The costs to a business of dispute resolution

dispute resolution clashing antlersIn an ideal world, most SME business owners would like to think that their business is so efficient and well-run and with such consistently good relationships with customers and suppliers that there is no likelihood of any dispute arising.

In reality, with the best will in the world given that people can be volatile or even unreasonable it is wiser to be prepared for the possibility that a situation may arise that results in a dispute that has to be resolved.

If it happens the associated costs may be so great that the result could be business failure.

By costs, we are not only referring to money, though if in the worst case the dispute ends up in court the financial costs of lawyers and court fees can be high, and more so where a court ruling goes against the business resulting in awarding costs against it including the other sides lawyers’ fees.

Add to that the worry and stress, and the time taken in trying to resolve the issue and preparing for court. Dealing with disputes is both distracting and takes focus away from the business itself, quite apart from uncertainty of the outcome.  There is also the risk that litigation can spiral out of control. These are also costs.

Whether the dispute is small enough to be referred to the small claims court or something larger the outcome may be damage to relationships with suppliers or customers.

Too often small disputes spiral out of control with disastrous consequences for some but for many it is an unwelcome and uneconomic distraction.

Alternative forms of dispute resolution

There are two main routes that a business could follow rather than trying to settle things in court.

One is to appoint a neutral third party, acceptable to both sides. This person would help them both clarify the issues under dispute and negotiate a mutually acceptable solution. Once agreement has been reached the parties would draw up and sign a binding agreement.  This process is called mediation and is considerably less costly than dispute resolution in a formal court setting. It depends heavily on the skills and expertise of the mediator and the willingness to arrive at a consensus.

A slightly costlier, but still less so than a court case, is the process of arbitration.  Again, this depends on a mutually acceptable neutral person whose judgement will be accepted as being impartial.  Normally the disputing sides will be required to sign an agreement stating that the arbitrator’s decision is binding on them. The arbitrator will then examine the evidence, hear both sides’ arguments and then impose a settlement.

Either of these two alternatives must surely be preferable to ending up in the adversarial situation that exists in a court of law, not only for saving costs (both financial and otherwise) but ultimately in saving a business from the risk of failure.

Given the cost saving it may be worth reviewing the relevant clauses in contracts to make an alternative dispute resolution option binding instead of the standard terms used in most agreements that refer to court as the default resolution procedure.

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