The Recent Fair-Trading Debate in Australia

These debates in eighteenth and nineteenth-century England and the United States have had their parallels in other jurisdictions that share the common-law tradition, including Australia—most recently, in the fair-trading debate that occurred at the federal level between 1974 and 1997. That debate arose out of continuing complaints from the small-business sector regarding the conduct of big business towards small business. It revolved around a series of proposals aimed at effectively broadening, by statute, the Equitable Doctrine of Unconscionability—the doctrine that carried the remnant of the medieval concern for fairness in trade and contracts, and which permitted courts to decline to enforce contractual arrangements. As we saw above, while the remit of contract law diminished progressively in the past two centuries, the Equitable Doctrine of Unconscionability within contract law had been progressively emasculated—being restricted to tightly defined procedural issues. Consequently, the proposals at the heart of the fair-trading debate challenged directly the classical doctrine of freedom of contract.

Lack of space prevents me dealing with the movement away from the doctrine of freedom of contract in the Australian states through detailed legislation covering such matters as weights and measures, sale of goods, safety and hire-purchase legislation. In particular, attention will not be directed at the New South Wales Contract Review Act 1980, which authorised the NSW courts to rewrite unfair contracts or to refuse to enforce them. Rather, attention will be directed to Commonwealth legislation intended to apply broadly to all trade and commerce. Nor will a detailed account be given of the constitutional limitations that confine the application of that legislation.

The first Commonwealth trade practices legislation was the Australian Industries Preservation Act 1906, which was inspired by US antitrust laws. The act proved ineffective, being subjected to a successful High Court challenge in 1910 and a successful Privy Council challenge in 1912. Similar state legislation was also rendered ineffective. The second major attempt was the Trade Practices Act 1965–71, which took a limited approach, influenced by the UK’s Restrictive Trade Practices Act of 1956 rather than the broad prohibitions of the US law. It established a process of registration and adjudication of the lawfulness of a practice by an administrative tribunal. This act and related successors were criticised as being inefficient, slow and costly and because examinable agreements or practices remained operative until restrained by the tribunal.[43]

The Trade Practices Act 1974 was the third major attempt to introduce effective general trade practices legislation in Australia:

Restrictive trade practices have long been rife in Australia. Most of them are undesirable and have served the interests of the parties engaged in them, irrespective of whether those interests coincide with the interests of Australians generally. These practices cause prices to be maintained at artificially high levels. They enable particular enterprises or groups of enterprises to attain positions of economic dominance which are then susceptible to abuse; they interfere with the interplay of competitive forces which are the foundation of any market economy; they allow discriminatory action against small businesses, exploitation of consumers and feather bedding of industries…The consumer needs protection by law and this Bill will provide such protection.[44]

The Trade Practices Act 1974 involved a substantial statutory interference in freedom of contract. Not only was it intended to promote economic efficiency, it was intended to promote fairness in competition and in dealings between businesses and between businesses and consumers, and to promote honesty in the provision of information. The inference to be drawn was that in enacting this legislation, the government and parliament had accepted that market forces left to themselves would not produce either just or economically satisfactory outcomes.

Since the enactment of that legislation in 1974, there have been at least 18 major reports or proposals to amend the act to strengthen the regulation of unfair business practices. The most influential of these inquiries was the Fair Trading Inquiry by the House of Representatives Standing Committee on Industry, Science and Technology (the Reid Committee).[45] The Reid Committee tabled a bipartisan report, Finding a Balance Towards Fair Trading in Australia, in the House of Representatives in May 1997. It concluded that concerns about unfair conduct towards small business were justified and should be addressed urgently. To this end, the report made wide-ranging recommendations to induce behavioural change on the part of big business towards small business and to provide adequate means of redress. In summary, the recommendations covered:

The committee believed that an inequality of power in commercial transactions was the underlying cause of the unfair business conduct raised with it. The result was a bias in business dealings in favour of powerful companies with the financial resources to engage in lengthy litigation. This left small-business people open to arbitrary or opportunistic conduct with an associated economic and social cost. The committee pointed also to a lack of adequate research into small-business failures in Australia, and to an absence of any formal research in evidence tendered to the committee. Nevertheless, the anecdotal evidence provided by the numerous small-business people convinced the committee that unscrupulous conduct of big business towards small business was a serious problem causing significant economic and social damage. The committee was conscious that in a competitive economic environment many businesses would fail, but that awareness did not exclude the need to examine the causes of failure—and action to alleviate its adverse consequences.

While acknowledging the inadequacies of the previous regulatory control regime, the committee was strongly critical of the efforts of the Australian Competition and Consumer Commission (ACCC) in relation to small-business disputes. It believed that there was a need to establish a body of precedent under proposed new provisions in the Trade Practices Act 1974 as quickly as practicable.

The strength and breadth of the committee’s report came as a surprise to many observers, including small-business representatives. It ran directly counter to the rhetoric of deregulation that had surrounded much recent public policy debate, including the rhetoric contained in its own terms of reference. As could be expected, small-business representatives welcomed the committee’s report warmly, while big-business representatives were much more reserved. Typical of the critical reactions was an editorial in the Australian Financial Review on 26 June 1997, which attacked the report as naïve, claiming that economic competition was desirably deliberate and ruthless. The editorial also claimed that requiring fair conduct from banks or large shopping centre managers in dealing with their clients and tenants would be a restriction on their ability to compete and that small businesses would suffer as a result. For its part, the Property Council of Australia commissioned economic consultancy firm Access Economics to produce a so-called ‘independent’ response. Their document, Tipping the Balance?,[46] which focused on retail tenancy issues, claimed the Reid report was not consistent with its terms of reference in that it would promote ‘sub-optimal economic outcomes’ as well as increasing the regulatory burden on retail businesses. Additionally, the Reid report was said to be internally inconsistent and to have paid scant regard to hard data on retail-industry performance. Tipping the Balance? criticised the Reid report’s reliance on anecdotal evidence from small-business operators and small-business groups and from competing expert witnesses. Of course, the claim to independence lacks credibility, given that the Property Council was paying. Rather, Tipping the Balance? provides an example of the partisan use made of economic analysis in public policy debate. It also provides an example of the demands made by economists generally that the forms of analysis used in public policy debate be confined to formal economic analysis relating to economic efficiency, as they define it, and that the direct experience of those involved in markets be disregarded.

Prominent economic fundamentalist P. P. McGuinness claimed that the Reid Committee’s report relied on emotion, prejudice and a desire to cater to the voters.[47] This reflects an elitist contempt for the political process typical of many economic fundamentalists. McGuinness claimed that the report was a classic case of an attempt to enrol political power and anti-competitive regulation in the cause of ripping off consumers. This one-sided application of capture theory also appears typical of economic fundamentalism: only economic fundamentalists can be trusted to present views untainted by self-interest—a view peculiarly inconsistent with their own theories. It also attempts to exploit the Enlightenment’s depreciation of the role of emotions in human judgement.

On the other side, Professor Andrew Terry argued in the Australian Financial Review on 27 June 1997 that the committee’s recommendations would not damage the economy, but would lead to a much needed extension and clarification of the law. The chief executive of the Council of Small Business Organisations in Australia, Rob Bastian, dismissed big-business concerns about uncertainty as ‘crap’, pointing to the uncertainty that had previously confronted hundreds of thousands of small businesses.[48]

Press reports claimed that the government had been subjected to heavy lobbying by several business groups strongly opposed to the committee’s proposals to adopt a new Section 51AA banning unfair conduct. The Treasury and the Department of Industry, Science and Technology were also reported to have been opposed. On the other hand, there was said to be support from coalition backbenchers.[49] Interestingly, a significant proportion of the government’s backbench had experience with small business, including members of the Reid Committee.

On 11 July 1997, the Minister for Small Business, Geoff Prosser, who was hostile to the committee’s recommendations, was forced to resign his portfolio after weeks of political controversy because of a perceived conflict of interest on these issues. Prosser was replaced by one of the government’s most experienced and effective politicians, Peter Reith, whose portfolio, Workplace Relations, acquired responsibility for small-business matters. This represented a significant upgrading in the importance of the small-business portfolio.

The government responded to the committee’s report in a statement by Reith to the House of Representatives, ‘New Deal: Fair deal—giving small business a fair go’, on 30 September 1997. As far as the rhetoric of the statement was concerned, the minister said:

Make no mistake about it, this Federal Coalition Government, this Prime Minister, and this Minister, is [sic] pro-small business, and proud of it…This response on fair trading policy…is the strongest message ever sent from Canberra to Australia’s small business community that they now have a national Government that has listened, has understood and has acted.[50]

The minister announced that the government would act on the recommendations of each of the seven areas of reform identified by the committee: unfair conduct, retail tenancy, franchising, misuse of market power, small-business finance, access to justice and education. Nevertheless, while claiming full credit, the government did not implement the committee’s recommendations in full. The minister said that, in a number of important respects, the government response had gone further than the committee’s recommendations, particularly in the area of effective enforcement of fair-trading issues by the ACCC. In summary, the government action involved:

In respect to the first of these, the new provision extended the existing common-law doctrine of unconscionability by mirroring the legal rights available to consumers under the existing Section 51AB and incorporating most of the matter included in the committee’s proposed Clause 51AA. Importantly, however, the government legislation persisted with the term ‘unconscionable conduct’ rather than ‘unfair conduct’ proposed by the committee. The committee had recommended that the term ‘unconscionable conduct’ be replaced with a term without its limiting legal entailments and proposed the term ‘unfair’ as covering all the circumstances that would be covered by the terms ‘unconscionable’, ‘harsh’ and ‘oppressive’. The government’s bill also dropped the terms ‘harshness of the result’ from the matters that the courts could take into account. Importantly, the new provision was also limited to transactions under $1 million and publicly listed companies were excluded from instigating action under the provision. This limit was subsequently raised to $3 million and is currently being increased to $10 million. In addition, a new provision is being added to include the use of a unilateral right to alter a contract as one of the matters the court can have regard to. Perhaps the most important recommendation that survived the government’s consideration of the Reid Committee’s proposals was the requirement that corporations covered by the section were effectively required to act in good faith.

While the committee recommended clearly that the law should be extended to cover procedural and substantive circumstances, it was unclear to what extent the government’s legislation achieved that widening. The government’s response, therefore—which, in other respects, was very much in the spirit of the committee’s recommendations—fudged the central issue in the inquiry, and limited the application of the changes to unconscionability to relatively small transactions. Consequently, it will be necessary to await the reaction of the courts over time to the new clauses before it is clear how extensive the change has been. In this regard, Bob Baxt recently criticised the ACCC for its failure to bring more meaningful unconscionability cases to the courts in the past five years.[51]

Throughout this debate, the issues remained essentially the same: whether, and to what extent, the Commonwealth should legislate to regulate unfair conduct by big business towards small business. Similarly, the arguments used throughout changed in style only, not in content. The debate also exhibited the tendency for public policy to follow a path of incremental change, which the early Charles Lindblom advocated as the best form of policy development.[52] It exhibits also the entrenched power of big-business groups that the less optimistic late Lindblom feared would forever provide a barrier to more radical change.[53] It is also unusual among contemporary policy debates in that, for the most part, it finds big and small-business lobby groups on different sides of the debate. Governments had sought to chart a course through two powerful business lobbies—advancing two different conceptions of justice—neither of which governments wished to offend. Consequently, throughout the debate, governments of both persuasions conceded as little to the pressure of small-business groups as they could get away with at the time.

The debate also provides a good illustration of the entrenched power of economic methodologies and values as the dominant evaluative considerations used in contemporary policy debates. Big business used the rhetoric of classical contract law—along with the contemporary economic rationalist rhetoric of minimum effective regulation—as the means of deflecting the political pressure. Indeed, the debate has been conducted almost entirely under this rubric. For example, during the Blunt Committee Inquiry in 1979, in commenting on a proposal from the Law Council of Australia for a general prohibition of harsh, unconscionable or unfair conduct, the Blunt Committee expressed the view that the Trade Practices Act 1974 was directed primarily at enhancing competition and should not deal with the ‘moral’ issues involved in business conduct.[54] The Business Council of Australia endorsed this view in its submission to the Reid Inquiry.[55] The claim is, of course, unsustainable. It is a view that relies directly on the positivist separation of law and morals—a separation that is largely discredited. In the particular case, protecting competition—as the Trade Practices Act 1974 does in some of its sections—is not an end in itself. It is done because of the belief that competition enhances economic outcomes and that in turn enhances human welfare. That is, it is done for moral reasons—economic efficiency being one of the intermediate moral values served by that Act. Competition is seen also as producing fairer economic outcomes, as enhancing equity. Consequently, the competition provisions of the Act are intended to enhance welfare and fairness. Conduct that directly reduces welfare or fairness can hardly be thought to be consistent with the aims of that Act. Even the Blunt Committee acknowledged that competition laws operated directly on business conduct and accepted that the Act’s thrust against anti-competitive conduct was tempered to some extent to protect small business and to promote fairness.[56] This should come as no surprise as this is what the minister said when introducing the legislation in the first place. The Act was intended to enhance competition and protect against unscrupulous conduct.

There is some similarity between the position of the Business Council of Australia and Posner’s economic theory of the law, in which the law is seen as serving wealth maximisation.[57] Of course, the law to which he refers is judge-made law, which he considers morally superior to statute law, which tends to depart from his efficiency norm.[58] Posner’s theory is, in fact, an extreme manifestation of the economic fundamentalism of the Chicago school. It is such a transparently impoverished account of justice—running in the face of our contemporary moral vocabulary—that it warrants little serious consideration. For Posner, suffering is irrelevant to his conception of justice unless it is accompanied by a capacity to pay. It equates justice with economic efficiency, but an economic efficiency that is defined purely in terms of wealth maximisation. It is clearly intended to be a descriptive and a normative theory. It is a theory that attaches importance to freedom of choice, but only to the positive rights and values intrinsic to capitalism, the protection of private property rights, promise keeping and freedom of contract—those rights and obligations that are also central to Locke’s social-contract theory.

The Blunt Committee went on to define ‘desirable economic performance’ specifically in terms of ‘economic efficiency’—a concept that it took to be the equivalent of Pareto-optimality. The Blunt Committee acknowledged—in a footnote only—some limitations of this concept, but its analysis remained unaffected by that acknowledgement, a deficiency shared by subsequent references to ‘economic efficiency’ throughout this debate, and in recent public policy debate more generally. Similarly, the Business Council of Australia’s submission to the Reid Inquiry mounts a standard economic argument based on Pareto-optimality: that there should be ‘regulatory intervention’ only when ‘economic efficiency’ is lessened by distortions in a market—interventions that hinder the movement of resources to their most valuable and efficient use, and where the benefits of that intervention outweigh the costs. It went on to suggest that this calculus is one that should properly be performed by the Productivity Commission, the successor body to the Industry Commission, an organisation believed popularly to be committed to economic fundamentalism.

Throughout the debate, the Trade Practices Commission and its successor—the ACCC—consistently argued that economic efficiency would be enhanced by action directed against unconscionable conduct in commercial transactions. Similarly, small-business groups responded with theoretical arguments to the effect that economic efficiency would be enhanced by legislation of the type they had proposed. There seems little recognition of the fact that mainstream economics has little to say about productive and dynamic efficiency.

Similarly, the Treasury responded with concerns about the impact of regulatory action on transaction costs throughout the economy. It went on to argue that there were two primary reasons for government intervention: market failure and equity/fairness. As we saw earlier, this use of the word ‘intervention’ is not neutral, as it implies interference in the normal, or even the ideal, state of affairs—an interference that has to be justified. The implication is that the normal or ideal is an unregulated market. It carries with it a commitment to the minimalist account of the role of the State derived from Locke. Treasury agreed, however, that inadequate information, high transaction costs and substantial market power might give rise to a ‘market failure’. This failure can result in efficient small businesses being discouraged from entering the market or being forced out of business, thereby producing a sub-optimal allocation of the community’s resources. Treasury also acknowledged that unfair business conduct could lead to other social costs, such as increased bankruptcies and social dislocation. It was concerned, however, that general legislative action to deal with these issues—and associated equity considerations—could have adverse consequences on business certainty and the competitive process. In relation to the economic arguments, neither the relevant departments nor the big-business lobby paid any serious attention to ‘distributional’ or equity issues. In the case of the Treasury, the existence of equity concerns is acknowledged briefly, but not discussed. There seems to be no recognition that, in practice, it is impossible to separate efficiency from distribution issues, however much economists like the conceptual distinction. More broadly, the word justice is never uttered.

In Chapter 3, attention was directed in particular to the role of trust in promoting social and economic interaction. In the language of neoclassical economics, however, trust and similar values—loyalty or truthfulness—are called ‘externalities’.[59] The very language seems to marginalise their importance even though technically they are called externalities only because they are external to the price system—those areas in which the price system fails to operate. In a climate in which the importance of externalities is discounted, there is a danger that the importance of those moral values will be forgotten. This is relevant particularly to contracts in contemporary society that rely on informal constraints to ensure that parties will act honourably when unforeseen circumstances arise during the course of contracts, which, in practice, are necessarily incomplete.

The dangers associated with a transaction depend not only on the nature of that transaction, but with the trading environment of which it is a part. Consequently, opportunistic behaviour on the part of one party to a transaction or a contract can increase risks attached to all transactions and the costs of doing business generally. Consequently, the moral and legal sanctions that reduce opportunistic conduct also reduce transaction costs generally. In particular, they can have the effect of infusing trading confidence into transactions that are characterised by costly information and power asymmetries. Moral standards and a complementary legal framework provide infrastructure fundamental to the efficiency of the market system—our moral and legal institutions are an essential part of the capital of the economic system. As Arrow has noted, a lack of mutual trust is among the properties of many societies whose economic development is backward. This argument runs directly counter to Treasury’s claim that unfair trading laws could raise transaction costs generally.

Such social demands can be expressed through the internalised demands of conscience or they can be embodied in formal legal rules. Reliance on the more informal demands of conscience could well have efficiency benefits in some situations because of their adaptability to different circumstances. The calculation involved in the application of rigid rules could well be dysfunctional if cooperative attitudes—with their positive spill-over effects—are undermined. It follows that an exploitative business culture is likely to be less efficient than one in which there is a greater degree of give and take. A number of specific studies have looked at the role played by social convention in helping to sustain collaborative relationships—even where recourse to the courts might have been preferred. In particular, Stewart Macauley researched non-contractual relations in the manufacturing industry in Wisconsin in 1963.[60] He found that business people often preferred to rely on a person’s word in a letter, a handshake or common honesty and decency—even when the transaction involved exposure to serious risks—rather than seek professional legal advice and protect themselves with a tightly worded contract. Macauley discovered that in some cases, business people considered that recourse to legalism in relationship-building indicated a lack of trust, turning a cooperative venture into an antagonistic horse-trade. Any weakening of the social and moral sanctions promoting such give and take could well increase the need for the codification of such standards through law.

The potential exists for significant conflict between the internalised social demands of conscience and the social demands expressed through formal legal rules, particularly in a litigious culture. Lacking extensive experience of the rigid application of the formal rules of contract law, inexperienced small-business operators are likely to expect that standards of conscience will govern—or at least moderate—the business relationships they enter into. Further complicating this situation is the likelihood that unscrupulous businesses will exploit these expectations in contract negotiations so as to impose harsh contract terms. Of course, unscrupulous businesses have been known to lie about their intentions in order to obtain the agreement of the other party.

It is argued, therefore, that such competition as is permitted is the servant of our fundamental social values, not the determinant of our values. In particular, it is those fundamental values that define what is meant by social welfare. Consequently, such fundamental values as fairness or justice in social relationships are not to be conditioned by more instrumental values such as competition. Competition must therefore always remain bounded; the question that then has to be decided is to what extent? What is also evident is that the debate cannot be settled on the basis of theoretical arguments based on mainstream economic analysis or current moral theories based on individualistic premises. It involves the complex empirical issue of whether, in practice, unregulated markets can produce efficient or equitable outcomes. It appears to be an economic issue that can be answered only by experience—by experimentation. Economic categories do not, however, cover all the possible issues adequately. Some forms of behaviour are simply considered wrong, regardless of the consequences. Consequently, resolution of the question involves the application of practical moral wisdom and can be mediated only by the political process.

Curiously, it appears that we are unable to come to terms with the meanings of the words ‘unconscionable’ and ‘unfair’, while being obliged to pretend that all legal words should have an objective and identifiable meaning available to all. Of course, most people will not have heard of the word ‘unconscionable’, let alone how the courts have used it in recent times. This stands in marked contrast with the word ‘fair’, which is used daily by everyone in our society.

There is a particular irony about the closing phases of this debate as well. At a time when small-business groups were pressing strongly for justice in their dealings with large businesses—pointing in particular to oppressive terms and conditions of contractual arrangements, to the unilateral alterations of terms and conditions and to unfair terminations of long-term contractual arrangements—these same lobby groups were also opposing unfair dismissal laws intended to protect employees from similar unfair conduct by small-business employers.

The next chapter will turn to a more general reflection on the long journey we have shared together.