According to a recent survey by the Federation of Small Businesses, commercial disputes are costing small businesses in England and Wales a staggering £11.6 billion a year. The themes the survey identified are sadly all too familiar. Disputes are inevitable - the survey found that 70% of small businesses were involved in at least one dispute between 2010 and 2015 - most of which were down to chasing unpaid debts. The FSB have cited the lack of resource - both human and financial - as the primary reason why so many debts are not collected, leading to cash-flow difficulties or insolvency.
But, time and money are scarce resources for all businesses. Businesses do not have spare management teams waiting to be parachuted in to resolve a dispute. Pursuing a claim often means they have to be distracted from what they are good at - their ‘day jobs’ and winning more work.
Similarly, most businesses would prefer to use what financial resource they have on growing their business, rather than haemorrhaging costs on a battle they could lose. If they do take on a dispute and they’re unsuccessful, they’ve got the potential consequences of not only losing their outlay for good, but also having to pay their opponent’s costs.
So, when a dispute arises, most businesses are faced with a dilemma. Do they plough more time and costs into trying to recover what they are owed or do they cut their losses and move on? The FSB’s survey highlights that small businesses reluctantly opt for the latter and often feel the pinch more as a consequence. According to the FSB, small businesses had £62 billion locked up in disputes between 2010 and 2015 as a consequence of late payments. Average debts were of £18,000 a year - and virtually the same amount was incurred trying to resolve disputes and chase down debts.
The Department for Business, Energy and Industrial Strategy’s answer to this is to require larger businesses to publish details twice a year on how quickly they pay their suppliers - a kind of social engineering through ‘naming and shaming’ of the late payers.
We’re also likely to see the appointment of a new small business commissioner at the tail end of 2017, who’ll handle complaints by small businesses. But, if the FCA is anything to go by, this new commissioner’s office is likely to be inundated.
The FSB also call for a greater use of ‘Alternative Dispute Resolution’ (often involving confidential negotiations between the parties and facilitated by a neutral third party, such as a mediator) given that apparently only 8% of small businesses use ADR.
But, there are few who are actually trying to tackle the key reasons why many businesses - large or small - are reluctant to pursue claims. Namely, the resource (human and financial) invested in running a risk in the hope that it’ll eventually pay off.
At the moment, the legal system is largely based on lawyers charging hourly rates to clients or working on the basis of being paid on results - albeit the client still having to pay for court fees, expert’s fees and other disbursements to pursue the claim. Litigation funding - where a third party covers all costs in return of a share of the winnings - is one solution, and it’s changing quickly. My firm, Capital Law LLP, became the first law firm in the UK to launch our own litigation fund last year - Capital Dispute Finance, to tackle this problem.
Access to justice shouldn’t just be for those who can afford it. The FSB’s findings show that - with a little help and a focus on driving innovative solutions - small businesses in the UK could unlock a wealth of debt, helping them to grow exponentially.
Andrew Brown is a Partner and a specialist in commercial disputes at Cardiff and London based law firm Capital Law.