How To Help Small Business Owners In Western Washington

Transcription

1 S''!īJ- 1.. fi t;!'.,', 'l' Government of Western Australia Small Business Development Corporation Small Business Development Corporation Western Australia Our ref: 012/1833 Assistant Secretary Business Law Branch Attorney-General's Department Robert Garran Offices 3-5 National Circuit BARTON ACT 2600 Dear Assistant Secretary I am writing in regards to the release of "Improving Australia's Law and Justice Framework: A discussion paper to explore the scope for reforming Australian contract law" ('the Discussion Paper'). The Small Business Development Corporation ('SBDC') is Western Australia's ('WA') premier government agency established to support the growth and development of small businesses in the State. The SBDC has been providing advice and assistance to WA small business owners for over 25 years on a wide range of matters, including in relation to general principles of contract law and their rights and obligations under individual contractual arrangements. This important role has been enhanced following the recent appointment of WA's inaugural Small Business Commissioner- who is also Chief Executive Officer of the SBDC -and the introduction of a low-cost, non-litigious alternative dispute resolution service for small businesses. While we are not able to specifically address all of the questions posed in the Discussion Paper, we believe that given our daily interaction with, and experience in helping, small businesses in WA we are well placed to provide valuable feedback on some of the issues being explored in this review. To help inform the attached submission, the SBDC conducted a short survey of small business owners in WA to elicit their experiences in relation to entering into and enforcing business contracts (including online contracts). Although limited to a fraction of our small business clients, the survey provides some useful insight into the attitudes and practices of business operators regarding their contract dealings. The survey results are augmented by the anecdotal experiences of SBDC's specialist business advisers gleaned from their daily contact with small business operators. Level 2, 140 William Street, Perth WA 6000 GPO Box C111, Perth WA6001 Telephone: 131 BIZ ( ) Facsimile: (08) Toll free: info@smallbusiness.wa.gov.au

2 The SBDC welcomes the opportunity to provide feedback to the Federal Attorney- General's Department on this important aspect of commercial law that touches on the operations of all small businesses in WA and which is vital to inter alia protecting consumer rights and preserving business relationships. Given this, the SBDC believes that a robust and transparent system of contract law is pivotal to the ongoing success of the small business sector in Australia. Should you require further information on any aspect of the attached submission, please contact Ms Darcy Bosch, Policy and Advocacy Officer, on (08) or darcy.bosch@smallbusiness.wa.gov.au. Yours sincerely

3 IMPROVING AUSTRALIA'S LAW AND JUSTICE FRAMEWORK- AUSTRALIAN CONTRACT LAW SUBMISSION BY THE SMALL BUSINESS DEVELOPMENT CORPORATION Background The Small Business Development Corporation ('SBDC') is Western Australia's ('WA') premier government agency established to provide assistance and advice to small businesses in the State. The SBDC is established under the Small Business Development Corporation Act The SBDC's role has recently been enhanced following the appointment of WA's inaugural Small Business Commissioner ('Commissioner') as Chief Executive Officer of the agency and the introduction of an alternative dispute resolution ('ADR') service for small businesses. Specifically, the Commissioner's new ADR service - which utilises guided resolution in the first instance and mediation when required - provides access to a low-cost, non-litigious means of resolving retail tenancy, business-to-business and business-to-government disputes (which often involve contractual matters). Since its establishment over 25 years ago, the SBDC has provided advice and assistance to countless small business operators on a wide range of matters, including clarifying parties' rights and obligations under contractual arrangements covering retail shop leases, supply agreements and franchise agreements, among others. Further to this, the SBDC has a mandated role under the Commercial Tenancy (Retail Shops) Agreements Act 1985 to provide information and guidance to tenants, landlords and other industry participants on all aspects of negotiating and leasing commercial premises. lt should be noted that the SBDC does not provide legal advice to small business clients. The SBDC welcomes the opportunity to provide a submission to this review. The submission is based on our knowledge of small business in WA and is not intended to give a legal opinion on the state of contract law in Australia. The purpose of this submission is to inform the Federal Government about pertinent contract law issues commonly faced by small businesses in WA. This submission is supported by the SBDC's general observations and anecdotes gathered from our interactions with small businesses. This includes feedback received by our general business advisors as well as from the dispute-related matters raised through our ADR service. Throughout the submission we also refer to two recent surveys undertaken by the SBDC. The first, referred to as the 'Ready Response Network' survey, involved an online survey of a small number of SBDC clients. This survey was conducted with the express intent of informing this submission and as such the Ready Response Network was surveyed to obtain information about the views and experiences of small businesses in contract dealings. The second was a larger telephone survey of 1,000 small businesses, referred to as the 'State of Small Business' survey, which aimed to obtain information about the issues facing small businesses in WA.

4 General observations about small businesses' experience with contracts In the SBDC's experience, the main issues that small businesses raise in relation to their contractual arrangements relate to: 1. Complexity of Contract; 2. Enforceability of Contract; and 3. Imbalance of Power in the Contractual Relationship. In this section, the SBDC will also make some general observations about the use of online contracts and the impact of the digital marketplace on small businesses. Complexity of Contract The main complaint raised by many of the SBDC's small business clients (especially those that find themselves in legal trouble) is that the contracts they enter into are complicated and often difficult to understand. These concerns reflect some of the drivers of reform mentioned in the Discussion Paper, specifically 'accessibility' and 'suitability for small and medium sized businesses'. Results from the Ready Response Network survey indicate that the main issues with contracts lie with their complex structure and overly legalistic and confusing content. This is also borne out in the types of contractual disputes small business operators find themselves in when seeking assistance from the SBDC's ADR service. This would suggest that many small business operators often struggle to understand the essential terms of the contracts they enter and what their rights and obligations are. In many cases this is due to the fact that many small businesses do not seek out expert/legal advice before entering into a contract (this will be explored further later in the submission). The results of the Ready Response Network survey emphasise the need to simplify contracts (i.e. use more plain language and be less complicated) in order to make them easier to understand and minimise the use of legalese and jargon. These sentiments were reflected by the following comments made by survey respondents: "Use plain English to concisely define the intent of the contract so as not to cause/ create confusion." [Ready Response Network Survey Respondent] "Business contracts should be as short and simple as possible... This ensures both parties understand and agree to the terms and conditions and endeavor [sic] to honor [sic] them." [Ready Response Network Survey Respondent] "Make an overview, simplify the English, engender trust and honesty and a willingness to cooperate and negotiate in good faith." [Ready Response Network Survey Respondent] "Don't bury crucial information in microprint." [Ready Response Network Survey Respondent]

5 When asked whether they read through all their business contracts, almost half (49%; n=31) of Ready Response Network survey respondents indicated that they did not always fully read through and comprehend the terms and conditions of the contracts that they enter. In relation to online contracts, a worrying six out of 10 respondents (n=34) revealed that they merely clicked the 'accept' button rather than read through the terms and conditions. Among the matters canvassed in our State of Small Business survey, small business operators were asked what type of training or assistance they would like from government. Without prompting, several respondents indicated that they required training in relation to contracts: "we need to learn how to write contracts" [State of Small Business Survey Respondent] "Contract management in a not for profit sector... [is] a huge issue" [State of Small Business Survey Respondent] As briefly touched on earlier, although many contracts are considered to be complex and confusing, many small business operators do not seek the assistance of a professional when developing or entering into a business contract. More than half (55%; n=34) of the Ready Response Network survey respondents indicated that they did not use a lawyer or other professional to draft and/or interpret their contracts. Instead, 62% of respondents (n=36) indicated that they based their contracts on existing ones, and one in three business operators either adopted them from friends or other business contracts (28%; n=16) or used online templates (29%; n=17). Making it easier for small businesses to understand their contracts will, over the longer term, reduce their costs in having to develop contracts (which may not always contain terms and conditions in their best interests) and understand their rights and obligations. Reducing the complexity of contracts is also expected to reduce the number of small businesses that find themselves in a contractual dispute with the other party. Enforceability of Contract The second driver of reform mentioned in the Discussion Paper relates to certainty of contract. While we agree that small businesses would benefit from an increased certainty of contract, the SBDC is mindful of the point raised in the Discussion Paper that certainty must be balanced against unfairness. Although small businesses are often at a disadvantage in the contractual relationship vis-a-vis the other (generally larger) party (such as the franchiser, shopping centre landlord, supplier or government authority), it is crucial that reforms to contract Jaw do not over-correct this power imbalance and swing the pendulum too far the other way. In other words, to be overly protective of the weaker party introduces additional uncertainty into the contract as neither party can be sure whether the terms they agreed to upon signing the contract will be enforceable at a later stage. This could

6 ultimately weaken the business relationship and lead to other unintended consequences. Certainty of contract is a very important concept and is inextricably linked to the theoretical principles of freedom of contract and sanctity of contract. According to these principles, individuals should be free to bargain among themselves the terms and conditions of their own contracts, without government interference, and be bound by these terms and conditions as framed, in the circumstances that existed at the time the contract was entered. lt is the presence of power imbalances which are arguably inherent in all business contracts that underpins governments' regulatory interventions (for example, the regulation of the franchisor/franchisee and retail shop tenant/landlord relationships). From a small business perspective (as generally being the weaker party), central to the debate on certainty of contract is the ability for parties to be able to enforce the terms and conditions of the contract. Small businesses will be in a much stronger position to enforce their contractual arrangements with certainty of contract. However, despite the legal protection that a contract offers parties, it would appear that some small businesses do not feel that they are fully able to enforce contracts. The comments below from a range of small business operators underlie this concern: "I have trouble sometimes with clients understanding that a contract is a contract and that they should adhere to the contract..." [Ready Response Network Survey Respondent] "Half the time people don't read them [contracts] and some people dispute what is in there regardless." [Ready Response Network Survey Respondent] "Contracts aren't enforceable and [are] always arguable." [Ready Response Network Survey Respondent] "One just can't enforce the contracts, because the accused can 'dodge and weave' whilst we spend money on lawyers to achieve nothing." [Ready Response Network Survey Respondent] As is well understood, many small businesses have limited resources to engage the services of professional advisers. This is especially the case in relation to utilising legal experts when contractual problems/disputes arise, as the costs involved in enforcing these rights can be prohibitive (and which can sometimes outweigh the value of what is at dispute). From the SBDC's experience, the time, cost and stress associated with enforcing legally-bound rights through the judicial system can often be a disincentive for many small business owners, evidenced by the following comment: "...even if you have a contract it's difficult to enforce and expensive to go to Court over" [Ready Response Network Survey Respondent] In practice, many small businesses often lack the resources to rely on the principles of contract law in order to protect their rights, particularly when they are in dispute

7 with larger, much better resourced companies. Traditional court-based mechanisms to seek redress from contractual breaches are generally not considered sufficiently accessible or responsive to small business needs, largely because they are perceived as being too complex, formal, time consuming and costly. In particular, small business operators can find formal court and tribunal based dispute resolution processes to be intimidating and prefer more hands-on assistance and advice from government. it is for this reason that the WA Government decided in 2010 to establish the Commissioner and provide low-cost, non-litigious assistance to small businesses to resolve disputes through ADR. As such, the Commissioner and new ADR service filled a market gap by providing small businesses in WA with a timely and inexpensive avenue to resolve their disputes which would otherwise prove very costly to pursue through the Court system or remain unresolved (often with the smaller party counting their losses and walking away from the agreement or result in an irreconcilable breakdown in the business relationship). Although the Commissioner's services have only been available in WA for four months so far, the initial feedback from small business clients has been very positive, with a number of disputes resolved without the need for lawyers or taking action in the Courts. Another enforceability issue that the SBDC regularly receives queries about relates to confusion over jurisdiction (i.e. the appropriate arena in which to enforce business contracts). In recent months, the SBDC has received several enquiries regarding which court to lodge an application seeking enforcement of a contract. Confusion over the relevant court of law is further exacerbated in those situations involving disputes with businesses based in another State or country. Given this confusion over jurisdiction - especially in relation to interstate and international contracts- the SBDC is not able to dispute the comment on page 15 of the Discussion Paper that there is a lack of understanding by small business operators of the operation of the Vienna Convention in Australia. Imbalance of Power in the Contractual Relationship As has already been pointed out, small businesses tend to traditionally be the weaker party in many of their contractual arrangements. Sometimes, in desperation to secure a particular contract, small businesses will sign an agreement that heavily favours the other party. One such example is the use of guarantees in contracts and leases. Small business owners may be presented with a guarantee to sign before the other party agrees to execute the contract. The consequences of having such a guarantee enforced against a small business owner can sometimes be dire, particularly if that guarantee is fixed to the individual's personal property. The following comment exemplifies small business concerns around guarantees that accompany contracts: "it's not the contracts I have an issue with; it's the guarantees [that]... go along with the contracts. When you read through them you are pretty much giving away control of your own business to a third party if they wish to get nasty." [Ready Response Network Survey Respondent]

8 When asked what their experience with contracts has been, one small business owner responded as follows: ''[We have experienced] financial loss, court action, loss of business reputation and loss of opportunity." [Ready Response Network Survey Respondent] The SBDC would very much support reforms that go some way to addressing the power imbalance that often leaves small business operators at a (sometimes significant) disadvantage. As mentioned earlier, however, care needs to be taken when addressing this problem as introducing reforms that are overly protective of one party can lead to uncertainty of contract. This argument ties in with the fourth driver of reform mentioned in the Discussion Paper, that is, "Setting acceptable standards of conduct". While the introduction of a code of conduct may appear prima facie to be the panacea to this problem, the SBDC would be hesitant to support such a move. In our experience, the introduction of mandatory codes of conduct in business relationships can lead to unintended and detrimental consequences for small businesses. For example, small business operators may spend time and money (which they can ill afford) in order to understand the obligations that these new regimes place on them. The SBDC therefore does not support the introduction of a mandatory code of conduct to cover contractual arrangements. This point is also applicable to calls for the introduction of nebulous concepts -such as an explicit standard of "good faith" - into codes of conduct or other regulatory instruments. The introduction of such hard-to-define concepts can often lead to immense confusion and additional costs to small business, especially when legal advice is relied upon to comprehend what is meant and to ensure compliance. Furthermore, by their nature, such concepts are often extremely challenging to prove/disprove in a court of law. A prime example of this over the years has been "unconscionable conduct", both in the equitable doctrine sense and in terms of statutory intervention (e.g. under the Competition and Consumer Act 2010 (Cth)). The generally strict and guarded interpretation of this provision by the courts suggests that only the most malevolent conduct will be regarded as sufficiently "unconscionable". The crux of the issue in case law is that, except in the most egregious circumstances, the "stronger" party to a contract is likely to be within their rights to protect, and act in, their own interests and pursue their own agenda, even where this has a disadvantageous effect on the other party. In other words, while conduct may appear to be harsh, unfair or even oppressive, it may not be enough to reach the unconscionability threshold required by law. In the SBDC's opinion therefore, the introduction of such concepts into contractual agreements has the potential to increase small business costs and complexity, as well as add risk to the commercial arrangement. The following comment highlights this point:

9 "[by] following the Franchise Code of Conduct instead of our own cost us over $230,000 in legal fees and 6 years in cowt... we won but lost when the people we fought went bankrupt." [Ready Response Network Swvey Respondent] The SBDC believes that the imbalance of power in contractual relationships could best be offset by empowering small businesses through information and education. This should involve educating small businesses about their rights and obligations under contract law as well as common principles such as unconscionable conduct and other forms of statutory protection. lt should be noted that a central feature of the SBDC and Commissioner's role is to reduce the vulnerability of small business operators in WA to unfair market practices and minimise disputes by providing information, education, guidance and hands-on assistance. The Digital Marketplace The Discussion Paper states that Australian businesses are not as engaged in the digital marketplace as their international counterparts. In the SBDC's experience, this is even more the case for small businesses, who often are late adapters of technology and innovation. For example, a particular theme that was explored in the SBDC's State of Small Business survey was the use of the interne!by small businesses in WA. Of those sampled, only around two-thirds of small businesses indicated that they had a corporate website. The majority of those businesses with a website generated none (40.5%) or less than 25% (35.3%) of their income from online sales. While these results appear to support the statement made in the Discussion Paper, feedback from survey respondents suggests that under-utilisation of the digital marketplace is related to a perception that e-commerce is not an issue for their particular industry. However, the survey did not explore further the impact of online contracts on small businesses' decision to use or not use the interne!for generating sales. lt is recognised that the increasing adoption of e-commerce by Australian small businesses necessitates the need to protect Australian consumer interests in the sphere of global trade and contracting. In this context, the SBDC believes that small businesses should also be recognised as a "consumer" that needs protection in their contracts in the same way that the law protects individual consumers. In general, the SBDC would support a move toward the simplification of online contracts. This is likely to encourage further adoption of e-commerce and other opportunities in the digital marketplace. General comments about reforming contract law The SBDC's comments about the three options for reform mentioned in the Discussion Paper (i.e. Restatement, Simplification and Reform) are set out below: Restatement

10 In the SBDC's opinion, the option to restate the existing law in a single text would be beneficial to small business operators, who would be able to read and refer to the rules in a single publication. The Discussion Paper argues whether this should be a binding codification or a non-binding restatement. The SBDC foresees two problems with making this restatement a binding code: whether businesses will readily adopt it; and whether its benefit will outweigh any detriment associated with its introduction. Given the lack of enthusiasm amongst Australian business people to adopt international principles in making contracts with foreign companies (as referred to on page 17 of the Discussion Paper}, it is questionable whether another code would be readily adopted by contracting parties in this country. This would be particularly the case if they are given the option of opting out of the code. The second problem anticipated by the SBDC relates to the cost versus benefit of this measure. As mentioned earlier, small businesses are likely to incur additional costs when trying to understand and comply with any new code of conduct. Furthermore, if the code is simply a restatement of existing rules, then it is arguable that these rules are already enforceable at law and are unlikely to provide any additional benefit to business. In other words, introducing a mandatory code would not achieve any more certainty than what already exists, but which is likely to add to the costs of small business operations. Having said this, however, the SBDC is supportive of restating the rules in a single publication from an educational point of view as this would make it easier for small businesses to understand and reference their general legal position under contract law. it is our view that such a consolidated publication would prove to be a valuable resource for the small business sector in developing and managing their contracts and which should be implemented by the Federal Government as a matter of priority. Simplification The Discussion Paper mentions the removal of technicality and simplification of the rules. The SBDC is not in a position to comment on this particular aspect of the review, particularly as the specific details of the technicalities were not set out in the Discussion Paper. As a general statement though, the SBDC favours any moves to simplify legal terms and statutory rules unless of course they fundamentally change existing legal principles. Reform The SBDC strongly advocates for the careful consideration of all unintended consequences associated with reforming Australian contract law. it should be noted that any law reform, no matter how minor or trivial it may seem to policy makers, has the potential to have serious practical and costly impacts on contracting parties, especially small businesses. As has already been argued, introducing a code of

11 conduct for example may seem like a good idea to policy makers but in effect it is likely to add confusion, cost and compliance burden on small business. In relation to reform options, the SBDC believes that small businesses would benefit from a move toward more plain language contracts. lt is understood that for years now the legal profession has been encouraged to use plain English when drafting contracts and this outcome should be further championed. The use of antiquated language and legalese, coupled with complex structures, is especially unhelpful for those business operators developing and managing their own contracts without the assistance of a legal professional. Another area for reform that the SBDC espouses relates to standard form contracts. Although the Competition and Consumer Act 2010 (Cth) goes some way to address issues regarding unfair contract terms and standard form contracts, it is limited in the protection that it affords to small businesses. The unfair contract term provisions contained in the Competition and Consumer Act 2010 (Cth) apply only to consumer contracts, which is defined under section 23(3) as "a contract for a supply of goods and services; or a sale or grant of an interest in land to an individual whose acquisition of the goods, services or interest is wholly or predominately for the personal, domestic or household use or consumption". By definition, small businesses are excluded from this protection as they do not meet the definitional requirements of "individual", which according to the Acts Interpretation Act 1901 (Cth) refers to a "natural person". Broadening the application of these prov1s1ons to encompass small businesses would provide enhanced protections for the sector that are currently available to consumers under the Competition and Consumer Act To this end, the SBDC notes that the agreement originally reached between the Commonwealth and the States/Territories for the introduction of the Competition and Consumer Act 2010 extended coverage to small businesses under the Australian Consumer Law. lt is understood that this protection was unilaterally removed by the Commonwealth at the 11th hour. Reform of contract law (particularly if standard form contracts are extended to cover small businesses) may also assist those entering into online contracts, which are often long and complicated and typically on a "take it or leave it" basis. In effect, individuals/businesses have no other option if they want to proceed but to accept these terms and conditions (which, the SBDC notes from the feedback received from the survey of the Ready Response Network, are largely not thoroughly read, if at all). Furthermore, the SBDC urges the Federal Government to carefully consider the impact that any reform would have and to make sure any changes are clearly and effectively communicated to affected parties. In our experience, small businesses generally take a long time and often require extra assistance to come to grips with legislative changes, as evidenced by the slow acceptance of the recently introduced Australian Consumer Law as part of the Competition and Consumer Act 2010 (Cth). Similarly, any reform should be mindful of ensuring that it does not lead to increased red tape and compliance burdens for small businesses.

12 Concluding Statement The SBDC acknowledges that any change to Australian contract law will be a lengthy and complex process. We note that the European Union has commenced the reform process for contracts and by all reports it has elicited much debate and differing opinions among member nations. Key to assisting small business operators' understanding of the law and how it impacts on their rights and obligations is education. This is a role that the SBDC can assist the Federal Government to undertake in WA. Along with a targeted education campaign, the restatement of contract law principles in a single publication would go some way to achieving a better informed and empowered small business sector. As enforcement of contract terms and conditions remains a major concern for small businesses, the SBDC would welcome measures to improve outcomes in this regard. Together with better education of the sector about the processes and avenues available to enforce contracts, the SBDC supports in principle the introduction of ADR services for small businesses across Australia, similar to that offered by the Commissioner in WA. To this end, the SBDC notes the Commonwealth's intention to introduce a Federal Small Business Commissioner by the start of Such a position will provide another avenue for redress for small businesses in Australia.