Take a good hard look, are your contract terms uncertain?
Updated: Oct 20
Latest update 28/05/2024 | Last update 27/03/2024 | First published 21/09/2023 on TradeBox's website, 18/08/2023 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.
Making sense
Have you ever found yourself reading a clause over and over again, trying to make sense of it?
I know I have.
You see, it’s not personal. It’s in their nature make us feel like we are going crazy trying to extract some crumbs of meaning.
Even lawyers with 20 years’ experience (like me) can be baffled by what a clause is trying to say. Because some clauses just do not make sense.
A couple of years ago, I gave a client four different interpretations of one clause. That clause was incredibly poorly written. In fact, the barrister on the same matter advised that it would take at least one day in court just to argue the meaning of that same one clause.
So, poorly drafted clauses cause confusion and uncertainty, which in turn causes more legal cost when things go wrong.
However, sometimes a clause can be void for uncertainty.
The Bold Properties case
As you may remember, we have been going through the recent District Court decision in Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99 ('Perera v Bold').
In that case, the homeowners argued that the special condition 7 was uncertain. Special condition 7 stated:
“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.”
The homeowners argued that special condition 7 should be void because:
It gave Bold the right to charge more than the fixed price;
It did not state what any increase might be nor how it would be calculated; and
Any increase to the fixed price was solely within Bold’s power and discretion.
The court held that:
Special condition 7 allowed Bold to fix whatever price it determined as its “current base price” for the house type. Further, it did not need to relate to Bold’s expected profit margin from that price.
The price of the contract was fundamental to the contract, particularly as it was stated to be a fixed price contract.
As the right to change the contract price was at Bold’s “sole discretion”, this further added uncertainty to the clause, as it allowed Bold to determine arbitrarily whether or not to use the clause.
Special condition 7 allowed Bold to increase the price based on unstated objective criteria, effectively enabling Bold to change an essential term, the price, without any reference to any such objective criteria.
So what does this mean for you?
I need to be very clear that although the clause in the Perera v Bold case was uncertain and blatantly unfair, it wasn’t actually too dissimilar to a lot of clauses seen in trade terms and subcontracts all the time.
In fact, the expression “at the head contractor’s sole discretion” is a builder favourite in subcontracts.
Our building and construction industry has been built on a foundation of unfairness, one-sided [terms] and uncertain terms, which means that it is much harder for most members of our industry to pick when a term might be uncertain or unfair.
In addition, based on the tests used in Perera v Bold nearly all businesses with trade terms are likely to have unfair and uncertain terms, whether they were drafted by lawyers or by the tradies themselves.
Why uncertain and unfair terms exist
Why? In truth there are so many reasons why uncertain terms and unfair terms exist, so here are a few reasons:
Firstly, [it's] important to understand that one party's "unfair term", is usually a term that protects the other party's interests;
When lawyers draft terms for clients, we are duty bound to draft the terms in the best interests of our clients. What is in the best interests of our clients may often result in unfair and/or uncertain terms;
Clients often request and want the most protective terms possible in their contracts. They want the ability to arbitrarily change parts of the contract at their own whim. This creates uncertain and unfair terms;
When drafting a clause, lawyers are trying to anticipate all of things that could happen. Sometimes the result is a term that is so broad that it becomes uncertain;
It is really easy to draft an uncertain and unfair term, it is far more challenging to draft very clear fair terms; and
Until recently there has been no incentive to draft terms that were fair unless the client requested the fair term. The court's ability to make a term void just has not been enough to encourage parties to want to have fair terms.
On 9 November 2023[A1] Australian Consumer Law changes and with it comes the financial incentives to having transparent and fair terms in standard form contracts, including the ability of the other party to seek their damages and losses caused by the unfair term and the ACCC to claim pecuniary penalties (civil fines).
Have a look at your trade terms
So, it’s time to take a good hard look at your trade terms:
Do your terms allow you to determine anything at your sole discretion?
Are you able to change an essential term in the contract, such as increase the contract price?
If you are able to change an essential term, is the change based on an objective test or can you just decide what the change will be?
End notes
[A1] In the earlier version of this guidance article published 18 August 2023, the date for when Australian Consumer Law changes come into force was incorrectly stated as 10 November 2023, when in fact it is actually coming into force on 9 November 2023.
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 for TradeBox to share with its customers, prospective customers, alliance partners and other parties. Individual liability limited by a scheme approved under professional standards legislation.
