The contract key that could swing small business

Unfair contract protections are a source of consumer justice that has been denied, by lobbyists and Labor, to small business. If Tony Abbott does extend the laws he will set free much SME growth.

The Abbott Coalition election plan released over the weekend makes some big claims in relation to small business. Chief among these is that a Coalition government will double the annual rate of growth of small business. They believe it’s from small business that more than half of their million new jobs target will be achieved.

But the question is, does Abbott’s Coalition plan contain substance that can make their small business claims look credible? On one issue alone the answer is yes.

In its plan Abbott’s Coalition has reaffirmed its commitment to extending unfair contract protections – currently available to consumers – to small business. Few people probably understand the significance of this and the extent to which it is an economic game changer and major economic reform initiative. The impact cuts across a massive percentage of business-to-business economic activity.

The unfair contract issue first achieved attention in a 2008 Productivity Commission Report. This lead to the introduction of the Australian Consumer Law in 2010 which contained new provisions to protect consumers from unfair contracts.

The idea of unfair contract laws tends to spark angst from many lawyers and sometimes economists who see the concept as an attack against the sanctity of contract. Such critics generally view commercial contract law as being solely dependent upon ‘offer and acceptance'. Anything that interferes with that is an assault against commercial transactions. This narrow view is not, however, how the courts see the common law principles of commercial contract.

Primarily the consumer unfair contract protections codify in statute what is in common law. For example a contract that enables one party alone to vary the terms of a contract without agreement from the other party is unfair and breaches the Australian Consumer Law. (This reference gives a summary of the main unfair contract provisions.)

The original Australian Consumer Law proposal included applying unfair contract protections to small business people as well as consumers. It had cross-party political support. But a powerful big business, big union and (it’s understood) public sector bureaucracy lobby combined and fought hard behind the scenes against this.

In what can only be described as an act of political treachery against small business the federal Labor government excluded small business from the unfair contract protections with the passing of the law in 2010.

The impact this has on limiting small business capability and growth has to be understood.

In conducting their business, small business people only have a theoretical access to the rule of commercial law. The high expense and complexity of securing commercial contract rights effectively excludes the operation of commercial law when a small business person is confronted by big business or government. In this respect small business people are in a very consumer-like situation.

The consequence is that in a vast percentage of commercial transactions, small business people cannot trust the legal system to secure their rights. This failure of the application of law diminishes commercial trust, inhibits and constrains small business activity and reduces the quality and quantity of commercial transactions. It’s bad for the economy and jobs.

For this reason, the Abbott Coalition commitment to unfair contract protections for small business is a much bigger issue than appears on the surface. It will change massively the relationship between small business people and big business and the public sector bureaucracy. The fact is that when big business and big government engage in commercial transactions with small business the contracts are routinely and appallingly one-sided in giving all power to the larger party.

Abbott’s small business unfair contract protections will force a review and rewrite of such big business, big government contracts putting small business people on a more equal footing before the law. This will create a stronger small business environment. This should directly result in a spur to small business growth as claimed and targeted by the Abbott Coalition.

It won’t happen easily however. Several big business lobbyists have gloated to me that they have locked down sufficient influence within the Abbott Coalition to block the small business unfair contract provisions. But with the Abbott Coalition going so public with the commitment over the weekend it would appear that small business is seen as more important by the Abbott Coalition.

Certainly on this issue, Labor has made itself the partner of big business against small business. This seems strange. But within the twisted political deal making culture that Labor has become, big union-big business deals are more important to Labor than is small business.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.