This post is the third in a series where we unpack the new unfair contract term (UCT) regime in the Australian Consumer Law (ACL). Keep an eye out over the next few weeks for upcoming deep dives into certain types of clauses in standard form consumer and small business contracts that may be caught by the UCT regime.
In our post on 15 March 2023, we explained what standard form contracts are, and in our post on 18 April 2023 we outlined the key unfair contract terms as outlined in section 25 of the Australian Consumer Law. Building on from these recent posts, this post explores unilateral variation clauses under the UCT regime.
On 9 November 2023 reforms to the UCT regime take effect and it will be prohibited to apply or rely (or purport to apply or rely) on an unfair term in a standard form consumer or small business contract. It is important for businesses to consider their contracts, noting that the scope of contracts caught by these provisions will also broaden in November. Unilateral variation clauses are one type of clause the businesses need to be looking out for when reviewing their contracts to prepare for the new UCT regime.
Understanding unilateral variation clauses
Clauses that provide one party with the right to vary the terms of a contract at their own discretion – referred to as a unilateral variation clause – can be common in standard form contracts with consumers and small businesses. A unilateral variation clause can come in all shapes and sizes. Such a clause can be explicit – for example, by providing that one of the parties can amend the contract by written notice at any time – or it might arise in a less obvious manner such as by providing that the parties agree to abide by a particular policy that forms part of the contract and which can be amended from time to time by only one party.
Unilateral price variation clauses
An unfair unilateral variation clause might appear in the form of a price variation clause which permits one party to unilaterally alter the price provided for under the contract without any corresponding rights given to the other contracting party. The result of this clause is that one party is forced to accept a new price under a contract without any negotiation taking place.
Whilst a supplier’s costs may increase due to reasons beyond their control which might appear to necessitate a change in contract price, it’s likely unfair if a clause unilaterally increases a contract price with no corresponding benefit to the counterparty or ability for them to terminate the contract for convenience. This is because such as clause is likely to extend beyond what is reasonably necessary to protect the business’ legitimate interests.
The meaning of ‘legitimate business interests’ was explored in the decision ACCC v Employsure Pty Ltd [2020] FCA 1409. In this case, a unilateral price increase upon automatic renewal was found to be reasonably necessary to protect Employsure’s legitimate interests in seeking to guard against or allow for inflation. The Court accepted that it would be administratively difficult, time-consuming and expensive for Employsure to meet with and renegotiate every client’s contract as the termination date approached and the alternative of including in the standard renewal email the terms of a proposed price increase for each customer would have significant resource implications for staff and resources. However, it was relevant to the Court’s finding that this particular clause was not unfair that, amongst other things, Employsure had to provide one months’ written notice of the automatic renewal, and the customer could terminate the contract by cancelling the renewal. Accordingly, in the circumstances of this particular case, the Court found that the price increase clause did not create a unilateral right for Employsure to increase or otherwise vary contract fees.
On the other hand, in ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224, a waste management company used standard form contracts which contained a clause which allowed it to unilaterally increase its price without providing a corresponding benefit to customers that allowed them to change the scope or scale of the services or terminate the contract. This was found to be unfair.
Other cases involving unilateral variation clauses
Some other examples of decisions where courts found that a unilateral variation clause was unfair include:
- ACCC v Fujifilm Business Innovation Australia [2022] FCA 928 – Fujifilm’s standard form contracts allowed it to unfairly unilaterally vary both the price charged to its customers and the rights and obligations between Fujifilm and its customers. Our post exploring the Fujifilm decision in detail can be read here.
- ASIC v Bank of Queensland Limited [2021] FCA 957 – BoQ had standard form loan contracts for small business borrowers and unilateral variation clauses which unfairly allowed BoQ to vary the terms and conditions of their contracts without giving borrowers advance notice or an opportunity to exit the contract without penalty.
- ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716 – Bendigo Bank had standard form contracts in its lending contracts with small business borrowers and the unilateral variation clause unfairly entitled the bank to vary the terms of the contract or terminate the contract without the borrower’s consent.
- ACCC v Mitolo Group Pty Ltd [2019] FCA 1257 – a potato wholesaler used standard form contracts with its suppliers of potatoes which contained clauses which unfairly allowed the wholesaler to unilaterally vary its standard terms and conditions, and vary the price it paid to its suppliers as there was no corresponding rights for the suppliers.
How to make unilateral variation clauses more ‘fair’
In a report into unfair terms in small business contracts (which can be accessed here), the ACCC noted that unilateral variation clauses run the risk of being ruled unfair if they permit the supplier to change the good, service, or price without providing the customer or small business with sufficient notice of the change and the opportunity to terminate the contract, so as to avoid the variation, without incurring any penalties for doing so early. Yet, the ACCC has emphasised that giving prior notice of a unilateral variation will not necessarily protect the term from being unfair. The ACCC suggests that in the case that counterparties terminate the contract in response to a unilateral variation, suppliers should consider providing pro-rata reimbursements on charges incurred (not only limited to waiving termination fees, but also refunding any upfront, or installation or equipment costs).
In the decision of ASIC v Bendigo and Adelaide Bank Limited [2020] FCA 716, Gleeson J’s orders included variations to the terms that had been deemed unfair. The replacement unilateral variation clauses:
- Provided for a minimum notice period in exercising a unilateral variation clause, the length of which will depend upon the nature of the change taking place and whether the change is likely to have an adverse impact on the other party;
- Provided that the unilateral variation rights may only be exercised ‘reasonably’ and to the ‘extent reasonably necessary to protect legitimate business interests’.
- Provided customers with the ability to terminate the contract if and when there is an exercise of a unilateral variation right, without being charged discharge fees/break costs.
Key takeaways
It is important to remember that what is fair in one scenario, may be unfair in a different one. Businesses should be mindful that, because they are so high risk, the inclusion of any unilateral variation clauses must only go so far as reasonably necessary to protect legitimate interests which should be clearly set out in the contract. It would also be prudent to balance the ‘fairness’ with minimum notice periods, countervailing termination rights, rights to pro-rata reimbursement, and a requirement that the variation be exercised reasonably. UCT cases turn on their facts, so we recommend seeking legal advice to avoid the high penalties which will apply to UCTs from November 2023 (see our Alert here).
Stay tuned for our next post where we will examine unilateral termination clauses and recent cases where these have been found to be unfair.
Image credit: Potato1.jpg by safaritravelplus / Wikimedia Commons / CC1.0 / Remixed to B&W and resized
