The Law Commission plans to offer more protection to small businesses. Fine in principle – unless it allows small firms to exploit large loopholes

Having never been taller than five foot five, I am quite a fan of anything that protects the little people. I should therefore welcome the new Law Commission Report and its proposal to change the law on unfair contract terms in favour of small businesses. It wants to give the little people greater rights to challenge terms that are not fair, and to end the days when small businesses have to sign away their life and their livelihood in order to secure work. At first sight it’s a worthy cause – but it might lead to some odd things in the construction industry.

First, a bit of background. The law which renders certain terms within contracts either void or only enforceable if they pass a “reasonableness” test is currently a bit of a jumble. Some of it is contained in the Unfair Contract Terms Act 1977, and a similar but separate regime for contracts with what the law calls “consumers” is set out in the Unfair Terms and Consumer Contracts Regulations 1999 (see Tony Blackler, page 56, for more about this). Part of what the Law Commission wants to do is bring all of the law in this area into one new act. But the overall act would deal separately with consumers, businesses and the new category of “small businesses”.

UCTA focuses on provisions in contracts which seek to exclude or restrict the liability of one party. The regulations for consumer contracts are broader, as they extend to all standard terms of business, not just exclusion and limitation clauses. The Law Commission proposes enabling small businesses to enjoy a similar position to consumers.

This means a small business could avoid having to comply with indemnities, onerous methods of dispute resolution and clauses that enable the other party to terminate quickly and without reason. Other examples are onerous terms for payment of interest, and clauses that require payments to be forfeited or ownership of goods and materials to be lost.

The Law Commission’s test for what is a small business is simple but frighteningly arbitrary – any business that has nine or fewer staff. This is indeed small, but it could create some odd results. Take a developer who appoints a professional team for his project. It has developed a standard form of appointment. This is issued to a 20-partner firm of architects, a national firm of quantity surveyors, a structural engineer that employs eight people and the developer’s mate who has set up as a project manager. If all of them sign to the same document and a problem arises, the engineer and the project manager could challenge a standard term but the architect and the QS could not.

Here is a third example that will test your sympathy with small businesses – take a small firm of solicitors comprising nine partners and staff who engage an architect and a contractor to build an extension on their office. Even here, the architect who offers to work on the RIBA terms and the contractor who suggests a JCT contract could find that the solicitors later challenge some of the provisions of these for not being fair and reasonable.

A small business could avoid having to comply with contract provisions such as indemnities or dispute resolution

In other circumstances, the new law could work against the professional team and in favour of the developer. Many developers are small businesses – the main man, his business partner, a PA and a couple of project managers, for example. If they invited a team to work for them and the architect suggested the RIBA conditions of appointment and the engineer put forward the ACE conditions, the developer could sign up but subsequently challenge any of the terms.

We do not need to worry just yet. The Law Commission has produced a draft bill but it may never become law.

Those who deal with construction contracts have suffered a lot of statutory interference over the past few years. I fear that these changes to the law on unfair contract terms could create less certainty and more headaches. Do small developers need protection? Will small practices in the construction industry benefit or will people simply use this as another reason to deal only with the bigger firms?

Patrick Holmes is a partner in solicitor Macfarlanes