The Coalition’s policy to extend unfair contract provisions to small business may have the unintended impact of causing contractual uncertainty and increasing litigation, law firm King & Wood Mallesons has warned.
The Coalition plans to extend the unfair contract protections consumers get under the Australian Consumer Law to small business if elected.
Bruce Billson, shadow minister for small business, told SmartCompany he finds small businesses often have to negotiate with big business on a take it or leave it basis under standard form contracts which place a disproportionate burden on one party over the other.
“What happens with standard form contracts is businesses use them irrespective of the scale or legal status of the person they are contracting with, consumers have certain protections but small businesses have no more power to negotiate and no access to those unfair contract provisions,” he says.
However, Melissa Monks, senior associate at King & Wood Mallesons, warns if implemented the policy could have a big regulatory and economic impact.
“It can affect the way commercial transactions are executed and not only the ways businesses interact but also the end user; and it could introduce a whole extra level of uncertainty and therefore costs,” she says.
“They have to be really careful not to have a case of regulatory overreach, this was introduced to protect vulnerable consumers and if it is extended into business it is uncharted waters.
Monks says unfair contract provisions have not been extended to small business in any other jurisdiction in the world and some jurisdictions such as Japan have expressly excluded small business.
“Certainty in contracts is quite fundamental to businesses but this could lead to more uncertainty, more litigation and increased costs.”
Monks says one of the key reasons unfair contract provisions have not been extended to small business is the difficulty in defining what a small business is.
“How do you define small business? Is it annual turnover, the value of the transaction or the purpose they are acquiring the goods and services for?” she says.
“There is so much uncertainty, particularly because there is no evidence that this kind of reform is really needed.”
She says it would be very difficult for the Coalition to draft and frame such a regime in a practical and usable way in defining what a small business is.
“The concept of unfair terms is a difficult thing and to extend it to small business just creates some uncertainty in business to business contracts, that flows on down the value chain and ultimately impacts on the bottom line in terms of prices,” she says.
However, Billson says he is confident the Coalition can reach agreement on a workable definition of which small businesses are protected by unfair contract provision
“We are consulting on the detail concerning the implementation of the commitment as it relates to the businesses able to access the protections and value of the transactions,” he says.
“The nature of the transaction is more the focus of the provision than describing the party to the contract; it goes to the question of a significant imbalance to the contract rather than the size of the parties.”
Billson says the policy will not increase costs and uncertainty for business.
“I don’t think there is any evidence to support that, standard form contracts are used throughout the economy widely, those people using them have had experience relating to unfair contract term provisions as they relate to individuals and that knowledge would be carried over,” he says.
At this stage the coalition is still consulting on the likely cost of implementing the policy.
“Our consultations have identified a number of bigger businesses using standard form contracts have already incurred costs in implementing the unfair contract terms provisions for consumers, so we are consulting with them on the most cost-effective way to carry over that existing work,” he says.
“A number of larger businesses have already indicated they would be ready to make that conversion, where a number already treat small business customers as if they are consumers.”