund term in a recorded message which suffered from the deficiencies outlined at [858] of these reasons for judgment. The patient was not provided with a written copy of the refund term until after the contract was entered into, save in the case of patients who attended clinics.

Examples at Section 25(1) of the ACL

Section 25(1) of the Australian Consumer Law gives examples of unfair contract clauses.  The subparagraphs which are relevant to a clause allowing for the builder to unilaterally vary the price of the building contract include:

• 25(d) a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract.
• 25(f) a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract.

In the Explanatory memorandum for the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010 (Cth) the Legislature clearly saw that the legislation was to provide statutory guidance only, and not to be prescriptive.  They say at 5.44 and 5.55:

5.44 The examples in subsection 25(1) of the ACL provide statutory guidance on the types of terms which may be regarded as being of concern. They do not prohibit the use of those terms, nor do they create a presumption that those terms are unfair … 5.45 Any consideration of a term of a type listed as an example is subject to the test set out in subsection 24(1) of the ACL. In this context, there may be circumstances in which the use of such a term is reasonably necessary in order to protect a party’s reasonable business interests.

You can also check out the second reading speeches in Hansard if you are really keen.

A price increase clause in a standard form consumer fixed price building contract may be an unfair contract term.  To flesh it out, we need to look at what the cases have said.

Price increase clauses can be an unfair contract term in certain circumstances. If found to be unfair, they can be struck out, and be unenforceable.  Speak to our building and construction lawyers today.

Price Increase Clauses Case Law

The most recent case in relation to unilateral price variation clause in the special conditions of a residential building contract is  Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99. In this case special conditions 7 and 11 provided as follows:

7. 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 builders 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.

11. The paragraph under the word “Warning” in Item 2 of Schedule 1 is amended to read “The contract price is subject to change. The clauses that allow for changes to the contract price are clauses 9, 10, 11, 13, 15, 16, 19, 20, 21, 23 the Special Conditions and the Tender Conditions attached to this contract.

Mr & Mrs Perera claimed that special condition 7 was void and cannot be enforced for several reasons. Firstly, they argued that it is invalid due to its lack of clarity and uncertainty. Secondly, they asserted that the contract did not adequately warn about potential price increases related to special condition 7, as mandated by schedule 1 of the QBBC Act. Consequently, they argued that the contract is invalid under that Act. Thirdly, they claimed that special condition 7 is an unfair provision in the contract, which goes against section 25(f) of the Australian Consumer Law  and therefore renders it invalid / void under that Act.

In his reasoning, Barlow KC DCJ determined the issue of certainty by saying at [27]:

Special condition 7 provides the respondent the sole discretion to determine whether or not to increase the contract price where commencement has not occurred by the anticipated start day. It does provide some form of criterion by which such an increase may be measured – the cost of the “builder’s current base price” for the relevant house type. However, the manner in which the “current base price” is determined is not set out or referred to in the condition, nor anywhere else in the contract or related documents.

Deciding at [33]:

Special condition 7, in purporting to allow the respondent to increase the price based on unstated objective criteria, effectively purported to enable the respondent to change an essential term – the price –without any reference to any such criteria. That makes the clause and its potential effect uncertain. It is therefore unenforceable.

His Honour also addressed the question of whether the warning complied with the QBCC Act, stating at [51] & [52]:

The warning, at least insofar as it concerns special condition 7, is therefore contrary to the QBCC Act and, under s 108D(2)(a), is void to the extent of that insufficiency. Does that mean that special condition 7 is itself void as being contrary to the Act? In my view, that is the effect of the invalidity of the warning insofar as it concerns that condition. The condition, if effective at common law, provides for a change to the contract price but no warning is given about the existence or effect of the condition. The effect of the legislation must be that the special condition itself is void, because otherwise the absence of a necessary warning and explanation would have no effect on the parties’ rights, but it would simply be an offence against the Act for the respondent to commence work before the contract complied with the requirement of schedule 1B, s 14 … Therefore, special condition 7 is wholly void.

His Honour finally concluding at [95]:

I shall declare that special condition 7 of the contract is void.

There are a number of other non-building cases which declare that unilateral price variation clauses are unfair and in breach of the ACL.

In Van Der Westhuizen, Chinelle; Evans, Philip — “ACL Unfair Contract Terms and Standard Construction Contracts” [2019] UNDAULawRw 4; (2019) 21 The University of Notre Dame Australia Law Review, Article 4, Chinelle Van Der Westhuizen and Phillip Evans briefly touch on the issue of unilateral price variation clauses, and say:

A useful example relates to price variation clauses and how these clauses extend beyond what is reasonably necessary. This may impact a small business and cause a significant imbalance of their rights and obligations within a construction contract.

In Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224, Moshinsky J said:

Clause 4 … provides: Price Variations. JJR may adjust its prices during the term of the agreement for reasons such as but not limited to increased operation costs, changes in disposal fees, site profitability, changes to disposal facility locations or increased government charges and levies by giving customers 30 days’ notice of such increase.

The Court said at [56]:

The price variation clause allows JJ Richards to unilaterally increase the price of JJR Waste Management Services for any reason. It creates a significant imbalance because there is not any corresponding right given to the JJR Customer to terminate the contract or obtain a change in the scope or scale of the service provided by JJ Richards or a lower price.

The Court ultimately declaring that:

The following terms (as set out in Annexure A) of any small business contracts within the meaning of s 23(4) of the Australian Consumer Law (ACL) which are standard form contracts within the meaning of s 27 of the ACL entered into, or renewed, after 12 November 2016 between the respondent and any of its customers (Captured Contracts) are unfair contract terms within the meaning of s 24 of the ACL and are void by operation of s 23 of the ACL … (b) price variation (clause 4).

In Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA 1044, when discussing a unilateral price increase clauses (clauses 4 & 9), Markovic J held at [2] that:

Clauses 4, 9(a) … of the TPS Contract, ASCI Contract and OMS Contract and cl 11(b) of the ASCI Contract are unfair terms within the meaning of s 24 of the ACL and are void by operation of s 23 of the ACL, in that each of those terms:
(a) would cause a significant imbalance in the parties’ rights and obligations arising under the TPS Contract, the ASCI Contract and the OMS Contract;
(b) are not reasonably necessary in order to protect the legitimate interests of Servcorp Melbourne and Servcorp Parramatta; and
(c) would cause detriment (whether financial or otherwise) to the small business counterparties if they were to be applied or relied on by Servcorp Melbourne or Servcorp Parramatta.

In Australian Competition and Consumer Commission v Mitolo Group Pty Ltd [2019] FCA 1257 the relevant contract term allowed the respondents (amongst others) to:

Unilaterally set and to vary for any reason, the price that it paid to the grower for the supply of potatoes by the grower to the respondents;

Murphy J ultimately declaring that:

Pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA) and s 250 of the Australian Consumer Law (ACL) the following terms, being those set out in Annexure A to these orders, of the contracts listed in Annexure B to these orders, are unfair contract terms within the meaning of s 24 of the ACL and are void by operation of s 23 of the ACL … (b) Unilateral variation of terms clause.

Unilateral variation clauses are discussed again in Accrue Membership Pty Ltd v Suntana (Civil Claims) [2018] VCAT 1403 where Deputy President I. Lulham was looking at clause 1.2 and clause 6 of a standard form contract which allowed the Applicant to amend the terms from time to time, and give the Respondents no claim against it by reason of any changes.  In the decision, the Tribunal (citing ACCC v JJ Richards) said at [30]:

Clause 1.2 and clause 6, which allow the Applicant to amend the terms from time to time, and give the Respondents no claim against it by reason of any changes, are unfair. As Moshinsky J said in ACCC v JJ Richards at paragraph [56] in relation to a clause that allowed Richards to unilaterally increase the price of its services for any reason – “It creates a significant imbalance because there is not a corresponding right given to the customer to terminate the contract or obtain a change in the scope or scale of the service provided by JJ Richards or a lower price”. Clauses permitting unilateral variation are one of the examples given in section 25 (d) of the Australian Consumer Law.

Are Unilateral Price Increase Clauses Enforceable?

So, are unilateral price increase clauses enforceable?  It depends.

The enforceability of a contract is to be determined in relation to the contract as a whole, taking into consideration the following:

1. Underlying policy behind the ASIC Act and the ACL; and
2. Is there a significant imbalance between the parties?
3. Is it reasonably necessary to protect legitimate interests of the builder?
4. Does the term cause a detriment to the owner?
5. The transparency of the term.

Following the Chrisco case, and the Advanced Medical case above, if the term in question does not clearly identify the amounts that will be charged; or the means by which those amounts would be determined; or the basis on which the price increase is to be calculated; or the method of calculation; then it may be found to be an unfair contract term.

Conversely, if the term is transparent; contains a part about the owner being able to terminate if they do not agree to the increase; is genuine (not simply a money grab); and conforms with the requirements mentioned above; then it may not be an unfair term.

For a determination as to whether the price increase clause is unfair, then it needs to be determined by reference to all of the above.  Seek legal advice.

Price increase clauses can be an unfair contract term in certain circumstances. If found to be unfair, they can be struck out, and be unenforceable.  Speak to our contract litigation lawyers today.

Price Increase Clauses FAQ

We get asked a number of questions in relation to price increase clauses in residential building contracts.  We have extracted a few of the most common.

What makes a contract term unfair?

A contract term will be unfair, if it is deemed to be unfair after assessment of the relevant considerations, such as:

1. Underlying policy behind the ASIC Act and the ACL; and
2. Is there a significant imbalance between the parties?
3. Is it reasonably necessary to protect legitimate interests of the builder?
4. Does the term cause a detriment to the owner?
5. The transparency of the term.

What is an unfair contract term Australia?

Some terms that may be considered unfair include:

1. Terms that enable one party (but not another) to avoid or limit their obligations under the contract; and/or
2. Terms that enable one party (but not another) to terminate the contract; and/or
3. Term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract (price increase clauses).

Can builder cancel contract because of price increase?

It depends on whether there is a genuine (not unfair) clause in the residential building contract which allows the builder to cancel the contract.  On the most part, no, a builder cannot cancel contract because of price increase.

Can a builder charge me for material price increase?

If it is a cost-plus contract, or there are prime cost or provisional sum allowances in your contract, then a builder can charge an owner for material price increase.  In a fixed price contract, with none of these, then there will need to be a genuine (not unfair) clause which allows the builder to charge an owner for material price increase.

Can builder increase price on a fixed price contract?

If you have a fixed price building contract, and no contractual allowances for a price increase, then no, a builder cannot increase the price of a fixed price contract.  We have an article which discusses this at length – https://stonegatelegal.com.au/price-increases-in-fixed-price-building-contracts-qld/

Price increase clauses can be an unfair contract term in certain circumstances. If found to be unfair, they can be struck out, and be unenforceable.  Speak to our building and construction lawyers today.