Welcome to the fifth article in our ‘UCT 101’ series, designed to assist businesses in preparing for new reforms to the unfair contract terms regime under the Australian Consumer Law (ACL)1 introduced by the Treasury Laws Amendment (More Competition, Better Prices) Act 2022 (Act). The reforms to the UCT regime under the Act will take effect from 9 November 2023.
In our first three articles of the series (which can be found here), we discussed some of the preliminary foundational questions associated with the application of the unfair contract terms (UCT) regime, namely – what constitutes a ‘standard form contract’, a ‘small business contract’, and an ‘unfair contract term’ for the purposes of the UCT regime.
In our fourth most recent article, we turned to look at some of the ‘usual suspects’ when it comes to the UCT regime – that is, those terms that by their nature run a higher risk of being unfair. In this article, we consider our second ‘usual suspect’, the unilateral variation clause.
What is a unilateral variation clause (UVC)?
Put simply, a UVC allows one party (but not the other) to change the terms of a contract at its discretion. The UVC may require that party to notify the other party of the change, but equally, it may not.
Example 1: “the Supplier may amend this contract by written notice to the Purchaser at any time during the term of this agreement. The variation shall apply within 14 days after the date of the notice by the Supplier.”
Example 2: “The Purchaser agrees that the Supplier’s standard terms and conditions (as updated from time to time) form part of this Contract.”
When is a UVC likely to be used?
A UVC is often used in sale terms and conditions and supply contracts, usually to allow the supplier of goods or services to update their terms and conditions from time to time, as laws or business conditions change. Sometimes a UVC is obvious, such as the one used in Example 1 above. Other times, the UVC is more subtle, and has the potential to be overlooked, such as the one used in Example 2 above.
When is a UVC unfair?
As discussed in a previous article in the series, there are three main limbs to consider when determining whether a contract term is unfair under the ACL (UCT Test):
- Does the term cause a significant imbalance in the parties’ rights and obligations arising under the contract?
- Is the term reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term?
- Does the term cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on?
In applying the UCT Test, a court may take into account such matters as it thinks relevant, but must take into account the extent to which the term is transparent and the contract as a whole.2
The range of matters that must be taken into account when determining whether a contract term is unfair makes the UCT Test a balancing act. Applying each part of the UCT Test to the general concept of unilateral variation clause below, we can see how fact-dependant its application may be in practice:
|Limb 1: Does the term cause a significant imbalance in the parties’ rights and obligations arising under the contract?||A UVC is likely to create an imbalance in the rights and obligations of the parties where one party (but not the other) is entitled to vary the contract. The ACL specifically lists as an example of a UCT – “a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract”.|
|Limb 2: Is the term reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term?||Given the likelihood that a UVC will satisfy Limb 1, Limb 2 becomes very important for parties seeking to propose, apply or rely on a UVC. The question of whether a UVC is ‘reasonably necessary’ to protect a party’s ‘legitimate interests’ is a fact-dependent and often debatable question – for example, it might be reasonably necessary for a supplier to include a UVC in its contracts where it has a set of standard terms and conditions that apply to a high volume of customer contracts that may need to be updated from time to time to respond to changes in law or regulatory conditions. The legitimate interest being protected in this scenario might be that the supplier would otherwise be forced to incur significant administrative cost in seeking consent from (and potentially negotiating with) hundreds of customers in order to put through minor changes that are required to ensure it complies with the law. In contrast, it might not be reasonably necessary for a purchaser of goods to include a UVC in a one-off contract with a small business supplier or to include a UVC that is not sufficiently confined to address reasonable issues or changes.|
|Limb 3: Does the term cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on?||A party could certainly suffer detriment if the terms of a contract to which it was a party were changed, for example, an update in price calculation or price review provisions that favours the party making the changes.|
|Additional considerations: Transparency, the contract as a whole, and any other matters a court thinks relevant.||It is important to remember that a court may take into account the extent to which the contract is transparent, the contract as a whole, and any other matters it sees fit, such as the size and bargaining power of the contracting parties, any pre-contractual conduct and the general nature and practical realities of the arrangement. For example, a UVC may be considered more transparent where it is limited to certain events, rather than open-ended, for example, a clause included by the supplier allowing it to update the contract where it is required to do so in response to changes in the law or an internal policy.|
How has the UCT Test been applied to unilateral variation clauses in practice?
There have been a significant number of court cases and regulatory actions over the past decade that illustrate the way in which courts and the ACCC will apply the UCT Test as it relates to unilateral variation clauses. These relevant actions include:
- A recent Federal Court case in which the Federal Court found that a UVC clause used by a bank in its standard form contracts with small business borrowers was unfair. The reasons given for this decision included the fact that (a) the bank was able to reduce the funds on loan at either 14 days’ or 30 days’ notice, which may not give the borrower sufficient time to refinance, (b) the bank was entitled in certain circumstances to terminate the contract if the borrower did not accept the updated term, or alternatively the borrower would need to a break fee if it elected to terminate, and (c) there was no corresponding right for the borrower in these circumstances, ie nothing to mitigate the impact of the UVC.
- ACCC v Servcorp Ltd  FCA 1044, in which the Federal Court found that a UVC clause used by Servcorp was unfair in circumstances where: (a) the clause allowed Servcorp to vary the service charges payable under its customer contracts; (b) the contracts did not require Servcorp to act fairly or reasonably in exercising its rights under the UVC or to consult in any way with the customer; and (c) the contracts were silent as to whether Servcorp was required to give the customer notice of such variations. Even though the customer was permitted to terminate the contract by giving one month’s notice, this corresponding right was apparently not enough to prevent the UVC from being unfair.
- ACCC v JJ Richards & Sons Pty Ltd  FCA 1224, in which the Federal Court determined that a number of clauses in JJ Richard’s standard form small business contracts were unfair, including a UVC which allowed JJ Richards to unilaterally increase its prices. The Federal Court said that this clause created a significant imbalance in the rights of the parties as there was no corresponding benefit to customers to terminate the contract or to obtain a change in the scope or scale of the services or a lower price.3 The Federal Court also noted that while JJ Richard’s costs may increase for reasons beyond its control, the price variation clause went beyond what was reasonably necessary to protect its legitimate interests, using as an example the idea that the clause would allow JJ Richards to increase its prices simply because it wished to increase its revenue or profitability, which in the view of the court, were not legitimate interests in this context.4
- ACCC v Mitolo Group Pty Ltd  FCA 1257, in which the Federal Court determined that a number of clauses used by Mitolo (a potato wholesaler) in its standard form contracts with its suppliers (potato growers) were unfair, including a price UVC allowing Mitolo to unilaterally vary the price it paid to grower for any reason, and a general UVC allowing Mitolo to unilaterally vary its standard terms and conditions. The court took issue with these clauses considering that there were no corresponding rights afforded to the growers, particularly any right to terminate the contract or to obtain a change in the scope or scale of supply of potatoes to the wholesaler or to enable the grower to sell the potatoes to any other potential purchaser.
- An ACCC investigation into standard contract terms used by various processors in the chicken meat industry, which revealed potentially unfair contract terms allowing processors to vary growers’ supply arrangements or to impose additional costs on growers. The ACCC announced that in response to its investigation, several processors had agreed to amend certain terms in their contracts to address the ACCC’s concerns.5
So, how do I make my unilateral variation clause fair?
Ultimately, this will depend on the clause itself, the application of the UCT Test and the circumstances surrounding the particular transaction. What is unfair in one case may be fair in another, and often the analysis will require businesses to undertake an internal risk assessment, considering the potential UCT risks of including a clause versus the commercial risks of not including it. In saying that, these are our ‘best practice’ tips when it comes to including unilateral variation clauses in contracts that may be subject to the UCT regime.
- According to the ACCC,6 a “broad unfettered” UVC is more likely to be considered unfair than a UVC that “only goes as far as is necessary to allow the business to achieve its legitimate business interest”7. If businesses, after considering their UCT exposure, decide to proceed with using a UVC, risk may be mitigated by making the UVC as specific and limited as possible.
- The ACCC acknowledges that it may be reasonably necessary for a supplier to include a UVC to allow it to vary charges to reflect price increases on goods or services that must be accessed from third party providers (such as disposal costs, fuel costs, international roaming fees, or any increased costs associated with a change in the law), in order to reflect price increases from those third party providers. However, following from the above point, terms that allow the provider to vary prices for any reason (rather than, for example, to pass on increased costs) are likely to be unfair.
- As highlighted in this article, case law suggests that contracts containing UVCs which: (a) do not include a requirement for the varying party to notify the counterparty of the variation; and /or (b) do not allow a counterparty to exit the arrangement once variations have been made (or worse yet, impose a break fee or cancellation fee if the counterparty choses to exit to avoid a variation), are likely to fall foul of the UCT regime.
- A UVC that allows a counterparty to terminate a contract can still be unfair if the counterparty is out-of-pocket after terminating the contract. The ACCC has previously shared an example of this principle in the context of the telecommunications industry. In the example, the provider of the telecommunication services agreed to waive its right to be paid a termination fee from its customer because the customer had terminated the contract in response to the exercise of the UVC by the provider. However, the provider refused to refund other significant charges that the customer had paid to acquire the services when the customer entered into the contract, such as upfront installation fees and equipment costs (which in some cases exceeded the waived termination fee). The ACCC noted that in this case, the customer may be left out of pocket with no use for the equipment they are left with once they switch to another provider. This example illustrates the importance of considering the fairness of a UVC (and any other potential UCT) in the broader context of the transaction and the relevant industry in which the transaction occurs.8
In our next instalment of ‘UCT 101’, we will be back with another ‘usual suspect’ – unbalanced liability and indemnity clauses – once again providing some background and guidance on their application.
How can we help?
We have a dedicated contracting and consumer law team that can assist you with contract preparation and review and can provide you with advice on your rights and obligations under the ACL, particularly in light of recent reforms. We also routinely present to businesses on the Australian Consumer Law and the unfair contract terms regime. Please contact us if you would like more information about the services we provide.
This article was written by Teresa Torcasio, Partner and Zoe Vise, Associate.
1Competition and Consumer Act 2001 (Cth), Schedule 2 (‘Australian Consumer Law’ or ‘ACL’).
3ACCC v JJ Richards & Sons Pty Ltd  FCA 1224 at .
4Ibid at .
6Australian Competition and Consumer Commission, ‘Unfair terms in small business contracts – a review of selected industries’ (November 2016) (ACCC Review).
7ACCC Review, pp 10 and 21.
8ACCC Review, pp 10.