Court orders variation of unfair contract terms – lessons when using unilateral variation clauses

A recent Federal Court decision could serve as a guide when incorporating unilateral variation clauses into standard-form contracts with small business and consumers. ASIC successfully obtained orders declaring void and varying "unfair terms" in a small business loan contracts used by the "Delphi Bank" and "Rural Bank" business units of the Bendigo and Adelaide Bank (Delphi and Rural)

Unilateral variation rights

Clauses providing one party with the right to unilaterally vary the terms of their contract are common in standard form contracts with small business and consumers. This decision discusses features that render such a clause "unfair" (and so, voidable), and also provides guidance as to when a unilateral variation clause may not necessarily be "unfair".

Unfair unilateral variation rights

In this instance, Justice Gleeson found that the unilateral variation clauses (amongst others) in these contracts were "unfair", as they:

• created a significant imbalance in the parties' rights and obligations because they:
• did not give the other party sufficient notice, having regard to the nature of the terms being varied;
• permitted termination by Delphi and Rural if the variation was not accepted by the customer; and
• did not provide the other party with a corresponding right;
• would have caused detriment if relied upon, as the customer would have incurred higher fees and charges if it accepted the change;
• were not countered by other provisions of the loan contracts which mitigated the unfairness of the unilateral variation terms; and
• the unilateral variation clauses were not, in the case of the Rural loan document, sufficiently transparent, as they were located, in some instances, in a section of the loan document titled "Use of facility".

"Fair" unilateral variation rights

Usefully, Justice Gleeson's orders included variations to each of the unfair terms, including the unilateral variation clauses. Notable features of the replacement unilateral variation clauses include:

• limitations that unilateral variation rights may only be exercised "reasonably" and "to the extent reasonably necessary to protect [Rural's] legitimate business interests";
• minimum notice periods, of variable length having regard to the nature of the change and whether the change is likely to have an adverse impact on the other party (i.e. a shorter notice period is permissible where a change does not have an adverse impact on the other party's rights); and
• provision for the customer to terminate the contract in the event of an exercise of the unilateral variation right, without being charged "discharge fees".

Application beyond financial products

Notwithstanding that this decision was made under the Australian Securities and Investments Commission Act 2001 (ASIC Act), which governs standard form small business contracts relating to financial products (including credit) and , the regime applied is the same as in Chapter 2, Australian Consumer Law, Schedule 2 to the Competition and Consumer Act 2010 (ACL) '€“ which, generally speaking, applies to the supply of goods and .'  That is to say, if a business' activities are regulated by the ACL, Justice Gleeson's findings would apply equally outside of the financial products context. If your standard form contracts contain unilateral variation clauses, to reduce the likelihood of those clauses being voidable (and so, unenforceable) consider revisiting and amending'  these provisions so that they more closely align with those clauses forming part of Justice Gleeson's orders. We'd be happy to review your standard form contracts to assess whether amendments may be advisable. Contact us for more information.