Wise Businesses use Alternative Dispute Resolution

We live in an era of disputes, whether it be Brexit vs Remain, or the election of Donald Trump, a president with more ongoing disputes than any other in history. For small businesses, FSB research shows that disputes are a real and expensive problem.  When it comes to resolving disputes, sooner is always better than later as they can easily get out of hand. Even small claims proceedings can involve cost and delay. We ask how this can be remedied? One solution which is available is alternative dispute resolution ("ADR") in its many forms, including mediation and arbitration. The FSB research shows that small businesses generally prefer to resolve disputes informally or to go to Court, but only 8% use ADR. The ratio of Court vs ADR for resolving disputes is 3:1. This suggests that small businesses have not embraced ADR yet and there is a long way to go to change the culture of dispute resolution in the UK.  The EU Parliament recently produced a report on the Mediation Directive and held a workshop on the issue of redressing the balance between the Courts and ADR and in their view a 50:50 ratio is desirable.  There is clearly a long way to go in achieving this objective and no doubt Brexit will have an impact if consumer rights are watered down.

What do you do when you get into a dispute: contact a solicitor to make a claim, ring a mediator or try to resolve it informally yourself? FSB research would suggest the majority prefer the last option, but that means that businesses can get bogged down in long running litigation. How many of you have a provision in your contracts setting out a procedure to follow in such cases?

What businesses often do not realise is that the power to resolve disputes lies in their own hands. They can circumvent the inefficient Court system by taking a leaf out of the public sector book and including dispute resolution clauses in contracts with suppliers and customers and can refer disputes with consumers to certified ADR bodies who are well equipped and trained to help.

The statistics

According to a report from FSB:

70% of small businesses have had at least one commercial dispute in 5 years.  

This suggests there were at least 3.4 million commercial disputes involving small and medium-sized businesses across England and Wales over that period.

Of those small businesses reporting a dispute:

• Nearly three-quarters (72%) were in relation to late and non-payment, e.g. small businesses in supply chains experiencing late and non-payment from their customers.
• Just over a quarter (28%) had a dispute over non-payment related contractual issues 
• 19% use the Civil Courts as opposed to alternative dispute resolution. 43% use informal and semi-formal ways of resolving things. 8% use alternative dispute resolution.

FSB research suggests that disputes arise overwhelmingly between businesses in customer–supplier relationships. 

Disputes with customers/clients accounted for over half (nearly 57%) of the most recent disputes in which respondents had been involved.

Disputes with suppliers accounted for just over a fifth (21%) of commercial disputes, whether that be the respondent raising the dispute or it being raised against them.

The FSB research found that the average value of the most recent dispute between 2010 and 2015 was over ￡18,000. That is a significant amount for many small businesses. This suggests that, between 2010 and 2015, around ￡62 billion was tied up in disputes involving small businesses. This equates to ￡12.4 billion per year during that period. 

In attempting to resolve the dispute small businesses incur costs (such as legal representation, lost alternative business opportunities, time spent dealing with the dispute rather than on core business activity) of nearly ￡17,000. This represents a broader cost to the small business community of around ￡11.6 billion per year.  

Resolving disputes could unlock this wasted money tied up in disputes.

The Impact of Disputes

Everyone seems to be agreed that resolving disputes early could help businesses save money and increase efficiency. Time and cost spent dealing with a dispute is wasted time, except that sometimes valuable lessons can be learned. The longer that a dispute drags on the more the costs and wasted time increase. Very few people want to be in a dispute and the majority would like to resolve them as quickly and cheaply as possible, but not at the expense of capitulating and waving the white flag. The idea of ADR is to help through negotiations to find the elusive middle ground between the parties where neither one is extremely unhappy with the outcome. Otherwise going to Court should always be an option.  

As a deputy district judge, mediator running an ADR mediation provider for businesses all over the UK and solicitor, I am involved in every stage of the process and understand that businesses want to have the option of going to Court, but that most do not want to get tied up in a dispute.

From my perspective as a mediator I can see that ADR and mediation can be a very effective way of resolving a dispute early on before it gets out of hand. There is nothing more satisfying than having helped parties to see the wood from the trees and to have helped them solve a problem dispute that has been worrying them, often over a long period of time.  

From a judicial perspective I regularly see happy winners but also disappointed or frustrated losers in the Court system. Unfortunately that is the consequence of our adversarial system. The litigation system is designed to create winners and losers. It is the pursuit of war by other means, as opposed to a more nuanced constructive approach through ADR where both parties try to compromise and there is give and take. Quite often in litigation there relationship breakdown, anger and personal dislike between the parties. This can be stoked up and boils over when the parties confront each other at Court. It is easy to demonise an opponent in the abstract when allegations are made in solicitors' letters and witness statements. Often the first time the parties meet each other again when a dispute arises is outside Court waiting to go in and see the Judge. Mediation can short circuit the process and get people round a table, or on the telephone, to talk at an earlier stage.

As Martin Mactague from the FSB says, Compared to larger business, smaller businesses are significantly less well equipped for resolving disputes. They simply do not have the resource to deal with the associated processes on top of the day job of trying to sustain and grow their business. Disputes are complex and costs can quickly spiral out of control. Most importantly though is the damage to a commercial relationship with a third party on whom the business may depend for its survival. The consequences can be devastating for small businesses, ranging from short-term cash-flow difficulties right through to insolvency."

The considerable costs that disputes give rise to indicate that preventing them or resolving them fairly, justly and efficiently could deliver a considerable boon for both the small business community and the wider economy. How then can the system be improved to achieve this?

Deficiencies in the dispute resolution landscape

The FSB report finds that despite the wide-ranging economic consequences of commercial disputes for small businesses and the economy, the dispute resolution environment is not as effective as it could be.

Access to appropriate dispute resolution methods is limited, for a number of reasons:

• Knowledge and skills: effective relationship management and dispute resolution strategies are essential for resolving disputes, but many small businesses do not have access to the relevant knowledge and skills.
• The ADR sector is fragmented and small businesses remain unaware of its possibilities. This market failure partly explains the relative unpopularity of ADR among smaller businesses. Only eight per cent of FSB respondents used ADR to resolve their most recent dispute compared to 19 per cent who used the civil courts.
• The courts are inefficient i.e. slow and expensive. The report suggests that all is not well in the Court system, which small businesses prefer to use. The civil justice system fails to perform well enough on three out of four of key criteria. These include:
• Speed (efficiency) in dealing with a case
• Accessibility i.e. open and useable to all who may need it to obtain redress
• Fairness with impartial decision-making
• Efficient enforcement of judgments
• Legal costs are high.A claim of nearly ￡54,336 incurs costs of around 35 per cent of the value. The fees to make the claim and use the courts cost around account 7.7 per cent of the value of a typical claim.
• It takes 30 days to file and serve the claim.
• It can take a year to get from issue of proceedings to judgment.
• To get a judgment enforced it is likely to take an additional 62 days costing the equivalent of 1.2 per cent of the value of the claim.

The report suggests that a new approach to dispute resolution must be put in place that is based on the understanding that investing in reducing disputes and speeding up their resolution fairly and justly will deliver long-term benefits for small businesses and the wider economy. 

The report recommends a three tier system including the civil courts as the final stage in the process if the dispute cannot be resolved and ADR as a first port of call.

The recommendations are very much in line with two developments which businesses will soon know about, if they do not already: the Online Solutions  Court and the Small Business Commissioner. The new Online Solutions Court will result in the end of the small claims system as we know it because all disputes (with some exceptions) under ￡25,000 will be dealt with via a three stage online system which will involve ADR at its heart. It is being developed and the aim is to introduce it by 2020. This will mean that businesses will be faced with a very different body than the current small claims court and will find themselves pushed in the direction of ADR as a first step in a dispute. The government is driving this process in order to save money. This year alone 85 local courts have been closed and litigants are having to travel further to get their case heard.

The Small Business Commissioner is due to be launched in 2017 and BEIS has closed its consultation on the complaints handling functions of the SBC and will be reporting on its conclusions by March. One of the functions of the SBC will be to encourage greater use of ADR as well as helping small businesses to resolve late payment issues with larger businesses and to redress the power imbalance.

The Report reveals that while there does not appear to be a shortage of supply of ADR services in England and Wales, use of ADR by small businesses is relatively low. Despite an increase in use of ADR generally since 2013 when court reforms were introduced, this does not seem to have permeated down to the small business community to the degree that many would like. FSB research found that only eight per cent of English and Welsh small businesses used ADR to resolve their most recent dispute, and only 3% used mediation.

Bizarrely, the courts remain a much more popular method of resolving disputes among small businesses than ADR. Just under a fifth of respondents who had experienced a dispute resolved their most recent one through the courts, yet according to the report the Courts are not providing a good service.  The large majority (79%) of the cases that went to court went to the Small Claims Court (SCC), but that will be subsumed into the Online Solutions Court going forwards, which is going to involve more ADR anyway.  It seems to me that businesses are simply used to dealing with disputes in this way and are resistant to change.

There are, as the report points out, considerable advantages to using ADR:

• Price: It can be cheaper than using a court process and consequently more accessible to businesses.
• Expertise: It can more easily leverage in expertise than the courts, where expert testimony has to be organised and presented and the opportunity to challenge it also has to be allowed.
• Relationship saving: There can be a greater chance of ‘saving’ the commercial relationship because it is less confrontational than the courts and can encourage participants to work together to resolve the issue.
• Flexibility: Participants can have more control over the method, pace and scope of the process. The ability to be more involved in the process and the informality of the methods help increase satisfaction with ADR. A found that 58 per cent of those who used ADR rated the easiness of the process satisfactory. We receive good feedback from customers who use our mediation service.
• Success rate: Settlement rates for ADR are often high. High settlement rates are accompanied by high levels of satisfaction. In our experience the settlement rate is over 90%.

Despite these positive factors, there is still considerable resistance to using mediation and ADR in the business community. We come across this every day as we receive literally hundreds of enquiries from consumers on a daily basis and there is clearly an appetite to use ADR among consumers and some businesses notably endorse it, but when mediation is offered to small businesses they often refuse to take part. Even though there is a legal requirement to provide details of a certified ADR provider to consumers, businesses often choose to follow the letter rather than the spirit of the law and refuse to engage in the process. You can lead a horse to water but you can't make it drink!

They often cite the cost of mediation as a reason, or the belief that the claim or complaint is wholly without merit, so they do not see why they should negotiate. There is also a degree to which businesses bury their heads in the sand and hope that a dispute will go away rather than go to Court, which is just putting off the evil day. In our experience a dispute very rarely goes away without some positive step being taken, whether informal talks, Court action, a third party intervening, or if there is a commercial imperative to resolve.

It is difficult to persuade businesses to use ADR in consumer cases even though the statistics suggest that offering it to customers is beneficial. According to Ombudsman Services:

• 52% of the public think more highly of a business that handles complaints effectively;
• 43% would feel more confident in a company that offered access to a dispute resolution service, such as an ombudsman scheme;
• 26% would be more likely to buy from a business offering dispute resolution services; and
• 75% would be more likely to return to a company if a complaint they made was handled well (compared to 8% if badly handled).Therefore, using ADR results in increased consumer confidence and customer retention.

It is an uphill struggle to persuade businesses to use ADR as the litigation culture is deeply ingrained and it is viewed to some degree as a foreign import. The fact that the EU has encouraged ADR, with the Mediation Directive and ADR Directive (leading to the introduction of the ADR Regulations 2015 in the UK) does not help at a time when Brexit appears to be imminent.

According to the report, the disadvantages of ADR explain why it is not used as much as many would like. Nonetheless, the FSB says that ADR is an important tool which should have a central place in the dispute resolution landscape. The report concludes that the focus of policy should be helping to create the right suite of dispute resolution options for small businesses and providing them access to the right information and tools needed.

The Report suggests that ensuring the adequate availability of ADR requires the problems on both the demand and supply- side of the ADR market to be tackled. The benefits of reforms bridge the ‘knowledge gap’ and help the supply-side overcome some of the problems caused by its fragmentation could be significant for both the small business sector and the wider economy. Helping the ADR market work better for smaller businesses will require making it much easier for small businesses to navigate through more effective signalling mechanisms.

The data highlighting the current preference among small businesses for the civil courts over ADR is a clear indication of the need for a comprehensive dispute resolution system to have a third tier i.e. the civil courts, and for the courts to be effective resolvers of disputes. Small businesses should not be unreasonably penalised with an inefficient court system for either choosing or having to take the court route to resolve their disputes. 

The Report therefore recommends a three tier system.  The first tier should be focused on encouraging and equipping small businesses to prevent disputes arising or, if that is not possible, resolving them as early and as informally as possible. When a dispute cannot be prevented or resolved informally, the second tier should provide businesses access to a vibrant, diverse and trusted alternative resolution system. Finally, the first two tiers must be underpinned by the third tier, an effective civil justice system providing cheap, fair and just outcomes.

I agree that there should be a fully functioning Court system which is easy to access, which will be implemented with the Online Solutions Court, but the emphasis of that new Court will be more towards encouraging parties to find a solution and giving them a choice of dispute resolution options rather than just a "winner takes all" Court system.  It is recognised that it is time for a 21st century justice system, using modern technology.  As the judge in charge of the proposals has said about the new online Court, the sky is the limit. If people grow used to the idea of a more non adversarial approach, the online Court could be expanded to deal with higher value claims.

There is no need to wait until 2020 when the Online Court comes in or for the Small Business Commissioner to be established. Businesses can embed ADR into their terms and conditions to ensure that if a dispute arises, the parties have to use ADR before resorting to the Court system.