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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.

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