Too little too late – When will price increase notices and requests for extension of time be valid under a “fixed price” or “lump sum” building contract - PART ONE

Too little too late – When will price increase notices and requests for extension of time be valid under a “fixed price” or “lump sum” building contract – the State Administrative Tribunal provides clarification in the case of Vadakkumkaraputhaveedu v Kulowall Construction Pty Ltd [2023] WASAT 29 (Kulowall).

PART ONE

Key Takeaways:

1. The right to issue a price increase notice under the applicable provisions of the contract do not permit a builder to levy price increases over the entire life of the contract and the works.
2. A builder can only justifiably issue a price increase notice in respect of an increase in the cost of labour and materials which arise between the date the works were supposed to start under the contract and the   date that the works are actually able to commence.
3. If the builder commences the works without levying the price increase notice, the builder may be precluded from doing so at a later date.  
4. COVID-19 will not, by itself, generally be a basis to levy a price increase notice where the parties are both aware of the COVID-19 Pandemic.

The surge in building and construction activity particularly in the residential sector has been the subject of much media coverage in recent months, however, what has been the subject of less coverage is the spike in attempts by builders to increase the price of their “fixed price” or “lump sum” building contracts with owners of all varieties (price increase notices).

These matters are generally referred to the Building & Energy Division of the Department of Mines, Industry Regulation and Safety (Building & Energy) and resolved at an early stage. Few are referred to the State Administrative Tribunal (Tribunal) and even fewer finally see the light of a final hearing in the Tribunal and a reported decision. This can sometimes create difficulty for owners and builders to enable both parties to “know where they stand” when they receive a price increase notice or a notice claiming an extension of time (EOT notices).

Fortunately, however, the Tribunal has had opportunity and cause to clarify several important matters surrounding implementation of price increase notices under lump sum building contracts in Western Australia in the case of Vadakkumkaraputhaveedu v Kulowall Construction Pty (Kulowall).

Before looking at the above issues, lets first understand the facts of the case which the Tribunal was considering:

The builder, Kulowall Construction Pty Ltd (K Construction) and the owners, Mr and Mrs Vadakkumkaraputhaveedu (the Owners) entered into a lump sum building contract on 18 November 2020 (contract):

1. providing K Construction with 320 working days to complete the contracted works.
2. requiring the Owners to obtain finance within 45-working days of the date of entry into the contract.
3. entitling K Construction to issue a price increase notice in the event that the works were not able to commence within 45-working days.

The Owners were required to obtain finance by 22 January 2021, but, were only able to obtain finance on 9 April 2021 (51-working days late).

Despite the delay in obtaining finance, K Construction proceeded to obtain a building permit, commence the works lay the slab and complete the foundations of the works.

K Construction proceeded to issue a price increase notice to the Owners, purporting to increase the cost of the works from $368,850.00 by $110,959.96. K Construction and the Owner fell into dispute and came before the Tribunal for resolution.

Price Increase Notice

K Construction and the Owners agreed that finance was obtained late by the Owners and were aware of the rights conferred by the contract to terminate it in those circumstances. Despite that, the Parties decided to “press on” with the Works.

Ultimately, the Tribunal did not uphold K Construction’s price increase notice for the following reasons:

1. K Construction did not attempt to levy the price increase notice once the Owners did succeed in obtaining finance;
2. K Construction, notwithstanding the fact that the Owners were late in obtaining finance, proceeded with the Works for the agreed-upon price unaffected by the price increase notice.

Most importantly, the Tribunal found that the proper interpretation of Clauses 6(b) and 22 which related to price increase notices could only allow K Construction to pass on costs during the period of the delay to secure funding before the Works commence.

The Tribunal held further that Clause 22 of the contract could not be used as a means to pass one all increases in the cost of labour and materials over the entire life of the contract and the works.

Although it was not pressed, the Tribunal then considered whether there was a potential basis to issue the price increase notice under Clause 12 of the contract on the basis that the price increase notice was issued as a result “unforeseen circumstances”.

In short, the Tribunal did not consider that Clause 12 would permit K Construction to levy the price increase notice. The evidence which motivated that finding was the fact that the time when the parties entered into the contract they were expressly aware of the COVID-19 Pandemic, and had some discussion as to how the contract price and time to complete the works would be negotiated in the circumstances.

Conclusions:

The decision of Kulowall presents some important lessons for builders and owners alike.

If you are a builder and there is an inability to commence the works for a period of time for a reason like, the owner/s is/are not able to obtain finance, to ensure that before the works do commenced, you have (a) evaluated the cost of labour and materials to complete the works by obtaining up to date quotations from your suppliers; (b) assessed whether the cost of labour and materials has increased between the date that you should have been able to commence the works and actually are able to commence the works; and (c) levy your price increase before commencing those works, limited only to claim an increase in price to the extent that price of labour and materials has increased over the period of the delay.

If you are an owner who has received a price increase notice, it is imperative that you review the price increase notice to ensure that (a) the builder is entitled to levy the price increase because of a delay in the commencement of the works which actually is not the fault of the builder; (b) the builder has issued it at the correct time and not potentially forfeited the right to levy the price increase notice because it has commenced the works; (c) the builder has not attempted to “overclaim” on the price increase notice by claiming a price increase for the cost of labour and materials outside the period of delay; and (d) where you consider that the price increase notice is not validly issued, take immediate steps to obtain advice and, if appropriate, challenge the price increase notice under the contract.

At Vogt Legal, we have extensive experience acting for both owners and builders defending or prosecuting EOT and price increase notices.

For a confidential and detailed discussion as to how you may be affected by Kulowall, do not hesitate to reach out and contact Will Vogt.