A welcome disruption to the economy

A welcome disruption to the economy

The Unfair Contracts Act for small business people was proclaimed on November 12 this year and will go through a 12-month implementation period. The Australian Consumer and Competition Commission has immediately began reviewing commercial contracts for compliance.

The Act is a significant microeconomic reform, holding promise as a driver of innovation and jobs. 

Economies are experiencing on going innovation upheaval. As a taste, banks are likely to halve their costs (and staff numbers) through technological innovation over the next decade. Automated cars  will start eliminating taxi driver jobs in the near future. Kenya has revolutionised financial transactions through phone-to-phone transfer, eliminating banks.

It’s not just the type of jobs but the very structure of how work is organised that is subject to wide-ranging change. The predictions I made in Independence and the Death of Employment,  published a decade ago, are coming to pass.

But the new jobs potential is primarily with small business people. Big business innovates to create wealth, but this involves removing jobs. Small businesses innovate all the time, and this nearly always involves job creation.

In the last four years in the UK, self-employment has grown by 570,000 accounting for all new jobs in the UK (says the Bank of England). This drove the UK unemployment rate down to 5.5 per cent.

In Australia, around 45 per cent of workers are engaged in businesses with fewer than 20 workers. That increases to 62 per cent for businesses up to 50 workers. It’s with self-employed, small business people that innovation and jobs growth opportunity lies -- in the ‘guts’ of the economy.

The Unfair Contract Act is similar to ‘disruptive’ technology; it forces innovation and improvement. Australian big business opposed the law, fearing constraints on them. Instead, they should welcome the law.

The command-and-control ‘employee’ model of a firm is under competitive challenge. The processes of ‘business’ are increasingly being organised through ‘outsourcing’, using ‘as needed’ networks of (mostly) skilled individuals operating through commercial rather than employment contracts. In effect, this is the free market (for labour) penetrating the internal operations of firms.

To manage the new business model, large firms use ‘standard form contracts’ offered as ‘take it or leave it’ contracts. However, it is common practice to ‘skew’ these contracts so that they give the large firm near-total control of the contract structure. For example, the large firm can change the terms or price of the contract or transfer unreasonable risk at whim without the other party’s consent.

Such ‘skewing’ breaches the structural integrity of commercial contracts found at common (and Roman) law. It’s a free-market (in labour) avoidance mechanism. 

The skewing of ‘standard form’ commercial contracts was recognized as damaging to trust and market activity in the consumer space. In 2010, unfair contract laws were created for consumers. This effectively codifies common law. For example, it requires that if one party can unilaterally change the terms of a contract, the other party must have the same right. Further, one party cannot unilaterally avoid or limit the performance of the contract.

The full list of ‘fairness’ requirements is here. It’s about a power balance under the structure of the contract. This facilitates trust, in that the contract has integrity.

Commercial activity is dependent on trust between parties. The law’s role is to embed ‘trust’ in the contract structure. Common law does this. Much current practice with standard form contracts undoes this embedded trust.

The 2015 Unfair Contracts Act extends the consumer protections to cover small business. If self-employed, small business people are to thrive, innovate, create, explore and thus create jobs, they must have confidence in the integrity of their contracts and the law that supports contracts.

The law is ‘radical’. It is, to my knowledge, a world first in having fair contract terms apply to business-to-business transactions. But it does no more than embed in statute what applies in common law.

However, the law is also cautious because it is narrowly applied. The unfair contract laws reinstate trust, but in a defined way. The law only applies to businesses with fewer than 20 staff and where standard form contracts are used. It applies to contracts up to $300,000 in value or for contracts extending beyond one year, $1 million in value. The laws do not go to the price of a contract or the actual things to be done under a contract.

It’s a delicate but important balancing act. It should, over time, create for better business at the base (small business end) of the economy.

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