Chapter 2

An overview of small business disputes and issues relevant to the bill

2.1 Small businesses comprise around 96 per cent of the actively trading businesses in Australia.[1] This results in small businesses making a substantial contribution to overall economic activity and jobs; in 2010–11 small businesses provided employment for over 4.8 million people.[2] However, these positive observations about the success of small businesses overall can hide the array of challenges that they face as individual entities.

2.2 This chapter explores the types of disputes that small businesses may be involved in and how they can be resolved. Given this is an issue that is directly addressed by the bill, this includes an examination of the disputes small businesses may encounter in their commercial dealings with Commonwealth departments and agencies. The chapter then examines the roles performed by the small business commissioners that have been appointed by various state governments in recent years and then considers the role of the small business commissioner that was recently established at the Commonwealth level.

Characteristics of small businesses

2.3 Unlike larger businesses that have greater resources and within which tasks can be delegated to specialised management and employees, the capacity of small businesses to deal with issues that arise can be equated with the capacity of an individual or a small group of people. Owners of small businesses need to deal directly with multiple issues, including the immediate pressures associated with the day-to-day operations of the business, cash flow management and compliance with various Commonwealth, state or territory laws. However, small business owners are unlikely to have the skills or expertise necessary to deal with all issues that may arise. The Council of Small Business Organisations of Australia (COSBOA) argued that:

For many decades the small business community has been treated as though they are big business with all the experience, skills, resources, expertise and knowledge possessed by big business. Important compliance demands placed onto small business including workplace relations, competition policy, contract law, local regulations, business and tax law and processes and communications have all been designed for big businesses who have the capacity to deal with complexity. The small business community was placed under stress due to poor policy and process design.[3]

* * *

... people in small business do not have experts to assist them. They do not have paymasters, OH&S experts, tax experts, health experts etc. These businesses are people who normally have very good skills in one or two areas and then are asked to be experts on a range of other issues.[4]

2.4 Some of the key ways that small businesses differ from larger businesses include:

that only a small number of individuals, often a family, own the business;
the owners manage the business themselves;
they have a less sophisticated management structure;
they generally operate in one location and sell goods or services to nearby customers; and
they generally have limited market power.[5]

Challenges in managing the business

2.5 The typical features of small businesses noted above have implications for the types of issues small businesses may face in managing their business. The Australian Small Business Commissioner recently observed that, in their opinion, the two key challenges that small businesses face are related to cash flow and ensuring that they have the right management skills.[6] Difficulties in accessing finance following the global financial crisis is another issue that many small businesses face.[7] Dealing with government 'red tape' is also often put forward as a complaint by business in general, large and small.

2.6 The results of the Australian Bureau of Statistics' (ABS) 2010–11 Business Characteristics Survey indicates that there are a number of issues that small businesses consider impact their business activities or performance. Table 2.1 outlines some of the findings of that survey and compares the responses of small businesses to those given by medium and large business respondents.

Table 2.1: Barriers to general business activities or performance, 2010–11

Issue	% of small businesses		% of medium businesses)	% of large businesses	% of all businesses
Issue	0–4 employees	5–19 employees	% of medium businesses)	% of large businesses	% of all businesses
Lack of access to additional funds	17.7	18.1	18.1	10.3	17.8
Cost of inputs	11.9	16.4	14.2	11.0	13.5
Outstanding accounts receivable limiting cash flow	14.2	21.2	14.6	7.6	16.4
Lack of skilled employees:
within the business	8.8	14.7	12.2	12.2	10.9
within the labour market	9.4	19.5	22.7	19.4	13.6
in any location(c)	13.5	25.1	26.6	23.1	18.2
Government regulations or compliance	13.9	15.2	15.6	10.9	14.4
Lack of customer demand for goods or services	19.4	18.7	18.7	15.8	19.1
Lower profit margins to remain competitive	22.0	30.3	28.4	17.8	25.1
Environmental factors(d)	7.1	10.0	9.6	9.5	8.2
Any of the listed barriers to general business activities or performance	54.8	64.6	60.9	48.8	58.3
None of the listed barriers to general business activities or performance	45.2	35.4	39.1	51.2	41.7

Notes: (a) Proportions are of all businesses in each output category; (b) businesses could identify more than one barrier and were not asked to rank barriers in order of significance; (c) includes businesses that reported lack of skilled persons within the business and/or within the labour market; (d) examples of environmental factors include drought, insect plague and compliance with water restrictions; (e) a medium business is defined as a business with 20–199 employees; large business is 200 or more employees.

Source: ABS cat. 8167.0.

Disputes that small businesses encounter

2.7 A 2010 survey undertaken on behalf of the Department of Innovation, Industry, Science and Research (DIISR) sought information on the nature of small business disputes, including who the likely counterparts to a dispute with a small business are and what issues disputes are commonly over. It found that, for serious disputes,[8] the most likely counterpart was a client or business customer (54 per cent). Other typical counterparts include suppliers (33 per cent), a business partner or associate (five per cent), a competitor (four per cent) or another body, such as a subcontractor or financial institution (four per cent).[9] The issues most likely to be subject to a dispute included:

clients being unable to pay a bill, including due to bankruptcy or liquidation;
disagreements with suppliers about the quality of the goods or services provided;
the contravention of a formal or informal agreement;
being charged erroneously by suppliers; and
clients unhappy with the good or service supplied.[10]

2.8 Retail tenancy is another source of disputes. This category of disputes can strike at the fundamental operation of a business—it is unsurprising that COSBOA has previously noted that tenancy issues are 'one of the biggest concerns for small business'.[11]

2.9 Disputes may also arise from the inequality of bargaining power between small businesses and larger businesses. Related to this are instances of anti‑competitive conduct, such as the misuse of market power by larger firms. In 2012, the Australian Competition and Consumer Commission (ACCC) received 3274 complaints from small businesses regarding competition and consumer protection issues.[12] Another area where bargaining power issues can be prevalent is franchising, where the unequal standing of the franchisor and franchisee, and associated issues with standards of conduct, led to a mandatory industry code of conduct being introduced by the Australian government in 1998. The Franchising Code of Conduct is enforced by the ACCC which received 725 complaints about franchising in 2012.[13]

2.10 An interesting feature of small businesses in general is, once a dispute exists, how they respond to it. A consultation process undertaken by the Australian government in 2011 observed that small businesses 'tend to avoid dealing with their disputes until the dispute has reached a toxic stage'.[14] In addition to those listed earlier, factors that may help explain this outcome include:

concern about the time and money that will be consumed by dealing with a dispute;[15]
the 'complexity of modern commercial law' which 'is normally beyond the understanding of an individual';[16]
the cost of seeking professional legal advice which 'is often beyond the reach of a business owner'[17] (related to this, many small businesses are not aware of the dispute resolution mechanisms available[18]); and
fear that dealing with a dispute with a supplier, client or larger business will damage their relationship with that business.[19]

2.11 Demonstrating how these factors can affect the decisions about pursuing disputes, the 2010 DIISR survey on small business dispute resolution found that around 15 per cent of small businesses had experienced a dispute that was serious or potentially serious and that could not be easily resolved without escalation. However, a significant proportion did not take action to have the dispute resolved (see Table 2.2)

Table 2.2: Findings of a 2010 survey of the incidence of small business disputes

Nature of the dispute	% of respondents
Routine and minor, not something to worry about	1.5
Potentially serious but easily resolved without escalation	2.3
Potentially serious but avoided escalation due to potential costs	6.6
Serious enough to consider utilising third-party intervention but did not actually do so	2.0
Of a nature that required intervention by a third party or self-representation in formal proceedings	1.8
Serious enough to result in legal action being taken by either business involved in the dispute	4.6

Source: Orima Research, Summary Report: Department of Innovation, Industry, Science and Research (Industry and Small Business Policy Division)—Small Business Dispute Resolution, June 2010, p. 6.

Disputes with Australian government departments and agencies

2.12 The disputes small businesses may have regarding their commercial arrangements with Commonwealth departments and agencies is a key aspect of the bill.[20] Available data that provides an insight into these arrangements are focused on the time taken by government agencies to pay invoices issued by small businesses.

2.13 The Australian government has in place a policy that requires agencies to which the Financial Management and Accountability Act 1997 applies to pay invoices from small businesses within 30 days. If they fail to do this, they are generally required to pay interest. A summary of the policy is:

1. ... for payments valued up to and including A$5 million (GST inclusive) to small businesses, agencies must adopt maximum payment terms 'not exceeding 30 days' from the date of receipt by the agency of a correctly rendered invoice.

2. Additionally, for written procurement contracts with small businesses valued up to A$1 million (GST inclusive), where the amount of interest accrued is more than A$10, agencies must pay interest on late payments:

a. on request from the small business for payments made after 30 days and on, or prior to 60 days, from receipt of the correctly rendered invoice; and

b. via a self-generated payment for penalty interest where payments are made after 60 days from receipt of the correctly rendered invoice.[21]

2.14 A survey of 40 government agencies between 1 July 2010 and 30 June 2011 found that by number, 97.7 per cent of small business invoices were paid within 30 days (in terms of value, 89.2 per cent of invoices were paid within 30 days).[22] Evidence received from COSBOA, however, indicates that small businesses' dealings with Commonwealth government departments and agencies can, at times, be more difficult than these statistics suggest. In addition to payment, issues regarding processes can also be a concern:

Currently many agencies use their power and ability to make process[es] difficult and to force their will upon small business people. This is particularly true around payments, tendering processes, contract management and dispute resolution. The entrenched attitude and culture of most agencies is one based on their power and capacity to make business difficult for a small business and to make sure that any complaint or dispute will be time consuming and difficult for the person in their own business. There is also [real] or perceived punishment imposed upon a small business person who does complain. They will never get government work again.[23]

Dispute resolution mechanisms available

2.15 There are a significant number of ways through which small business disputes can be considered and resolved. Courts and tribunals are at the top of this framework. However, courts and tribunals generally require some form of arbitration or mediation to be exhausted before judicial determination is available.[24] Low value disputes are able to be considered through a small claims tribunal. Nonetheless, for small businesses the court process can be expensive, time consuming and difficult to access. As the submission from one external dispute resolution service remarked, small businesses, like individual consumers, are 'less likely to have the resources necessary to pursue a grievance through the formal legal system'.[25]

2.16 Generally, courts should be the last resort for resolving many types of disputes. It can also be desirable for certain matters to be kept out of the courts altogether. Accordingly, a number of specialist dispute resolution services exist and, given that consumers and small businesses can find it difficult to access the legal system, they often assist both. The key services that are relevant for business‑to‑business disputes that small businesses may encounter are listed in
Table 2.3.

Table 2.3: Dispute resolution schemes and codes of conduct relevant to small business disputes

Type of dispute/relevant sector	Relevant code/service
Energy	State energy ombudsmen
Franchising	Franchising Code of Conduct
Financial services	Code of Banking Practice, Financial Ombudsman Service Mutual Banking Code of Practice, Credit Ombudsman Service
Film industry	Film Exhibition and Distribution Code of Conduct
General disputes	Australian Small Business Commissioner (referral service) State small business commissioners Private ADR practitioners
Horticulture	Horticulture Code of Conduct Horticulture Mediation Adviser
Motor vehicle smash repair	Motor Vehicle Insurance and Repair Industry Code of Conduct
Petroleum retail	Oilcode
Produce and grocery	Produce and Grocery Code of Conduct Produce and Grocery Industry Ombudsman
Telecommunications	Telecommunication Industry Ombudsman
Wine industry	Wine Industry Code of Conduct

Source: Australian Small Business Commissioner, 'National services', www.asbc.gov.au/
resolving-disputes/national-services (accessed 20 March 2013); Australian Government, Options paper: Resolution of small business disputes, May 2011, p. 8.

2.17 Various government agencies are also relevant. For business-to-business disputes, these agencies include the ACCC and the Australian Securities and Investments Commission (ASIC) at the Commonwealth level, and fair trading departments and agencies at the state and territory level. Complaints about the administrative actions of Australian government agencies can be considered by the Commonwealth Ombudsman (state and territory ombudsmen can consider complaints that relate to agencies in their jurisdiction). However, the relevant specialist committee of the Law Council of Australia suggested that for small businesses which are dissatisfied with decisions made by Australian government agencies, as an avenue of complaint the Commonwealth Ombudsman is 'in reality ... quite inadequate'.[26]

2.18 While there are a number of different options available for resolving small business disputes, this in itself can be problematic. The Victorian Parliament's Law Reform Committee has observed that, in Victoria, 'the sheer number of services can be confusing for members of the community, who may become 'lost' in the system'.[27] In May 2011, the Australian government released an options paper on ways to assist small businesses in resolving their disputes with other businesses. The paper considers that the key message of the 2010 DIISR survey is:

that despite the wide range of mechanisms available, including low cost and free services, small businesses are not generally aware of the existing services, the relative costs or suitability of each mechanism for different types of disputes. The survey also found that small businesses have a low awareness of ADR and this view was supported by stakeholders consulted in the development of this paper.[28]

2.19 However, certain alternative dispute resolution services appear to be relatively well‑known and utilised. For example, the Telecommunications Industry Ombudsman (TIO), which considers complaints from residential and small business consumers about telecommunications services, received around 27,008 new complaints from small businesses in 2011–12.[29]

State Small Business Commissioners

2.20 While their roles have varied substantially and not all have continued in existence, at some time most state and territories have had a small business commissioner. Victoria was the first state to create such a position, following the commencement of the Small Business Commissioner Act 2003 (Vic) on 1 May 2003. Under that legislation, the Victorian Small Business Commissioner has the following functions:

facilitating and encouraging the fair treatment of small businesses in their commercial dealings with other businesses;
promoting informed decision-making by small businesses in order to minimise disputes with other businesses;
investigating complaints received from small businesses regarding unfair market practices, to mediate between the parties involved and to make representations to an appropriate body on behalf of the small business that made the complaint;
encouraging the development and implementation of small business service charters within government and to monitor the operation and effectiveness of these charters;
investigating compliance with industry codes;
monitoring various matters and reporting to the Minister (such as any emerging trends in market practices that have an adverse effect of small business); and
as required by the Minister, assisting other agencies of government in developing legislation, government procedures and administration 'that provide alternative ways in which small businesses can comply with the requirements of the legislation, procedures and administration'.[30]

2.21 The appointment of the Victorian Small Business Commissioner appears to have had an immediate and positive impact. In its first 12 months of operation (1 May 2003 to 30 April 2004), 431 disputes with a total value of around $30 million were referred to the Commissioner. Of these, 70 per cent were successfully resolved, relieving 'disputants of the costs of protracted court and tribunal proceedings'. The Commissioner's first annual report notes that this was achieved within a budget of $2 million per year.[31] Table 2.4 provides an overview of the Victorian Commissioner's workload in recent years.

Table 2.4: Number of disputes referred to the Victorian Small Business Commissioner,
2007–08 to 2011–12

Legislation relevant to the application	2007–08	2008–09	2009–10	2010–11	2011–12
Retail Leases Act 2003	951	1026	995	1070	1144
Small Business Commissioner Act 2003	211	299	343	458	269
Owner Drivers and Forestry Contractors Act 2005	37	37	42	25	49
Farm Debt Mediation Act 2011	n/a	n/a	n/a	n/a	48
Total	1174	1362	1380	1553	1510

Source: Office of the Victorian Small Business Commissioner, Annual report 2007–08, p .31; 2008–09, p. 25; 2009–10, p. 22; 2011–12, p. 8.

Note: The fall in disputes lodged under the Small Business Commissioner Act 2003 (Vic) in 2011–12 compared to 2010–11 may be attributed to the introduction of the Australian Consumer Law and public awareness activities conducted by Consumer Affairs Victoria. See Office of the Victorian Small Business Commissioner, Annual report 2011–12, September 2012, p. 8.

2.22 Following the appointment of a small business commissioner in Victoria, similar offices were established in several other states. At the time of writing this report, the following state jurisdictions have a small business commissioner:

Western Australia—following a decision by the Western Australian government in 2010 to establish a small business commissioner and subsequent legislative amendments enacted during 2010–11, the appointment of the first commissioner was announced in December 2011. The commissioner started in the role on 17 January 2012.[32]
South Australia—the creation of a South Australian Small Business Commissioner was announced in October 2010. Following the passage of the Small Business Commissioner Act 2011 (SA), the first commissioner was appointed on 29 March 2012.[33]
New South Wales—the appointment of the state's first small business commissioner was announced in July 2011.[34] In November 2012, the NSW government introduced a bill to establish the commissioner as a statutory officer; as at 4 March 2013 the bill remains before the Legislative Assembly.[35]

2.23 Similar offices have been established in other states and territories, but were later abolished. A commissioner for the Australian Capital Territory was set up following legislation passed in 2004; however, it was abolished two years later due to budgetary considerations.[36] In Queensland, the establishment of a Business Commissioner intended 'to cut red tape and drive reform' was announced in June 2011.[37] The office was abolished in 2012.

The Australian Small Business Commissioner

2.24 In May 2011, the Australian government released an options paper on ways to assist small businesses resolve their disputes with other businesses. Submissions were invited from stakeholders on the most appropriate of four proposed government bodies. The options were:

a national information and referral service;
a national dispute resolution service;
a national small business tribunal; or
a small business advocate.[38]

2.25 On 14 March 2012, the Prime Minister announced that an Australian Small Business Commissioner would be appointed. The role of the Commissioner appears to encompass the first and fourth proposals contained in the 2011 options paper. Specifically, it was announced that the Commissioner would:

provide small businesses 'with a new voice to highlight their issues to the Australian Government' and would represent these concerns 'directly to the Government';
act as a 'one stop shop for small business services and information', including referring businesses to external dispute resolution services;
ensure that 'the interests of small business remain at the forefront of Government policy making'; and
take up individual small business concerns with relevant government agencies.[39]

2.26 On 17 October 2012, the government announced that Mr Mark Brennan, the first Victorian Small Business Commissioner, would be appointed to be the first Australian Small Business Commissioner.[40] Mr Brennan's term commenced on 2 January 2013.

Duties of the Australian Small Business Commissioner

2.27 As noted above, when announcing that a small business commissioner would be appointed, the government envisaged four general functions for the office. The duties have been summarised as to 'advocate, assist, represent and refer'.[41]

2.28 Soon after his appointment became effective, Mr Brennan appeared before this committee as part of the 2012–13 additional budget estimates hearings. Mr Brennan was asked about the office and how he saw his role. The Commissioner advised that the key elements that he would employ are 'consultation, cooperation and striving to achieve credibility for the office'. Mr Brennan emphasised the importance of the office gaining credibility with both small businesses and 'those whom the office will seek to influence':

The way I see it, it is still very much in a form where we will shape the position according to the requirements of the small business community. As I said, I will consult very broadly on that, and I see the views of this committee as very instructive in the way in which I will shape the position.[42]

2.29 In addition to the matters set out when the government announced the creation of the position of Small Business Commissioner (see above), it has 'been made clear' to Mr Brennan that 'there is the opportunity to shape the position'. Mr Brennan advised that he saw two broad themes for the role:

information and education—'expecting those who participate in small business to get better at what they do', particularly management skills regarding cash flow; and
advocating to government about reducing red tape and regarding impact assessments of government interventions.[43]

2.30 Further to the government advocacy role, Mr Brennan noted that he wants to encourage government agencies to behave as model businesses in their commercial arrangements, similarly to how Australian government agencies are required to behave as model litigants. Mr Brennan explained:

I cannot tell you at this point what those characteristics of [a] model business are—the page is reasonably blank. But I expect that they would be things like—and some jurisdictions have already ticked these boxes to some extent, including the Commonwealth government and the Victorian government—a prompt payment policy. I expect that a modern business would pay its bills and pay them on time—and that is an example of the sorts of characteristics I would be looking at. There are other things that are a little bit like the model litigant thing, such as a commitment to have disputes resolved early, prior to litigation. Do not wait until you get to court and then see if you can mediate. Get in early and sort these things out before they become too costly for everybody.[44]

Views on whether the Australian Small Business Commissioner should be a statutory office

2.31 The evidence that the committee has received has generally supported the idea that an Office of the Small Business Commissioner should be established as a statutory agency. The Association of Professional Engineers, Scientists and Managers, Australia (APESMA) considers that the bill will support the objectives of ensuring 'a strong voice for small and micro‑business at the national level, cooperation across jurisdictions where disputes have implications at the national level, a regulatory framework which affords access to fair treatment for small and micro-businesses, government procurement processes which provide access to effective dispute resolution and a reliable small and microbusiness research base'.[45]

2.32 The South Australian Small Business Commissioner stated that, in its experience, statutory independence has been 'critical ... especially in relation to possible disputes between small businesses and State Government Departments and Agencies':

The reality is that an independent statutory office holder has the statutory standing to seek resolution of a possible dispute at the highest levels of a State Government Department or Agency. In practice, our statutory independence, as well as a statutory power to require information, has undoubtedly contributed to the excellent levels of cooperation we have received from State Government Departments and Agencies. This, in turn, has enabled our Office to achieve very high levels of success in resolving potential disputes with State Government Departments and Agencies.[46]

2.33 COSBOA is of the view that the powers of all small business commissioners, whether federal or state, need to 'be enhanced and be more consistent'.[47] COSBOA described the bill as 'well overdue', noting that the state commissioners have made a positive impact but that the current federal commissioner does not have sufficient powers:

In addressing small business issues the states have taken some different approaches to the power and processes given to the small business commissioners but in the main they have, or will have, the capacity and authority to make decisions and resolve disputes between large and small businesses and with the public sector, including local government. This is impacting on the way large organisations treat small business people. It appears that the commissioners are having an impact and are changing behaviour. This change can only be reflected at the federal level if the Australian small business commissioner is given similar power and capacity. The current powers do not give the national small business commissioner a capacity to achieve what is needed.[48]

2.34 The TIO stated that the bill 'has the potential to make a positive impact on Australian small businesses'. The TIO noted that the number of enquiries that it is receiving from small businesses which are outside its scope is increasing, which in the TIO's view suggests 'an opportunity for these businesses to have an alternative avenue of recourse for assistance with resolving their disputes'.[49] However, the TIO did note some possible undesirable outcomes, such as inefficiencies, confusion and 'forum shopping' that could arise from any overlapping jurisdiction between the Small Business Commissioner and other external dispute resolution schemes.[50]

2.35 The Queensland Law Society also supports, in principle, the overall intent of the bill although it also noted some concerns with how certain parts of the bill are drafted.[51] The Law Council of Australia noted that it previously supported the establishment in legislation of a federal small business commissioner when this was one of the options being considered by the government's 2011 options paper on small business disputes.[52]

2.36 The Chamber of Commerce and Industry of Western Australia (CCIWA) were less certain of the need to establish a statutory authority for the Small Business Commissioner. CCIWA argued that ‘it is unclear whether this position is necessary given the establishment of Small Business Commissioners in a number of states including Western Australia’ citing possible duplication of roles and functions as a concern.[53]

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