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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Commissioners help the small guys

Friday, July 20, 2012

The regulation of business-to-business contracts is undergoing changes that will, for some, challenge sacred-cow ideas about the law and economics.

At the high policy end, the federal Attorney-General's department is conducting a review of contract law.

However, if the AG's review results just in further tuning of complex legal issues and processes, it won't really have done much for the community.

Contract law is about the practicalities of doing business. The social task of the law in this respect is, or should be, to support the commercial bargains into which people choose to enter.

This simple idea---freedom to contract---is at the core of commercial contract law and is central to the functioning of market economies. Contemplation of how freedom to contract actually operates mostly takes a big business perspective; that is, contracts involving lots of lawyers.

The concept, however, comes unstuck in practice when small businesspeople engage in commercial contracts with large organisations, both business and government.

The reality is that much of the functioning of market economies (at the small business end) is poor because the theory of contract law fails to operate in practice.

However, without a great deal of fanfare, that dysfunction is progressively being addressed. To this purpose attention needs to be focused on the small business commissioners across the nation. In particular, the proposed powers of the NSW Small Business Commissioner have set new benchmarks.

When a small businessperson conducts business with a large organisation, say as a consultant, the common practice is that the large client requires the small businessperson to enter a contract drafted by the client.

These contracts invariably deliver contractual power and advantage to the client. If there is a dispute under the contract, the large organisation frequently applies its superior legal and financial resources to enforce its desired outcome. Small businesspeople cannot afford the legal cost of securing their contractual rights. The theory of the law exists, but the practice of the law fails. For small businesspeople, this is the reality of being in business. Most small businesspeople write off any losses and move on.

The outcome, however, is a badly functioning economy. Where the law fails to provide cheap and efficient enforcement of commercial contracts, levels of commercial trust diminish. People engage in less business. The full wealth creation potential of the nation goes unrealised.

Of Australia's workforce of 11.5 million people, 2.1 million are self-employed small businesspeople. Of those, 1.1 million don't employ anyone. The other million employ about six million. That is, about eight million people run or work in the small business sector. It is the dominant sector of the economy, but it suffers systemic and institutionalised contractual dysfunction. This is a major economic issue.

The problem is being recognised. Policymakers understand that small businesspeople are like consumers in this respect. This realisation was reflected in intentions in 2010 to provide to small businesspeople the same unfair contract protections delivered to consumers under the Australian Consumer Law Act. The proposal had cross-party political support. but the federal ALP government buckled to big business lobbying and effectively screwed over small businesspeople by withdrawing the provisions.

It's not a dead proposition, however, because the Abbott opposition has a commitment to proceed with small business unfair contract protections should it win office.

Enter the state small business commissioners into the mix. The first small business commissioner position was created in Victoria in 2004, primarily providing a highly successful, cheap and quick dispute mediation process. The intent has been to help resolve disputes while keeping parties in business together where possible.

The model has attracted significant interest. During the past 12 months Western Australia, South Australia and NSW have appointed small business commissioners, all with dispute mediation powers.

What's new is that the mediation powers are being given more grunt. There's no intention to turn the commissioners into dispute courts with powers to enforce settlement. Rather, there are new powers to encourage participation by big organisations in dispute mediation. This started in South Australia, where the commissioner can require a party to present information to the mediator.

Proposals have recently been released in NSW that will take this further. If passed, the NSW Small Business Commissioner will be able to require parties to present information and answer questions. If mediation fails the commissioner can support a small businessperson in a legal action against a larger party or initiate legal action on behalf of the small businessperson.

Suddenly the mediation process becomes something hard to ignore by big business. The power imbalance that exists in practice between big and small business is somewhat evened out by the small business commissioner. It's a step forward.

Importantly, the NSW proposal does not take away the right of parties to litigate. Further, nothing done or said in the mediation can be used in court proceedings. The slate is clean. This enables a safer engagement process in mediation. As in Victoria, the intent is to push the focus towards commercial common sense rather than legal form or technicality. What this does is give some measure of practical application to the theory of contract law.

The evolving of the small business commissioner model across the states, particularly the proposals in NSW, is a game-changer for small businesses.

Some in big business and the government sector perhaps will howl that this is the end of commerce as we know it. It's not. It's the sensible advancement of business capacity.

The rule of commercial contract law needs to be a practical and affordable reality if business and the economy is to move forward. What's happening with the small business commissioners is a positive move in this direction.


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