Thelaw has always been careful to maintain distinction between individualconsumers and businesses, with the latter consistently being afforded significantlyless protections under legislation and regulation. Courts and legislatorshave long upheld a reluctance to intervene in B2B transactions, thus allowingfor 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 inincreasing 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 grossvalue.1 Britain’sworkplace is shifting away from larger firms in favour of small businesses,with numbers of small businesses and entrepreneurs steadily on the rise.2 2017statistics show that within the UK alone, small and medium sized enterprises(SMEs) – those with 250 or fewer employees – accounted for an astounding 5.
7million or 99% of all businesses.3 Micro-businesses,comprised of nine or fewer employees, similarly accounted for 5.4 million or96% of all businesses.
4 Thesheer size of the small business market itself points towards cause for concernand a need for closer examination of the protections currently afforded toSMEs. Althoughsmall businesses tend to be more flexible and innovative than their largercounterparts, they are also particularly vulnerable to the behavior of largercorporates. While the Consumer Rights Actprovides comprehensive protection for consumers, the scope of its protection systematicallyexcludes small and micro businesses,5leaving such businesses largely unprotected against certain commercial issues includingrights over cancellation periods and termination fees.6 Thelack of distinction drawn by the law between micro businesses and largecorporations has consistently made small firms easy targets by their largercounterparts, with fifty-two percent of small businesses affected by unfairsupplier contract terms.7 Additionally,the relatively young age of most entrepreneurs and the lack of educationalqualifications of a significant proportion of business owners8 mean the majority of smallbusiness owners are usually in a position no better than individual consumers,yet lack the same rights and guarantees in the event of an unfaircontract. Many legal and social institutions alike have advocated for consumerprotections to be extended to small businesses. It is now becoming increasinglyrecognised that small businesses, particularly sole traders andmicro-businesses, have much in common with and face many of the same problemsas individual consumers and may therefore benefit under a more protectiveregime.
The recommendations of the Law Commissions of England and Scotland in a2005 joint report9were highly supportive of extending the protections of the Unfair Terms in Consumer Contracts Regulations 1999 to the mostvulnerable small businesses.10Among other recommendations, the report proposed that small businesses ought to be ableto challenge any standard term regardless of whether it is an exclusion clausecurrently covered by the Unfair ContractTerms Act 1977, given that many harsh terms that small businesses aresubject to do not actually fall within its scope. 11 Researchby theFederation of Small Businesses revealed that that small businesses were morelikely to be vulnerable when making purchasing decisions owing to reasonsincluding lack of expertise, greater opportunity cost of time spent makingpurchase decisions and lack of bargaining power when negotiating deals.12Larger businesses, by contrast, were more likely to have the staff, resources,expertise and bargaining power to make effective purchase decisions13and therefore did not experience the same challenges faced by their smallercounterparts. While small businesses are likely to be more vulnerable inpurchases for goods and services outside their field of expertise or corebusiness, research by the Law Commissions showed that that even where smallbusinesses were contracting for supplies obtained regularly in the course ofrunning the business, they often did not fully understand the standard terms ofthe purchase.14Small businesses are rarely able to persuade suppliers to alter contract terms intheir favour and are often compelled into contracting on the standard terms of thelarger firm.
15Furthermore, unlike larger businesses, small businesses are typically unable toafford legal advice on the terms of a proposed contract nor likely to havein-house legal expertise. Statistics from a 2016 Small Business Survey revealthat only 8% of SMEs sought advice from solicitors or lawyers in the previous12 months, with the number being even lower for micro-business enterprises.16 Clearly,small businesses face unique challenges in their everyday operations that makethem significantly more vulnerable to unfair terms than larger businesses. Conversely,some institutions would argue extending the scope of consumer protection to accommodatesmall businesses is redundant, given the vast body of existing legislation alreadyin place to protect small businesses. In addition to rights under common law, theUnfair Contract Terms Act 1977 17also provides protection to smallbusinesses against unfair contract terms when transacting with largersuppliers.
The Act limits the use ofexclusion clauses, such as excluding liability for negligence resulting indeath or personal injury, by rendering the terms ineffective or subject toreasonableness.18 Businesses are also protected from misleading advertising through the Business Protection from Misleading Marketing Regulations 2008 whichprohibits advertising that is deceptive in nature and likely to misleadtraders.19The Regulations also outline acceptable standards on comparative advertising and implement a EuropeanUnion (EU) Directive on Misleading and Comparative Advertising.
20 Moreover, it is important to note that small businesses are not definitivelyexcluded from protections available under the Consumer Rights Act, so long asthe business demonstrates itself as falling within the definition of aconsumer. The recent decision of the Court of Justice of the European Union in Costea v SC Volksbank Romania SA foundthat a lawyer could be treated as a consumer when contracting for purposes notlinked to his trade or profession. 21A similar situation arose in Overy v Paypal (Europe) Ltd; a person actingpartly for business purposes could be afforded protection under the UnfairTerms in Consumer Contracts Regulations 1999 if that purpose was insignificantor negligible.22Although these cases relate to European law, the definition of “consumer” underArticle 2(b) and (c) of the Directive23bears striking similarity to that of the definition under the Consumer Rights Act 2015.24Moreover, as the Consumer Rights Act definition is one of an individual actingfor purposes wholly or mainly outside the individuals’ trade, it may lower thethreshold such that the purchaser need only show the item was more for personalthan business use to rely on its protection. Some protections under existingconsumer rights legislation may thereby arise in favour of small businesses,but it is clear that these protections are neither extensive nor widelyavailable save in limited circumstances. Nonetheless, therehas been some evidence of recent government introduced measures to protectsmall business. Intended to promote enterprise and stable economic growth inBritain, the passing of the Enterprise Act in 201625saw the establishment of a Small Business Commissioner to resolve common issuesfaced by small businesses such as late payment.
In March 2015, the Government launched a callfor evidence into the current state of protective measures available to smalland micro businesses following concerns raised about the vulnerability of suchbusinesses.26 Thefindings of the call for evidence reiterated that small and micro businesseswould benefit from increased protections such as new rights over purchases ofdigital content, improved protection under UCTA and a broader range of remediesfor deficient goods and services. 27However, no further proposals or reforms have since been raised by thegovernment following the report. In spite of the range of legislation already available, currentprotections still fall short of providing adequate cover for small businesses. Althoughsmall and micro-businesses have access to some of the protections under the Unfair Contract Terms Act 1977,28 the protections provided againstunfair terms are minimal.
So long as the “reasonableness test” set out by UCTA is met by the partysetting forth the exclusion, liability for a whole range of terms including forconformity of goods with description, fitness and quality can be excluded.29 “Reasonableness”itself is not given a clear definition in the act 30 andonly applies where the parties are dealing with a contract on standard terms, andnot in contracts that are deemed to have been “freely negotiated”.31 In somescenarios, as was evident in Yuanda (UK) Co Ltd v WWGear Construction Ltd, thebusiness was altogether unable to rely on the protection provided by UCTA due smalltechnicalities which rendered the contract deemed not to be made on standardterms.32 Moreover,as was pointed out by the Law Commission, many unfair terms fall outside thescope of protection provided by UCTA, leaving small businesses vulnerable topotential abuse by larger firms.33 UCTAonly applies to exclusions or limitations of liability and does not restrictterms that impose additional obligations on the other party, nor examine thefairness of a contract generally. Thecosts involved in extending protections to small businesses has been a commonlycited reason for deterring government and legal institutions from initiatingany change in the law. Surveyed respondents in a report by the Department for BusinessInnovation & Skills identified that increasing protections to smallbusinesses would create compliance costs and unforeseen market burden costs, whichwould then be passed on through to consumers.
34 Extensionof consumer regulation to small business would also have many other unintendedconsequences; any benefits gained from the increased protections wouldpotentially be offset by the increased burden upon small businesses themselves tocomply with additional regulations when supplying goods and services.35 Moreover,requiring parties to a commercial contract ascertain the size of the otherparty according to an arbitrary definition of small business and introduce measuresto identify such businesses would create significant administrative costs andresult in considerable inefficiencies and delays in transactions.36 Currently,the government maintains the stance that there is neither quantitative data nor compellingevidence that small businesses are being abused to the point that it justifiesamending the current body of legislation. 37 In any case, it would bewise to approach the issue only after a considered and measured analysis of thecosts and benefits associated with increasing small business protections. Lookingto legislative frameworks upheld in other jurisdictions can provide valuable insightas to the optimal balance to be struck between consumer and small businessrights. Under the Australian model, consumer law protections can be extended tobusinesses or anyone who acquires a product or service up to the value of$40,000.
38The relatively flexible definition of a “consumer” under Australian law allowsthe law to protect a significantly broader class of consumers than wouldotherwise be protected under UK law. The ACL also prohibits misleading,deceptive and unconscionable conduct for all transactions involving sale orpurchase of goods and services, whether between consumer or business.39 However, protectionsagainst unfair contract terms cover only individual consumers and do not extendeven to small businesses.40 Conversely,in some jurisdictions, consumers and small businesses are afforded similarlevels of protections against unfair terms; in the Netherlands, unfair contractterms are identified in a black list which is applied to both consumers andsmall businesses, but not large businesses.
41 Itmay benefit the UK to apply a blended approach to its own legislation withreference to what has worked best for small businesses in other jurisdictions. Whileit is true that small businesses often find themselves in want of greaterlegislative protections, careful consideration and judgement is needed beforeany sweeping intervention in the law is made. Extending the scope of existing consumerlegislation to small businesses can create many unintended consequences and enforcinga catchall framework approach would be highly inappropriate in this situation. Law reform should step in only where necessaryand aid only the most vulnerable firms and sectors.
1 Ward M. &Rhodes, C. (2014) Small Businessesand the UK Economy, House of CommonsLibrary, 1. 2 LinkedIn Corporate Communications Team.,(2014).
UK small businessesand entrepreneurs on the rise OnlineLinkedIn. Available from: https://news.linkedin.com/2017/7/uk-small-businesses-and-entrepreneurs-on-the-riseAccessed 5 January 20173 Rhodes, C. (2017) Business Statistics, House of Commons Library, 5. 4 Rhodes, C.
(2017)Business Statistics, House of CommonsLibrary, 5. 5 Consumer Rights Act 2015 ExplanatoryNotes s 2(36).6 Sheppard E. & Burke C.
, (2016) Lack ofconsumer rights leaves small firms at mercy of multinationals Online TheGuardian. Available from: https://www.theguardian.com/small-business-network/2016/aug/25/consumer-rights-small-firms-unfair-contract-petitionAccessed 6 January 20177 Fletcher et al. (2014) SmallBusinesses As Consumers: Are They Sufficiently Protected? A report for theFederation of Small Businesses. Centre forCompetition Policy, University of East Anglia.8 The Law Commission and The ScottishLaw Commission.
, (2005). Unfair Terms in Contracts, The Law Commission and The Scottish Law Commission, 81-82.9 The Law Commission and The Scottish LawCommission., (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 Commissionand The Scottish Law Commission., (2005).
Unfair Terms in Contracts, The Law Commission and The Scottish LawCommission, 4. 12 Fletcher et al. (2014) Small Businesses AsConsumers: Are They Sufficiently Protected? A report for the Federation ofSmall Businesses.
Centre for CompetitionPolicy, University of East Anglia, 7. 13 Fletcher et al. (2014) Small Businesses AsConsumers: Are They Sufficiently Protected? A report for the Federation ofSmall Businesses. Centre for CompetitionPolicy, University of East Anglia, 7.
14 The Law Commissionand The Scottish Law Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish LawCommission, 4.15 Department for Business Innovation &Skills., (2016). Protection of small businesseswhen purchasing goods and services: Government response to the call forevidence, Department for BusinessInnovation & Skills, 5. 16 Department for Business,Energy & Industrial Strategy.
, (2016). LongitudinalSmall Business Survey Year 2 (2016): SME employers – cross-sectional report, Departmentfor 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 Regulations2008 s 6. 20 Directive 2006/114/EC of the European Parliament and of the Council of 12December 2006. 21 Costea v SC Volksbank Romania SA; C-110/14 – 2015All 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 12December 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 Departmentfor Business Innovation & Skills., (2015). Callfor evidence: Protection of small businesses when purchasing goods and services,Department for Business Innovation &Skills, 4. 27 Department forBusiness Innovation & Skills.
, (2015). Callfor 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 ContractTerms Act 1977 s 6(1A).
30 Unfair ContractTerms Act 1977 s 11.31 The Law Commission and The Scottish LawCommission., (2005).
Unfair Terms in Contracts, The Law Commission and The Scottish Law Commission, 40.32 Yuanda (UK) Co Ltd v WWGear Construction Limited 2010 EXHC 720 (TCC). 33 The Law Commissionand The Scottish Law Commission., (2005). Unfair Terms in Contracts, The Law Commission and The Scottish LawCommission, 61.34 Department forBusiness Innovation & Skills., (2016).
Protection ofsmall businesses when purchasing goods and services: Government response to thecall for evidence, Department forBusiness Innovation & Skills, 12. 35 Department forBusiness Innovation & Skills., (2016). Protection ofsmall businesses when purchasing goods and services: Government response to thecall for evidence, Department forBusiness Innovation & Skills, 12.36 Department forBusiness Innovation & Skills., (2016). Protection ofsmall businesses when purchasing goods and services: Government response to thecall for evidence, Department forBusiness Innovation & Skills, 12.37 Department forBusiness Innovation & Skills.
, (2016). Protection ofsmall businesses when purchasing goods and services: Government response to thecall for evidence, Department forBusiness Innovation & Skills, 14.38 Australian Consumer Law, s 3. 39 Australian Consumer Law, s 18. 40Australian Consumer Law, Part 2-3. 41 Dutch Civil Code Article 6:235(1) BW.