Price rises and the law

PRICe InCReASeS HAVe Been CITeD AS A MAJOR FACTOR In MAnY OF THe ReCenT COnSTRuCTIOn InDuSTRY COLLAPSeS. In ‘nORMAL TIMeS’ MATeRIAL PRICe RISeS HAVe Been LARGeLY PReDICTABLe SO BuILDeRS AnD COnTRACTORS WeRe HAPPY TO LOCK In A PRICe AnD GeT On WITH JOB. THe CuRRenT eCOnOMIC CLIMATe HAS Seen unPReCeDenTeD PRICe InCReASeS WHICH HAVe LeFT MAnY In THe InDuSTRY eXPOSeD.

Locking in a price is now something you have to think very carefully about. You will no doubt be asking yourself these questions:

½ will future price increases affect this job?; ½ will my profit margin be eroded (or worse still completely soaked up) by price increases?; ½ what can I do to protect my business?

It is legally possible to draft clauses for contracts that pass the risk of price rises on to the customer (often called “Rise and Fall” clauses), but these clauses can be tricky.

If you are doing domestic work for a home owner, there are some special rules about Rise and Fall clauses. You must make sure that you follow those rules if you want to have the benefit of a Rise and Fall clause in this setting. Provided you follow the rules, properly worded clauses will allow you to charge extra when your cost of materials goes up.

For commercial jobs, there are no fancy rules, but you still need to make sure that your Rise and Fall clause will bear up to legal scrutiny and be enforceable.

Putting to one side these legal issues, there are commercial aspects that you will have to think about before you decide to introduce a Rise and Fall clause. The person who is paying you for your work and materials is probably working to a budget. They may not like the uncertainty that a Rise and Fall clause introduces. Additionally, your customer may have borrowed the money (from a bank or similar) to pay you. Banks won’t just dish out more money if the price goes up! They want certainty too.

Many contractors are living with price increases and are trying to factor them into their costings without changing their contract wording. They are trying to manage the risk rather than transfer it to their customer. This can be risky, but for many it is preferable to having the rise and fall conversation with their customer.

Price volatility is going to be with us for some time and, for the sake of your business, you should be thinking about who is going to take on the risk and how you might perhaps share it with your customer.

Remember once you have locked in the job with a contract or a quote that has been accepted, it is too late to think about rise and fall.

To find out more about including a Rise and Fall clause in your contracts, contact your local neCA legal team –neCA ACT/QLD/nSW/TAS .... 1300 361 099

Lynch Meyer Lawyers mhutton@lynchmeyer.com.au

neCA SA/nT ................................... (08) 8272 2966 neCA VIC .......................................... 1300 632 247 neCA WA .......................................... (08) 6241 6129.

THe COMPETITION AND CONSUMER ACT 2010 OR AuSTRALIAn COnSuMeR LAW (ACL) WAS AMenDeD In LATe 2017, AnD “unFAIR COnTRACT TeRMS” COnTAIneD In A STAnDARD FORM SMALL BuSIneSS COnTRACT FOR GOODS AnD SeRVICeS BeCAMe LeGALLY unenFORCeABLe.

This restriction is specifically aimed at assisting small businesses. under the current ACL, a contract is a Standard Form Small Business Contract for goods and services if:

½ one party to the contract employs less than 20 people; and ½ the upfront contract price is less than $300,000 or $1M if the duration of the contract is for longer than 12 months.

To determine if a contract is a Standard Form contract, certain factors must be considered such as:

½ the bargaining power of the parties and whether the contract was prepared by one party before the negotiations; and ½ whether the contract was offered on a ‘take it or leave it’ basis or whether the small business was given effective opportunity to negotiate about the terms and changes thereto.

There is a presumption that a contract is a Standard Form contract unless it is proven otherwise. So, when is a term unfair? A term could be declared unfair if the inclusion of the term:

½ will cause a significant imbalance in rights and obligations (the onus is on the Applicant); ½ is not reasonably necessary to protect the party’s legitimate interests (the onus is on the Respondent); and ½ will cause a detriment to the small business party to the contract (the onus is on the Applicant).

Any relevant matter may be taken into account, but the extent to which the term is transparent, and the contract as a whole must be taken into account. Here are some examples of terms that have been declared unfair in recent cases:

½ the unilateral right to terminate, assign or renew the contract by one party; ½ the unilateral right to determine whether a breach occurred or to determine the meaning of a term by one party; ½ a limitation of one party’s liability or limiting the evidence that a party may produce to prove or disprove a claim; or ½ a term permitting one party to vary the price or characteristics of goods and services without the other party’s right to cancel the contract after that variation.

In a very recent case, the following were deemed unfair contract terms:

½ the customer charged all its rights in its property, allowing for registering of a caveat; ½ the customer indemnified the contractor against any costs incurred from the caveat; and ½ the customer appointed the contractor as its attorney.

[Lobux Pty Ltd v Willshaun Pty Ltd [2022] FCA 204]

Late last year the relevant Commonwealth, state and territory governments agreed to expand the existing unfair contract terms regime and an exposure draft of the legislative changes was released. Some of the key changes are: ½ an unfair contract term will no longer be simply void and unenforceable – it will be unlawful, and the Courts will be able to impose a remedy such as a civil penalty. This will significantly increase the risk for businesses; ½ for a company, the maximum amount of the penalty will be the greater of: ½ $10 million; ½ three times the value of the benefit the company obtained from the breach of the law (if the Court can determine the value of that benefit); or ½ if the Court cannot determine the value of that benefit, 10% of the company’s annual turnover. ½ for a person other than a company (e.g. a sole trader or partnership), the maximum penalty will be $500,000.

Further, each unfair contract term in the same contract will give rise to a separate breach of the law and could trigger a separate penalty; ½ more contracts will be covered by the proposed amendments to the ACL because a Small Business Contract under the amended regime is where one party to the contract has either: ½ fewer than 100 employees; or ½ annual turnover below $10 million.

½ the draft legislation provides that if a Court finds a contract term to be unfair, then in any subsequent Court proceeding a term that is the same, or substantially similar, in its effect will be presumed to be unfair (unless a party to the proceeding proves otherwise);

Our best guess is that the proposed changes will be legislated in the latter half of 2022. We recommend all businesses should have their contracts reviewed to ensure they are following the current requirements of the ACL as well as the proposed changes.

Disclaimer: This summary is a guide only and is not legal advice. For further information on legal obligations, contact your local neCA legal team - neCA ACT/QLD/nSW/TAS 1300 361 099, neCA SA/nT (08) 8272 2966, neCA VIC 1300 632 247, neCA WA (08) 6241 6100.

VeRY FeW COnTRACTInG PARTIeS SeT OuT TO BReACH THeIR AGReeMenTS; HOWeVeR, A VARIeTY OF PReSSuReS CAn unFORTunATeLY CAuSe SuCH BReACHeS TO OCCuR. IT IS THeReFORe ALWAYS IMPORTAnT THAT A PARTY LIMITS ITS LIABILITY In A COnSTRuCTIOn COnTRACT.

For example, if a contractor breaches its construction contract by providing defective works, will the contractor be responsible for repairing those works so they are functional/ non-defective? Or will the liability extend beyond that?

Contractors are often presented with contracts that could lead to extensive, even indeterminate, liability in the event that the contractor breaches the contract. We have seen scenarios in which a contractor can be liable for the full costs of repairing the direct consequences of the breach, as well as the other party’s loss of profits, loss of rent, even legal costs and expert fees.

Below are some specific ways that contractors can ensure they do not suffer the same fate:

ensure that your ultimate liability under the contract for any number of breaches is limited.

Consequential loss includes loss that is indirect, but is still ultimately caused by the breach. For example, a breach of a construction contract might require the works to be redone, which would address the other party’s direct loss. But while that work was carried out, the other party may not be able to rent out the premises. This loss of rent or a loss of a contract would be consequential loss. ensure that consequential loss is excluded or any liquidated damages sum specifically states that it has accounted for any and all potential consequential losses of the innocent party.

Contractors will no doubt be familiar with liquidated damages clauses, as these will almost certainly be included in any contract. ensure that these are reasonable and capped.

Senior Solicitor, NECA Legal

There will likely be an indemnity clause included, in which the contractor will indemnify the other party for damage to property and personal injury/death. It’s recommended that contractors have a policy to cover this.

Indemnities often sit outside caps to liability in the contract. It is therefore important to ensure that this indemnity does not also include indemnities for breach of contract because, if it does, the contractor could be liable for all the other party’s costs arising from a breach and lose the benefit of any liability cap.

Disclaimer: This summary is a guide only and is not legal advice. For more information, call the legal services offered by your NECA Branch.