Although often eclipsed by the prominence of large companies, small businesses play a critical role in helping to grow our economy. Their size, market footprint, resources, experience, and sophistication levels are as varied as the goods and services they provide. In her thought-provoking article The Small Business Dilemma, Professor Rachel G. Ngo Ntomp argues that contract law fails to take these variances into account when considering the contractual relationships between small businesses and other companies. She asserts that small businesses can find themselves caught in a catch-22 by being perceived and treated as “big fish” in dealings with both consumers and businesses when, in fact, they are “small fish” when contracting with companies with more resources and often more bargaining power. Considering that this bargaining power imbalance can result in unfair terms that harm small businesses, Professor Ntomp convincingly draws upon U.S. and international law to advocate for proposals including “a reformulation of the unconscionability doctrine under Section 2-302 of the UCC [Uniform Commercial Code] to provide a fairer and more equitable treatment of small businesses in their contractual relations with larger entities.”
Professor Ntomp situates the issue of small business protection within the broader context of consumer protection. She notes that the weaker party rationale for protecting consumers in contractual relationships is rarely applied to small businesses when they engage in commercial dealings with other businesses even though many small businesses find themselves in vulnerable positions with a lack of bargaining power similar to consumers.
Before advocating for greater protections for small businesses, Professor Ntomp defines “small business” for purposes of her article as “any business with very few to no employees.” She acknowledges the lack of uniformity in defining which entities qualify as a small business and provides examples of various metrics, such as employee counts and financial performance, that the U.S. Small Business Administration and others use to define small businesses. She asserts that “whatever criterion or combination of criteria is used, the general idea remains that these businesses are distinguishable from large enterprises because of their economic or informational inferiority,” which can lead to the imposition of unfair terms that can harm small businesses.
Professor Ntomp grounds her discussion of unfair terms and contracts in the U.S. doctrine of unconscionability and in various fairness tests that are applied internationally. After setting forth an operational definition of “unfair terms” as those “that allocate the risks of the contract to the most vulnerable party or otherwise create a significant imbalance in the parties’ rights and obligations to the detriment of that party,” she argues why rationales commonly used to justify protecting consumers against businesses can also serve as justifications for protecting small businesses against their larger, more powerful counterparts.
One such rationale is related to the prevalent use of standard-form contracts in both consumer and commercial transactions. According to Professor Ntomp, small businesses often have less bargaining power than larger entities who draft form contracts to best serve their interests and present them to small businesses on a “take-it-or-leave-it” basis affording them little or no opportunity to negotiate or change unfair terms that may be hidden therein. In situations involving non-standard-form agreements, Professor Ntomp asserts that “small businesses too often lack the necessary experience, resources, expertise, and legal knowledge to negotiate favorable contract terms and adequately assess the risks of a term.” Unlike businesses with greater financial resources, having the financial means by which to engage legal counsel during the negotiation to strengthen their bargaining position or explain various terms is often a challenge for small businesses that may impede their ability to obtain fairer or more favorable terms.
In detailing the potentially devasting consequences that the enforcement of unfair terms can have on small businesses, the vast majority of which are solo ventures or have fewer than twenty employees, Professor Ntomp makes a compelling case for why small businesses should be afforded greater protections against the operation of such terms despite their commercial rather than consumer status. Such consequences include the loss of substantial private assets and financial savings, diminished credit scores, increased debt, and bankruptcy filings.
Her argument for reforms is further strengthened by her discussion of small businesses’ dual identity dilemma “as ‘big fish,’ when dealing with consumers, and ‘small fish,’ when dealing with bigger businesses.” Central to this dilemma is the role of bargaining power disparities that can exist for “small fish” businesses in contractual relationships and the consideration, if any, that courts and policymakers are willing to give to such imbalances so as to justify interventions and greater protections for small businesses.
Professor Ntomp identifies the foundational contract principles of autonomy and freedom of contact and the advent of a hands-off “‘laissez-faire’ approach” to help explain courts’ present-day reluctance to intervene in the enforcement of contracts, particularly those entered into by businesses. She then engages in a very thorough discussion refuting arguments raised by Professors Max Helveston and Michael Jacobs in their article The Incoherent Role of Bargaining Power in Contract Law that led them to conclude that “all considerations of unequal bargaining power should be removed from contract law.” Professor Ntomp argues that bargaining power inequality can and should continue to be a relevant factor in determining the enforceability of contracts and serves as “a solid foundation for protecting certain contractual parties,” such as small businesses when they are contracting in their “small fish” rather than “big fish” capacity.
Professor Ntomp asserts that current consumer protection and relevant contract law jurisprudence rests on the assumption that “every and any business is presumed to be sophisticated, regardless of size, nature, experience, or resources, and irrespective of its co-contracting party’s identity,” which belies reality and contributes to small businesses’ lack of protections from unfair and harmful contract terms. In an effort to debunk this “‘myth of sophistication,’” she details how small businesses have to contend with similar issues as consumers, ranging from information asymmetries to limited resources and choices, that detrimentally impact the fairness of their bargains and can lead to harmful consequences.
In Professor Ntomp’s assessment, “U.S. contract law fails to protect weaker parties, including small businesses, from unfair terms;” therefore, she proposes amending the unconscionability statute codified in UCC Section 2-302 and adding a “small business” definition to Section 1-201 to enhance small businesses’ protection against unfair terms. The language and rationale for her proposals stem from domestic and international models such as the Texas Deceptive Trade Practices and Consumer Protection Act’s definition of “consumer,” which broadly applies to entities acquiring goods and services regardless of the purpose of the acquisition. By expanding the consumer concept beyond the conventional purpose of buying goods or services for personal, family, or household uses, courts and policymakers can provide greater protections to small businesses in their commercial dealings. Similar to models adopted in the Netherlands and Australia that expand protections beyond consumer contracts by expressly referencing small businesses in their statutes, Professor Ntomp advocates for revising Section 2-302 to arm courts with the ability to intervene in the enforceability of a contract “[i]f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable to the detriment of a consumer or small business at the time it was made.” (emphasis in original) Such revisions are necessary, according to Professor Ntomp, to help prevent the harms that often befall vulnerable small businesses due in part to the bargaining power disparities that can exist as they engage in contractual relationships with other businesses.
I greatly enjoyed reading Professor Ntomp’s article, and I applaud her for penning such an ambitious and excellent paper that draws our attention to an important yet rarely discussed issue. Her informative discussion of the small business dilemma highlights the critical role small businesses play in our society and their vulnerabilities that necessitate greater protection against unfair and unconscionable terms. Professor Ntomp’s well-written piece makes a significant contribution in advocating for such protection, and I look forward to reading more of her work in this area in the future.
