Media release: New small business legislation: making law subject to value judgments is destructive to the Rule of Law

Media Release
3 March 2021

On 11 December 2020, the Minister of Small Business Development gazetted for comment the National Small Enterprise Amendment Bill ("the draft Amendment Bill"). The Bill seeks to change the way government deals with the impact of legislation on small businesses, to regulate relations between small and other enterprises, and to introduce a new dispute-resolution process including the concept of "unfairness" in contractual dealings. In its submission, the Free Market Foundation (FMF) points out the flaws in the Bill in its present form and recommends changes, in particular that legislation subject to value judgments is destructive of the Rule of Law and introduces uncertainty and risk into commercial contractual relations.

In 1996, the National Small Enterprise Act established an Advisory Body to promote the interests of small enterprise in line with 1995 Small Business Strategy. This included a joint vision for big and small business and that the small-business environment should be as market-orientated as possible. The Advisory Body currently advises the Minister what the impact of current and new legislation will be on small enterprise, as well as the constraints affecting the viability of the small enterprise community, and provides for the Body's interaction with the Department and Parliament. The Amendment Bill alters this regime.

The Bill seeks to replace the Advisory Board and establish an office of a Small Enterprise Ombudsman Service and provide for the appointing of an Ombudsman with the powers to investigate and award compensation. The Minister may, on the Ombudsman's recommendation, prohibit certain practices in relation to small enterprises as being unfair, including transfer of commercial risk to the weaker party.

The FMF submits that abstract values such as fairness cannot constitute substantive rules for tribunals to use to intervene in contracts. A notion that contracts need not be enforced if they offend against fairness would give rise to legal and commercial uncertainty and undermine the Rule of Law. If the parties have agreed contractual terms, the law should not be used to give relief against unfair terms.

Gary Moore, Senior Researcher at the FMF said, "Every contract, no matter how carefully negotiated, would be open to subsequent challenge on the ground that some of its terms were unfair, with inestimable damage to the conduct of business, personal trust and respect for law. Imposing these notions of fairness would have the unintended consequence of deterring bigger enterprises from dealing with small ones, the opposite of government policy."

Moore continued, "There are already common-law rules applicable in cases of allegedly unequal bargaining power including interpreting ambiguous contracts as lightly as possible, and rules about duress, undue influence and public policy.

Consumer legislation recognises that the problem lies with the machinery of the law, rather than the law about unfair contracts. The statutes establish special courts and tribunals, and alternative dispute-resolution agents or an Ombudsman. These statutes' real value lies, not in rules about what is unfair, but rather in the mechanisms, which they introduce for more accessible, informal and inexpensive resolution of disputes".

A socio-economic impact assessment would identify these shortcomings of the draft Bill. Despite the requirement that all proposed bills should be accompanied by a Cabinet mandated socio-economic impact assessment (SEIA), this is absent from this Bill. A properly constructed and independent SEIA ensures that all policy is evidence based and not at the whim of politicians.


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