knowledge 21 October 2026 |

Clear words required: Supreme Court rules on validity of unilateral variation of contract clause

• A unilateral variation clause affecting a fundamental contractual term must be interpreted strictly.
• Clear language is required before a court will infer the existence of a unilateral power to alter a fundamental contractual term.
• Where the clause is sufficiently clear, the court will give effect to it but the resulting discretionary powers must be construed in a manner similar to those arising under administrative law (eg the discretion cannot be exercised in an arbitrary or manifestly unreasonable way).

What happened?

In Harte & Ors v The Governor and Company of the Bank of Ireland, the plaintiffs obtained two commercial property development facilities from Bank of Ireland (the “Bank”) in 2009. At the core of the plaintiffs’ case is the contention that the Bank wrongly changed the method of calculating interest from one based on “EURIBOR” (a third-party published interbank market rate) to the Bank’s own “Bank Cost of Funds” rate, which was developed and set by the Bank.  This change was notified to the plaintiffs in October 2011.  As this was not a consumer contract, protections against unfair terms in consumer contracts (deriving from the EU Unfair Contract Terms Directive) did not apply.

The plaintiffs claimed that the change was not permitted by the loan documentation and resulted in approximately €738,440 of additional interest. Although the loans were repaid, the plaintiffs reserved their position on this issue and sought recovery of that amount. The Supreme Court noted that it was estimated that this issue affected some 8,000 customers of the Bank. 

The clause in dispute

Clause 5 of the Bank’s standard terms and conditions provided:

“The method for calculating interest and the interest rate may be changed in respect of all facilities from time to time at the Bank’s absolute discretion, whether to take account of a change in prevailing market conventions in Ireland or otherwise…the Bank will give…the Borrower one month’s prior notice…”

The dispute therefore turned on the scope of an express power to change not only the rate, but also the method of calculation, and whether the words “whether to take account of a change in prevailing market conventions in Ireland or otherwise” limited the Bank’s discretion.

How should unilateral variation clauses be interpreted?

The Supreme Court recognised that the clause appeared to confer a sweeping power to unilaterally negate and override key provisions of the contractual agreement. It rejected, however, both an approach that would treat such clauses as automatically invalid and one that would give unrestricted effect to their widest possible wording.  Instead, the Supreme Court identified the following principles as applying to the interpretation of such a clause in a non-consumer contract:

• Strict construction: where a standard-form contract gives a dominant contracting party a unilateral power to change a fundamental feature of the contractual agreement, the clause must be construed with some strictness.
• Clear words: a court should be slow to infer such a power unless it is clearly provided for in the contract.
• Restrictions:  even where the contract provides for an “absolute” discretion, this will be subject to limitations and the courts can intervene if the discretion is exercised in an arbitrary or manifestly unreasonable way.

Why did the Bank succeed?

The Supreme Court held that Clause 5 was sufficiently clear. A power to change the “method for calculating interest” was broad enough to permit replacement of the constituent elements of that method, including the replacement of a market-based EURIBOR reference rate with the Bank’s own cost-of-funds rate.

The reference in Clause 5 to “a change in prevailing market conventions” did not confine the discretion. The words “whether” and “or otherwise” made that reference illustrative rather than restrictive. The exercise of the Bank’s “absolute discretion” was therefore not limited to circumstances in which an established market convention had changed.

The Supreme Court also observed that it was not suggested that the Bank had acted in an arbitrary or manifestly unreasonable way.  It was common case that, in the aftermath of the 2008 financial crash, the Bank had effectively been locked out of the EURIBOR market.

Finally, the Supreme Court noted that the principle that ambiguity may be construed against the drafter did not alter the outcome in this case. That principle applies only where the language of the clause is genuinely capable of two reasonable interpretations. The Court considered that the borrowers’ proposed reading of Clause 5 (which restricted the Bank’s discretion by reference to changes in market conventions) was not reasonably available on the wording used in the clause. The Supreme Court therefore upheld the conclusions of the High Court and Court of Appeal and dismissed the appeal.

Broader implications

Although the judgment was given in a finance context, it is relevant to any commercial contract containing a provision that allows one party to vary key terms unilaterally, including the basis on which price is calculated. It underscores the importance of clear drafting and confirms that Irish courts will, as a matter of principle, give effect to the bargain struck by commercial parties. Even where the language is clear, however, an “absolute” discretion is not unfettered: the courts may intervene if it is exercised in an arbitrary or manifestly unreasonable way. In consumer contracts, different considerations will also arise, given the protections arising under consumer legislation, including those derived from the EU Unfair Contract Terms Directive.