Unilateral variation clauses should be carefully considered before being used, as they are at risk of being declared unfair.
2021 is a significant year for the laws concerning unfair contract terms (UCTs). This is due to the expansion of the laws to cover various contracts of insurance plus a proposal to introduce penalties for using unfair terms. We're bringing you a series of articles on the UCT laws. Our first instalment was a general refresher; the second instalment addressed automatic renewal clauses; the third instalment addressed clauses that are commonly relied on in disputes; and the fourth instalment addressed indemnities and limitation of liability clauses. This fifth and final instalment will address clauses that are commonly in the cross-hairs of the UCT laws: unilateral variation clauses.
Before going any further, it's worth recapping some of the main points from our first instalment which was a general refresher on the UCT laws. First and foremost, the UCT laws do not apply to all contracts. The primary limit on the UCT laws' scope is that they only apply to standard form contracts which are either a "consumer contract" or "small business contract".
Second, a term will only be unfair if (i) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; (ii) it is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and (iii) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on. All three elements must be fulfilled for a term to be unfair. The onus is on the plaintiff to prove elements (i) and (iii) but the onus is on the defendant to disprove element (ii). This is significant because the validity of a unilateral variation clause may turn on whether the defendant can prove it was reasonably necessary to protect one of its legitimate interests.
Third, when determining whether a term is unfair, a court must also consider whether the term is "transparent". A term is transparent if it is expressed in reasonably plain language, legible, presented clearly and readily available.
Fourth, the UCT laws contain a list of terms which may (not must) be unfair. This list is colloquially called the "grey list", and includes unilateral variation clauses. Specifically, it includes a term that permits, or has the effect of:
- permitting one party (but not another party) to vary the terms of the contract;
- permitting one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; and
- permitting one party to unilaterally vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract.
The fact the grey list contains several examples of unilateral variation clauses indicates that such clauses are in the gaze of the UCT laws. It is worth noting that of the three examples of unilateral variation clauses in the grey list, only the one concerning price variations is qualified by the customer not being given the right to terminate the contract. This may suggest that a unilateral variation clause addressing price is more likely to be acceptable if it gives the customer an opportunity to terminate, while unilateral variation clauses addressing the terms of a contract and the characteristics of goods and services are less likely to be acceptable even if the customer is given the opportunity to terminate.
Fifth, the UCT laws do not apply to a terms that are "required, or expressly permitted, by a law of the Commonwealth, a State or a Territory". This may be relevant to particular unilateral variation clauses; for example, Part 4, Division 1 of the National Credit Code (which is schedule 1 to the National Consumer Credit Protection Act 2009 (Cth)) allows credit providers to make unilateral changes to credit contracts, mortgages and guarantees in specified circumstances.
ACCC guidance on unilateral variation clauses
The ACCC's guidance on unilateral variation clauses, Unfair terms in small business contracts: A review of selected industries,has noted that unilateral variation clauses are at risk of being declared unfair if they allow the supplier to vary the product, service or price without giving the consumer/small business adequate notice of the change and an opportunity to terminate the contract (to avoid the variation) without any penalty for early termination. Even allowing termination without penalty may still be unfair, it says, if the consumer has incurred significant upfront costs which will be lost if the contract is terminated early. It has suggested that suppliers should consider giving customers pro-rata refunds on such costs in the event they cancel the contract in response to a unilateral variation that causes them detriment.
The ACCC has also noted that advance notice of a unilateral change may not necessarily save a term from being unfair.
More generally, the ACCC has said that "unilateral variation clauses may be considered more acceptable if the variation power is clearly expressed, only goes as far as is necessary to allow the business to achieve its legitimate business interest, and provide a balancing right such as an ability for the customer to exit the contract without penalty where the change could be materially detrimental."
The courts' views on unilateral variation clauses
ASIC v Bendigo and Adelaide Bank Limited  FCA 716 is a recent decision that supports several of the points made by the ACCC in its guidance.
The Bank provided finance facilities to small businesses. The impugned clauses permitted the lender "to vary the upfront price of the contract, the financial services to be supplied under the contract and other terms of the contract". By agreement of the parties, the Court found that these clauses were unfair. In reaching this conclusion, the Court noted the following.
- The terms allowed the lender to vary the financial services to permit it to reduce the amount of funds that the borrower would otherwise be able to utilise. The lender was required to give notice of this to the borrower (14 days' notice in some cases and 30 days in others) but that notice period may not have been enough to give the borrower an opportunity to refinance.
- Some of the terms permitted the lender to terminate the contract if the borrower did not accept the new terms.
- The borrower had no corresponding right to unilaterally vary the contract.
- The borrower may have been exposed to break costs if they terminated the contract in response to a unilateral change that they found unacceptable.
- The clauses fell within several items in the grey list.
- The clauses were not transparent because they had titles that did not indicate that unilateral rights were bestowed on the lender, such as "Changes", "Use of facility" and "Change of terms".
The Court ordered that one of the clauses permitting the lender to unilaterally vary the terms of the contract be amended so that unilateral amendments were only allowed if the following requirements were met:
- the lender must be "[a]cting reasonably and to the extent reasonably necessary to protect… [its] legitimate business interests";
- the lender must give the borrower notice of each amendment with the particular notice period depending on the subject matter of the unilateral change and whether that change was adverse to the borrower;
- the lender must observe any minimum notice period specified by law; and
- if the borrower chooses to exit the contract due to a unilateral change, the lender must not charge them certain discharge fees.
Other cases where unilateral variation clauses have been declared unfair are ACCC v Mitolo Group Pty Ltd  FCA 1257, ACCC v Servcorp Limited  FCA 1044, ACCC v JJ Richards & Sons Pty Ltd  FCA 1224 and ACCC v Bytecard Pty Ltd (Federal Court of Australia, VID301/2013). All were resolved by agreement of the parties.
Making sure your unilateral variation clauses withstand ACCC scrutiny
Contracts are intended to give certainty to parties. This is eroded if one party is allowed to unilaterally change the contract. Unilateral variation clauses also give one party the opportunity to force an agreement upon the other party. To lessen the risk of a unilateral variation clause being declared unfair under the UCT laws, a business should:
- limit the clause to situations where a unilateral variation is reasonably necessary to protect its legitimate interests;
- have evidence of why the clause is reasonably necessary to protect this legitimate interest since the business will bear the onus of proving this;
- include a clause that requires the counterparty to be given notice of the proposed change and an opportunity to terminate the contract without penalty if it considers the variation unacceptable; and
- ensure the clause is clearly brought to the other party's attention in plain and simple terms.