Litigation as a last resort: How can arbitration help small businesses?

Could alternative dispute resolution prove a economical and time-saving legal alternative? 

Sign Up

Get the New Statesman's Morning Call email.

If keeping up with the challenges of the day-to-day running of a small business were not enough, business owners also have to contend with having an effective dispute management strategy in place. Planning for what to do in the event of a falling out with a supplier or how to resolve the issue of late payments may not be top priority compared with the more creative endeavour of formulating and implementing a business strategy but it is one that could critically impact the course of a business and ultimately, its survival.

Late payment remains a problem faced by many small and medium sized enterprises (SMEs), with many struggling to stay afloat simply because of their customers’ reluctance to pay on time. Recent estimates published by Crossflow Payments put the level of late payments affecting SMEs at £266bn; amounting to roughly 15% of the SME sector’s average turnover being stuck in the payment chain.  Smaller firms often lack bargaining power in pursuing legitimate debt claims against their larger counterparts and against a backdrop of rising court fees, larger firms are inclined to deny liability, safe in the knowledge that their opponent could not afford to bring proceedings. Furthermore, there is a logjam of cases in the courts delaying the process and adding to costs.

With prohibitive costs making litigation an option that is out of reach for many SMEs, what recourse then do they have, to settle disputes affordably?  Working alongside the court system is the alternative dispute resolution sector (ADR), an umbrella term for a whole range of processes and techniques that help parties resolve disputes without going to court. Typically involving an expert neutral third party deciding on the outcome, it is often less formal, cheaper, and quicker than litigation.

Arbitration is a form of ADR which is final and legally binding.  An arbitral award is enforceable in the same way as a court judgement, and users have the added advantage of being able to tailor the procedure to suit their needs. For instance, parties can choose an expert decision maker to oversee their case. Having a decision maker with experience or expertise in your business sector is advantageous to having a court-appointed judge who needs to be brought up to speed with salient background matters. Parties also have more control over the method, pace and scope of the process. With limited grounds for appeal, parties can avoid a long drawn out procedure in the courts. Another key benefit is its confidentiality, which enables business interests and relationships to be preserved. Moreover, arbitral awards can be enforced transnationally, due to the New York Convention 1958, compared with court judgements which are generally only enforceable where reciprocal enforcement arrangements exist.

There are even schemes tailormade for SMEs. The Chartered Institute of Arbitrators’ (CIArb) Business Arbitration Scheme (BAS) is a fixed fee scheme for disputes between £5,000-£10,000 in value. It offers the certainty of a final and legally binding award in less than 90 days from the appointment of the arbitrator. Businesses can present their own case without legal representation if they so wish and formal procedural steps have deliberately been kept to a minimum. The costs recoverable have also been limited to protect parties against liability for their opponents’ high legal bills. CIArb helps appoint an arbitrator from its specialist panel and even provides a free dispute resolution clause for businesses to draft into their commercial contracts or into their terms and conditions.

Faced with the many challenges running a business brings, schemes like BAS may just provide a lifeline to business owners needing swift and affordable access to justice.