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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.

Small business looks to Turnbull for confidence on contracts

Sunday, September 20, 2015

The new Turnbull government faces an immediate test of its small business credentials with the Small Business and Unfair Contract Terms Bill 2015 before parliament and needing a decision.

Big business interests oppose the bill. On Monday morning, the day of the spill against Tony ­Abbott, the bill was amended in the Senate, enlarging its reach to more small business contracts than the government’s plan.

For those who oppose the bill, the idea of parliament determining what is an “unfair” contract is an unacceptable interference in commerce.

On the broad issue, opponents are correct. Market-based economic activity happens through and because of freedom to enter commercial contracts. This should not be contorted.

However, what’s mostly missed is that commercial contracts have embedded in them a certain structure determined under common law that creates contractual freedom.

This structure, for example, holds that a contract must be genuinely entered, otherwise it’s not a contract. Further, it holds that the terms of the contract cannot be changed without agreement of all parties.

These features are found in common law but are only ­occasionally tested through the legal process. Mostly, it’s a commonsense, common understanding of commercial contracts.

Unfortunately, the theory of contractual freedom breaks down in practice in certain circumstances, frequently in the application of “standard-form” contracts.

When a big business or government agency has to engage in large numbers of contracts, they will often create a “standard form”.

They do this for managerial convenience because it’s too difficult to individually negotiate every contract. Mobile phone contracts are one example.

What happens with these “take it or leave it” contracts is that the terms are often written to give the large business unrestrained control over the contract.

For example, the large party can change the contract terms or price or cancel the contract at whim. The small party is denied the same contract rights.

In effect, such contracts cease to have the necessary structural features at common law that make a contract a contract.

Big businesses can do this because the small person at the other end of the contract does not understand, is not allowed to negotiate the contract and does not have the time, money or expertise to legally challenge the contract.

Contract theory breaks down in practice.

In 2010, “unfair” contract protection laws were introduced covering standard-form contracts for consumers. Effectively, these laws embed in statute the common law structure of commercial contracts. For example, if one party has the right to change the terms of the contract, the other party must have the same right. It’s about retaining the balance of power between the parties under contract structure.

It doesn’t touch other practical matters, such as price.

The Australian Competition & Consumer Commission enforces the law.

Since enactment, the ACCC has assisted large businesses to change their contracts. Only one prosecution has been necessary.

The law’s power has been in its successful commercial application. I’ve spoken with several large businesses that say it has made for better business.

The 2015 bill extends these same basic protections to small businesses, defined as businesses with fewer than 20 employees.

It is a significant economic and social reform. It will put small businesspeople on a more equal footing with large businesses but only where standard-form contracts apply.

Where it will have significant application is with the million or so independent contractors working as information technology consultants, engineers and so on. Owner-drivers, construction subbies and more are other examples.

It is a necessary reform as small businesspeople are individuals in exactly the same vulnerable and exploitable position as consumers.

But the bill has a huge flaw. It restricts the protections to contracts under $100,000 in a year. The government says this is to force small businesspeople to negotiate large contracts. That’s nonsense.

Limiting the protections to $100,000 contracts will not do anything to force a big business to negotiate, which is what’s required.

Further, a $100,000 contract net worth to the small businessperson is not $100,000 but (say) $80,000 when GST and core expenses are removed. And if an asset is supplied, say a vehicle for owner-drivers, the real limit becomes (say) $50,000.

With the $100,000 limit, large businesses will be able to structure contracts to avoid the laws. The $100,000 limit substantially neuters the effectiveness and application of the protections.

No limit applies to consumers’ contracts under their protection laws. No limit should apply to small businesspeople’s contracts.

If a large business has a large contract with a small businessperson and wants to avoid the unfair contract protections laws all they have to do is genuinely negotiate. Then the laws don’t apply.

The senate on Monday amended the bill, increasing the limit to $300,000. Family First Senator Bob Day called for a $500,000 limit.

These expanded limits will significantly increase the numbers of self-employed small businesspeople who are covered.

But on Monday morning, with Abbott still prime minister, the government declared it would reject the amended bill. About 10 hours later, Malcolm Turnbull became leader of the Liberal Party, heralding a “new” government.

[First published in The Australian, September 2015]

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