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Why unfair contract provisions are needed for small/micro business people in the Trade Practices Act

23 June 2010

In March 2010, federal parliament passed amendments to the Trade Practices Act to protect consumers from unfair contracts. We've explained and summarised the new laws here.

We've also explained that the original legislation (proposed in 2009 by then Minister Chris Bowen) would have made those same protections available to businesses. But the business unfair contract protections were removed from the legislation that passed through federal parliament in March this year (2010). Finance contracts were also removed.

Here, we discuss why business-to-business contracts (for small business, at least) and possibly finance contracts (for consumers and small businesses) should also be included.

1. Should fair contracts be imposed on business (and government) transactions?

This is a core issues for small/micro business people. Independent Contractors Australia constantly sees, and deals with, self-employed people (small/micro business people) who are being 'done over' by larger businesses and/or government agencies.

Here are just two examples: The Rudd Government, the Coalition and the minor political parties all accept that requiring business to have fair contracts for consumers (except on financial contracts) is a good thing and that much has been passed into law (March 2010). [Note: the Coalition and minor political parties objected to the removal of the business-to-business protections.]

The question that still needs addressing is: Should fair contracts be required in business-to-business transactions (including government-to-business)? Further, should fair finance contracts be required for consumers and small business people

The Rudd Government has answered 'No'.

ICA answers the question in several ways.
  1. 'Yes': Business-to-small business contracts should be required to be 'fair' under the TPA in the same way that consumers are covered.
  2. 'Possibly': For business-to-business contracts that do not involve small business the questions should remain open for further consideration.
  • Further, there is no question that fair contract laws should apply to government in the same way they apply to business.
And
  • With suitable implementation timelines, consumers and small business people should be entitled to fair finance contracts.
Here's our reasoning.

Small/micro business is different
There needs to be clarity about the real differences between small and 'big' business (and/or government).

And there's a simple concept that needs addressing. In public policy and regulatory terms, 'business' is thought of as a management system, controlling and directing the activities of the people who are 'in' the business/government. That is, companies and government bodies are management systems that require regulating. In designing regulations for business, it is assumed by policy makers that the same business regulations can apply to anyone in business no matter what their size.

However, when the smallest of small business is considered (that is micro-business people, self-employed, independent contractors, freelancers, or whatever the name) the 'business' is not a system but an individual. There is no 'system.' And that same individual is also a consumer. Therefore the 'business' is, in effect, a consumer.

Here then is an idea that shatters normal commercial regulatory concepts: A business is an individual who is also a consumer! When looked at from this point of view, the small business individuals are in exactly the same situation as consumers when engaging in commercial contract transactions.
  1. As consumers, when they are purchasing a product or service, under the new TPA laws they will have protections from unfair contracts.
  2. As suppliers of goods or services to an individual consumer, under the new TPA laws they will have responsibilities to the consumer to supply a fair contract.

    But
  3. As suppliers of goods or services to a larger business or to government there are no protections or obligations under the TPA for fair contracts to apply. The small business person is left exposed.
Consider the practical way in which business happens under this third scenario.

When big business and/or government bodies enter commercial contracts, they have the financial and managerial capacity to employ lawyers to write up their contracts. The lawyers generally take a single-minded view---that is, to write contracts that exclusively protect the interest of the organization for whom they are acting.

When large organizations are entering contracts with other large organizations, both parties spend considerable resources engaging in protracted (and expensive) negotiations. It can be assumed from a policy perspective that both parties have the negotiating capacity to ensure that the final contract entered into fairly represents the respective and mutual interests of both parties.

The process between large organizations (business and government) and small business people, however, is totally different. What ordinarily happens is that lawyers/management for the large organizations develop and have in place standard form contracts that they present to small business individuals on a 'take-it-or-leave-it' basis.

From ICA's experience, these standard form contracts would normally fail a large percentage of the 'unfair contract' items now listed in the TPA. Such contracts are routinely and patently unfair. We have accumulated some stark examples of these (see links above). The small business/self-employed person is generally not in a position effectively to negotiate the terms of the contract for several reasons:
  • The company/government agency simply refuses to change its contract.
  • The contract is written in dense legal language. The self-employed person frequently does not have the skill or legal background knowledge to understand the contract, let alone have the knowledge to change the contract.
  • The value of the contract is usually comparatively small, which means that the cost of engaging professional legal or other advice exceeds any profit that may flow from the contract.
  • The large organization (the client) wants work to start quickly. This means that the client does not factor in the needed time for contract discussion/negotiation. Moreover, the small business individual will often start the work without seeing a written contract (which is usually presented to him/her after work has begun).
All these elements place small business individuals in a position of significant contract negotiation weakness and disadvantage. In fact they are in precisely the same position as consumers and which the unfair contract amendments to the Trade Practices Act are designed to overcome.

Conclusion for small business individuals
Given these practical realities, unfair contract laws should be available to small/micro/self-employed people when they undertake work for larger companies and/or government.

Although companies/government may well be concerned about how to implement such changes, there should be no insoluble problems. The conceptual and practical implementation issues for large businesses/government when dealing with small business individuals are really no different to those arising from consumer unfair contract laws.

What about big-business-to-big-business contracts (including government)?
Whether or not unfair contract laws should apply to commercial transactions between large organizations (business-business-government) is a different item for discussion.

Nonetheless, there are arguments that could be mounted in favour of applying unfair contract to big organizations. These arguments relate to the creation (or reinforcement) of trust, honesty, certainty, transparency and accountability in commercial transactions, which are the very drivers of successful businesses and economies. However, this discussion can be put on the 'backburner' for another day. First, let's achieve unfair contract protections for small business people.


2. Are there existing remedies for small business/self-employed people faced with unfair contracts? If there are, does that mean that TPA protections are not needed?

Independent Contractors Act: unfair contract provisions
In its submission to the TPA unfair contracts review, the Australian Chamber of Commerce and Industry (ACCI) argued that unfair contract provisions for independent contractors are not necessary under the TPA because protections already exist in the Independent Contractors Act.

Independent Contractors Australia is a strong supporter of the Independent Contractors Act. The provisions in the Act covering unfairness are as follows.
    Section 9 What is an unfairness ground
    1. (1) Subject to subsection (2), each of the following grounds is an unfairness ground in relation to a services contract:
      (a) the contract is unfair;
      [and other grounds are also listed]
An individual self-employed person can take an action in the federal magistrates court over unfairness. ICA is aware of 2 such cases: In both cases the self-employed contractors won.

However, the problem is that the Independent Contractors Act does not specifically define what unfairness is. This is left to the discretion of the Court. This creates a level of uncertainty and difficulty for self-employed people, as they have no clear idea if they can successfully run an unfairness case.

The TPA amendments (March 2010), on the other hand, have a great advantage. The TPA specifically defines the types of clauses in a contract that are unfair.

This would create considerable clarity and certainty for self-employed people when negotiating a contract. They could take the TPA clauses to a larger business, point out where a contract is unfair and the larger business would know that not to change the contract would lead them to breach the TPA. This would empower self-employed people in a very practical way. The contract could be fixed before it is entered. This would result in better contracts, fewer disputes and less litigation.

The Independent Contractors Act is positive. The TPA unfair contract provisions would be even more positive. They should be made available to small/micro business people.

Unconscionable Conduct protections under the TPA:
Arguments could be mounted that small/micro business people have the protection of unconscionable conduct protections under the TPA. In fact, the second raft of amendments to the TPA (June 2010) are consolidating the unconscionable conduct protections.

The problem with unconscionable conduct provisions is their incredible complexity. Very few prosecutions have been undertaken. The laws are barely understood by lay people (and most lawyers) and are subject to highly technical legal interpretation. Prosecutions are extremely expensive and are conducted by the Australian Consumer and Competition Commission. Further, the laws only allow unconscionable conduct to be addressed after the event and do little to prevent unfairness.

The unconscionable conduct provisions are a valuable tool. But they are remote from the practical day-to-day needs of small/micro business people.


3. Should finance contracts for consumers and small business people be covered by the unfair contract provisions of the TPA?

In its submission to the review of the TPA (2009), the Australian Bankers Association argued that applying unfair contract provisions to finance contracts would put bank lending practices at risk. They painted (in polite bankers' language) a scary scenario in which loans and many types of financial transactions may well have been frozen. Apparently, to apply 'fair' contract requirements to financial contracts would increase risks to lenders, thereby leading them, potentially, not to lend.

This is a view that warrants close attention. What we would not want to see are changes to the TPA that stopped bank or other lending, or escalated the costs of lending. However, this view (and warning) by the ABA should not prevent finance contracts being subject to unfair contract rules under the TPA for consumers and small/micro business people. It may mean that a generous implementation period would need be applied for the finance sector. It may also mean that close monitoring would be needed during implementation to look for unintended consequences that may need to be addressed.

Further, however, it would seem plausible that bankers would welcome fair contract laws for consumers and small/micro business people. It makes good business banking sense.
  • Australian banks have often found themselves caught up in damaging financial scandals in which the bank/s have become (often unwitting) parties to questionable financial dealings. Small-time investors have found themselves the losers in financial schemes. The difficulties this creates for banks are enormous, as the corporate brand damage can be severe. A TPA requirement applying to all financial contracts for consumers and small/micro businesses could limit the frequency and size of such problems in the future. This would be a great positive on many fronts.
  • When making loans to small/micro businesses, wouldn't banks feel more comfortable lending to businesses whose business income was generated through 'fair' contracts? Have a look at this example of 'one of the worst contracts we've seen'. What bank would want to provide vehicle finance to an owner-driver, for example, where the driver's contract enabled the 'client' to repossess the driver's vehicle on a whim without proper compensation?

Conclusion

Fair financial contract requirements covering consumers and small/micro businesses should improve business practices in many ways. Bankers should embrace and accommodate such a move, rather than fear it.


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