Home Research PapersThe is now becoming increasingly recognised that small businesses,

The is now becoming increasingly recognised that small businesses,

The
law has always been careful to maintain distinction between individual
consumers and businesses, with the latter consistently being afforded significantly
less protections under legislation and regulation. Courts and legislators
have long upheld a reluctance to intervene in B2B transactions, thus allowing
for commercial transactions of goods to remain shrouded in a “buyer beware”
culture. Nonetheless, the rapid emergence of a plethora of small businesses,
entrepreneurial ventures and sole-traders in recent years has resulted in
increasing awareness of the challenges faced by small businesses, and in turn,
a growing support for increased protections to be provided for such businesses.

 

Small businesses have always been integral to Britain’s economy,
fuelling much of its growth and accounting for 49.8% of the economy’s gross
value.1 Britain’s
workplace is shifting away from larger firms in favour of small businesses,
with numbers of small businesses and entrepreneurs steadily on the rise.2 2017
statistics show that within the UK alone, small and medium sized enterprises
(SMEs) – those with 250 or fewer employees – accounted for an astounding 5.7
million or 99% of all businesses.3 Micro-businesses,
comprised of nine or fewer employees, similarly accounted for 5.4 million or
96% of all businesses.4 The
sheer size of the small business market itself points towards cause for concern
and a need for closer examination of the protections currently afforded to
SMEs.

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Although
small businesses tend to be more flexible and innovative than their larger
counterparts, they are also particularly vulnerable to the behavior of larger
corporates. While the Consumer Rights Act
provides comprehensive protection for consumers, the scope of its protection systematically
excludes small and micro businesses,5
leaving such businesses largely unprotected against certain commercial issues including
rights over cancellation periods and termination fees.6 The
lack of distinction drawn by the law between micro businesses and large
corporations has consistently made small firms easy targets by their larger
counterparts, with fifty-two percent of small businesses affected by unfair
supplier contract terms.7 Additionally,
the relatively young age of most entrepreneurs and the lack of educational
qualifications of a significant proportion of business owners8 mean the majority of small
business owners are usually in a position no better than individual consumers,
yet lack the same rights and guarantees in the event of an unfair
contract. 

 

Many legal and social institutions alike have advocated for consumer
protections to be extended to small businesses. It is now becoming increasingly
recognised that small businesses, particularly sole traders and
micro-businesses, have much in common with and face many of the same problems
as individual consumers and may therefore benefit under a more protective
regime. The recommendations of the Law Commissions of England and Scotland in a
2005 joint report9
were highly supportive of extending the protections of the Unfair Terms in Consumer Contracts Regulations 1999 to the most
vulnerable small businesses.10
Among other recommendations, the report proposed that small businesses ought to be able
to challenge any standard term regardless of whether it is an exclusion clause
currently covered by the Unfair Contract
Terms Act 1977, given that many harsh terms that small businesses are
subject to do not actually fall within its scope. 11

 

Research
by the
Federation of Small Businesses revealed that that small businesses were more
likely to be vulnerable when making purchasing decisions owing to reasons
including lack of expertise, greater opportunity cost of time spent making
purchase decisions and lack of bargaining power when negotiating deals.12
Larger businesses, by contrast, were more likely to have the staff, resources,
expertise and bargaining power to make effective purchase decisions13
and therefore did not experience the same challenges faced by their smaller
counterparts. While small businesses are likely to be more vulnerable in
purchases for goods and services outside their field of expertise or core
business, research by the Law Commissions showed that that even where small
businesses were contracting for supplies obtained regularly in the course of
running the business, they often did not fully understand the standard terms of
the purchase.14
Small businesses are rarely able to persuade suppliers to alter contract terms in
their favour and are often compelled into contracting on the standard terms of the
larger firm.15
Furthermore, unlike larger businesses, small businesses are typically unable to
afford legal advice on the terms of a proposed contract nor likely to have
in-house legal expertise. Statistics from a 2016 Small Business Survey reveal
that only 8% of SMEs sought advice from solicitors or lawyers in the previous
12 months, with the number being even lower for micro-business enterprises.16 Clearly,
small businesses face unique challenges in their everyday operations that make
them significantly more vulnerable to unfair terms than larger businesses.

 

Conversely,
some institutions would argue extending the scope of consumer protection to accommodate
small businesses is redundant, given the vast body of existing legislation already
in place to protect small businesses. In addition to rights under common law, the
Unfair Contract Terms Act 1977 17
also provides protection to small
businesses against unfair contract terms when transacting with larger
suppliers. The Act limits the use of
exclusion clauses, such as excluding liability for negligence resulting in
death or personal injury, by rendering the terms ineffective or subject to
reasonableness.18 Businesses are also protected from misleading advertising through the Business Protection from Misleading Marketing Regulations 2008 which
prohibits advertising that is deceptive in nature and likely to mislead
traders.19
The Regulations also outline acceptable standards on comparative advertising and implement a European
Union (EU) Directive on Misleading and Comparative Advertising. 20

 

Moreover, it is important to note that small businesses are not definitively
excluded from protections available under the Consumer Rights Act, so long as
the business demonstrates itself as falling within the definition of a
consumer. The recent decision of the Court of Justice of the European Union in Costea v SC Volksbank Romania SA found
that a lawyer could be treated as a consumer when contracting for purposes not
linked to his trade or profession. 21
A similar situation arose in Overy v Paypal (Europe) Ltd; a person acting
partly for business purposes could be afforded protection under the Unfair
Terms in Consumer Contracts Regulations 1999 if that purpose was insignificant
or negligible.22
Although these cases relate to European law, the definition of “consumer” under
Article 2(b) and (c) of the Directive23
bears striking similarity to that of the definition under the Consumer Rights Act 2015.24
Moreover, as the Consumer Rights Act definition is one of an individual acting
for purposes wholly or mainly outside the individuals’ trade, it may lower the
threshold such that the purchaser need only show the item was more for personal
than business use to rely on its protection. Some protections under existing
consumer rights legislation may thereby arise in favour of small businesses,
but it is clear that these protections are neither extensive nor widely
available save in limited circumstances.

 

Nonetheless, there
has been some evidence of recent government introduced measures to protect
small business. Intended to promote enterprise and stable economic growth in
Britain, the passing of the Enterprise Act in 201625
saw the establishment of a Small Business Commissioner to resolve common issues
faced by small businesses such as late payment.  In March 2015, the Government launched a call
for evidence into the current state of protective measures available to small
and micro businesses following concerns raised about the vulnerability of such
businesses.26 The
findings of the call for evidence reiterated that small and micro businesses
would benefit from increased protections such as new rights over purchases of
digital content, improved protection under UCTA and a broader range of remedies
for deficient goods and services. 27
However, no further proposals or reforms have since been raised by the
government following the report.

 

In spite of the range of legislation already available, current
protections still fall short of providing adequate cover for small businesses. Although
small and micro-businesses have access to some of the protections under the Unfair Contract Terms Act 1977,28 the protections provided against
unfair terms are minimal. So long as the “reasonableness test” set out by UCTA is met by the party
setting forth the exclusion, liability for a whole range of terms including for
conformity of goods with description, fitness and quality can be excluded.29 “Reasonableness”
itself is not given a clear definition in the act 30 and
only applies where the parties are dealing with a contract on standard terms, and
not in contracts that are deemed to have been “freely negotiated”.31 In some
scenarios, as was evident in Yuanda (UK) Co Ltd v WW
Gear Construction Ltd, the
business was altogether unable to rely on the protection provided by UCTA due small
technicalities which rendered the contract deemed not to be made on standard
terms.32 Moreover,
as was pointed out by the Law Commission, many unfair terms fall outside the
scope of protection provided by UCTA, leaving small businesses vulnerable to
potential abuse by larger firms.33 UCTA
only applies to exclusions or limitations of liability and does not restrict
terms that impose additional obligations on the other party, nor examine the
fairness of a contract generally.

 

The
costs involved in extending protections to small businesses has been a commonly
cited reason for deterring government and legal institutions from initiating
any change in the law. Surveyed respondents in a report by the Department for Business
Innovation & Skills identified that increasing protections to small
businesses would create compliance costs and unforeseen market burden costs, which
would then be passed on through to consumers.34 Extension
of consumer regulation to small business would also have many other unintended
consequences; any benefits gained from the increased protections would
potentially be offset by the increased burden upon small businesses themselves to
comply with additional regulations when supplying goods and services.35 Moreover,
requiring parties to a commercial contract ascertain the size of the other
party according to an arbitrary definition of small business and introduce measures
to identify such businesses would create significant administrative costs and
result in considerable inefficiencies and delays in transactions.36 Currently,
the government maintains the stance that there is neither quantitative data nor compelling
evidence that small businesses are being abused to the point that it justifies
amending the current body of legislation. 37 In any case, it would be
wise to approach the issue only after a considered and measured analysis of the
costs and benefits associated with increasing small business protections.

 

Looking
to legislative frameworks upheld in other jurisdictions can provide valuable insight
as to the optimal balance to be struck between consumer and small business
rights. Under the Australian model, consumer law protections can be extended to
businesses or anyone who acquires a product or service up to the value of
$40,000.38
The relatively flexible definition of a “consumer” under Australian law allows
the law to protect a significantly broader class of consumers than would
otherwise be protected under UK law. The ACL also prohibits misleading,
deceptive and unconscionable conduct for all transactions involving sale or
purchase of goods and services, whether between consumer or business.39 However, protections
against unfair contract terms cover only individual consumers and do not extend
even to small businesses.40 Conversely,
in some jurisdictions, consumers and small businesses are afforded similar
levels of protections against unfair terms; in the Netherlands, unfair contract
terms are identified in a black list which is applied to both consumers and
small businesses, but not large businesses. 41 It
may benefit the UK to apply a blended approach to its own legislation with
reference to what has worked best for small businesses in other jurisdictions.

 

While
it is true that small businesses often find themselves in want of greater
legislative protections, careful consideration and judgement is needed before
any sweeping intervention in the law is made. Extending the scope of existing consumer
legislation to small businesses can create many unintended consequences and enforcing
a catchall framework approach would be highly inappropriate in this situation.  Law reform should step in only where necessary
and aid only the most vulnerable firms and sectors.

1 Ward M. &
Rhodes, C. (2014) Small Businesses
and the UK Economy, House of Commons
Library, 1.

2  LinkedIn Corporate Communications Team.,
(2014). UK small businesses
and entrepreneurs on the rise  Online
LinkedIn. Available from:

 https://news.linkedin.com/2017/7/uk-small-businesses-and-entrepreneurs-on-the-rise
Accessed 5 January 2017

3  Rhodes, C. (2017) Business Statistics, House of Commons Library, 5.

4  Rhodes, C. (2017)
Business Statistics, House of Commons
Library, 5.

 

5 Consumer Rights Act 2015 Explanatory
Notes s 2(36).

6  Sheppard E. & Burke C., (2016) Lack of
consumer rights leaves small firms at mercy of multinationals Online The
Guardian. Available from: https://www.theguardian.com/small-business-network/2016/aug/25/consumer-rights-small-firms-unfair-contract-petition
Accessed 6 January 2017

7 Fletcher et al. (2014) Small
Businesses As Consumers: Are They Sufficiently Protected? A report for the
Federation of Small Businesses. Centre for
Competition Policy, University of East Anglia.

8 The Law Commission and The Scottish
Law Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law Commission, 81-82.

9  The Law Commission and The Scottish Law
Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law Commission, 78.

10 Unfair Terms in Consumer Contracts Regulations 1999.

11 The Law Commission
and The Scottish Law Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law
Commission, 4.

12  Fletcher et al. (2014) Small Businesses As
Consumers: Are They Sufficiently Protected? A report for the Federation of
Small Businesses. Centre for Competition
Policy, University of East Anglia, 7.

13  Fletcher et al. (2014) Small Businesses As
Consumers: Are They Sufficiently Protected? A report for the Federation of
Small Businesses. Centre for Competition
Policy, University of East Anglia, 7.

14 The Law Commission
and The Scottish Law Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law
Commission, 4.

15  Department for Business Innovation &
Skills., (2016). Protection of small businesses
when purchasing goods and services: Government response to the call for
evidence, Department for Business
Innovation & Skills, 5.

16 Department for Business,
Energy & Industrial Strategy., (2016). Longitudinal
Small Business Survey Year 2 (2016): SME employers – cross-sectional report, Department
for Business, Energy & Industrial Strategy, 113.

17 Unfair Contract Terms Act 1977.

18 Unfair Contract Terms Act 1977 s 6.

19 Business Protection from Misleading Marketing Regulations
2008 s 6.

20 Directive 2006/114/EC of the European Parliament and of the Council of 12
December 2006.

21 Costea v SC Volksbank Romania SA; C-110/14 – 2015
All ER (D) 29 (Sep).

22 Overy v Paypal (Europe) Ltd 2013 All ER (D) 133 (Mar).

23 Directive 2006/114/EC of the European Parliament and of the Council of 12
December 2006, Art 2(b)-(c).

24 Consumer Rights Act 2015 Part 1 Chapter 1 Section 2
(3).

25 Enterprise Act 2016 Part 1 s 1.

26 Department
for Business Innovation & Skills., (2015). Call
for evidence: Protection of small businesses when purchasing goods and services,
Department for Business Innovation &
Skills, 4.

27 Department for
Business Innovation & Skills., (2015). Call
for evidence: Protection of small businesses when purchasing goods and services,
Department for Business Innovation &
Skills, 18.

28  Unfair Contract Terms Act 1977 s 3, 6.

29  Unfair Contract
Terms Act 1977 s 6(1A).

30  Unfair Contract
Terms Act 1977 s 11.

31  The Law Commission and The Scottish Law
Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law Commission, 40.

32 Yuanda (UK) Co Ltd v WW
Gear Construction Limited 2010 EXHC 720 (TCC).

33 The Law Commission
and The Scottish Law Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law
Commission, 61.

34 Department for
Business Innovation & Skills., (2016). Protection of
small businesses when purchasing goods and services: Government response to the
call for evidence, Department for
Business Innovation & Skills, 12.

35 Department for
Business Innovation & Skills., (2016). Protection of
small businesses when purchasing goods and services: Government response to the
call for evidence, Department for
Business Innovation & Skills, 12.

36 Department for
Business Innovation & Skills., (2016). Protection of
small businesses when purchasing goods and services: Government response to the
call for evidence, Department for
Business Innovation & Skills, 12.

37 Department for
Business Innovation & Skills., (2016). Protection of
small businesses when purchasing goods and services: Government response to the
call for evidence, Department for
Business Innovation & Skills, 14.

38 Australian Consumer Law, s 3.

39 Australian Consumer Law, s 18.

40
Australian Consumer Law, Part 2-3.

41 Dutch Civil Code Article 6:235(1) BW.

 

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