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Unfair contracts? Suck it up!
A discussion and explanation of ICA's position

28 November 2010

Independent Contractors Australia has been running its 'fair contracts' campaign for over twelve months. We've

and much more.

We've attracted criticism, often from individual contractors, that in essence says we are being business 'naive'. "Suck it up" they say, "business is not fair, what do you expect, it's a battle out there" and "if you win, you're rewarded!" "It is, after all, a free world, take the contract or not."

This criticism and comment also often comes from lawyers, economists and public policy bureaucrats. The essence of the counter-argument to 'fair contracts' is that contracts are a take-it-or-leave-it instrument and that this is essential to commerce. It's this argument that is mounted to justify the insertion into contracts of almost any clause.

However, even supporters of the 'take-it-or-leave-it' contract accept that this has boundaries and limitations. As an extreme example, a contract to murder someone is clearly not accepted and no court would allow this as a defence from a murderer. "Your honour. I entered a contract and one of the clauses required me to murder my client's competitor. Therefore I'm not responsible. I was just fulfilling the terms of the contract."

Take a simpler example. If a haulage contract stipulated that a truck driver must exceed the speed limit, this would not be accepted as an excuse for speeding. From the point of view of the law, a clause in a contract requiring an illegal act voids the clause.

The parameters and boundaries to contracts have centuries of history to them (in the English legal tradition) of common law. These hold in general terms that the commercial contract is one in which a balance of power exists between the parties in that parties have equal rights to control the terms of the contract. There are probably plenty of lawyers who would disagree with that assessment.

I'm not a lawyer but I came to this understanding in researching my book Independence and the Death of Employment. I've read large numbers of court decisions identifying the difference between a commercial contract and an employment contract. It comes through clearly that the judges are looking for evidence of a balance in the power relationship between parties in a commercial contract. This balance is highly specific and goes to the structure of the contract.

Here's one example. If a contract allows one party to change the terms of the contract without reference to, or approval from, the other party, a court will tend to disallow that clause. I've discussed this with senior bank lawyers who say I'm wrong. They say that this would prevent banks from changing interests rates given market forces. But these lawyers are missing the point. If a person enters a bank contract for a variable rate of interest, the interest rate can change. But if a person enters a contract for a fixed rate of interest, the bank should not and is not able to change the interest rate.

It's all fairly common sense. We've summarised these key contract structures in our Charter of Contractual Fairness. We haven't 'invented' these key elements, but taken them from amendments to the Trade Practices Act enacted by the Australian Parliament in 2010 which created unfair contract protections for consumers. These amendments (mostly) codify common law.

Our argument is that these same legislative protections created for consumers need to be applied to self-employed, small business people. The reason is practical.

If two businesses that can afford lawyers engage in contracts, the lawyers will negotiate the terms of the contract until they both have an outcome that both accept. Each lawyer will work to protect and/or enhance the interests of his client. That's their job. If one lawyer can insert a clause that 'does over' the other party, it's seen as fair game. But, for example, if a lawyer allowed a clause to be inserted in the contract that enabled the other party to fundamentally change the terms of their client's contract, that lawyer would be both a fool and incompetent.

In this sense the idea that parties go into a commercial contract with their eyes wide open and having properly considered the contract is assumed to have practical application.

This is not an assumption that can be applied to self-employed small business people. Self-employed people are in a near-identical position to consumers. First, the value of the contracts into which they enter is usually low. The profit margin in the contracts is not sufficient to warrant using a lawyer to check every contract. Second, the speed with which contracts are drawn up is such that time most often does not allow for a lawyer to be engaged to check the contract. Because of this consumer-like situation, self-employed small business people need identical protections from unfair contracts as those available to consumers.

This does not mean to say that a small business person should or will be protected from entering a bad deal where they lose money, for example. They need to make those commercial decisions and risks for themselves. But it does mean that when they enter a 'standard form' contract, the contract is required to conform to a certain 'fairness' structure. Our view is that the structures are common sense and hard to disagree with. Read them yourself and see what you think.

There are important reasons for campaigning on this issue. Independent Contractors Australia is not in the business of creating some sort of artificial advantage for small business people. Our interest is in encouraging structures and institutions that enhance quality commercial transactions between businesses, whether the business is an individual or a massive corporation.

The essence of all sustainable, quality commercial transactions is the element of 'trust.' If trust in commercial transactions in high, people will engage in high volumes of transactions. Commerce has its best chance of flourishing in environments of trust.

We assert that that levels of trust operating in commercial transactions for self-employed small business people is frequently too low. We have accumulated evidence of this. Large organizations impose contracts on self-employed people where trust is non-existent and the self-employed person can be treated with patent unfairness---in fact, abused.

What we seek is provisions under law and applied in practice where the structure of commercial contracts ensures fairness to both parties. Within this framework, parties can make their own decisions about the risk-benefit analysis.

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