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Keeping the peace

Monday, 30 May 2011 | By Oliver Milman

Brawling with other businesses is something that very few entrepreneurs think of when starting up. But the issue of disputes is becoming an increasingly pressing problem for start-ups, many of which can’t afford costly legal battles.

 

Last week, the Government unveiled its strategy to combat small business disputes, inviting discussion on four potential solutions – a telephone hotline, a new tribunal, a dispute resolution service and a small business “advocate”, who would fight the corner of entrepreneurialism within government.

 

The plans were immediately praised by Peter Strong, executive director of the Council of Small Business of Australia, who said: “We’ve been asking for this for a long time. If you have a blue with your landlord, it’s so hard. Small businesses are so time poor and focused just on saving their own businesses, which is what larger companies take advantage of.”

 

But how big a problem are disputes among small businesses and will these proposals help in anyway?

 

Big v small?

 

A SME-specialist lawyer, who didn’t want to be named, says that the issue is a little more complex than simply a case of large landlords and clients turning the screws on helpless start-ups.

 

“The most common disputes are over poor workmanship, or not getting paid for a job, poor communication and disputes between business owners over who is pulling their weight,” he says. “It can be anything. It could be down to the fact you haven’t documented whether there’s a fixed fee for a service or an hourly rate.”

 

“It’s the same as having a neighbour. You can fall out over a number of things. Some of that is the faulty of large businesses, but small businesses are just as likely to screw each other over.”

 

The lawyer adds that legal action is expensive and often pointless for small businesses. Other reasons for not acting are fears over damaging a relationship with a key partner.

 

“You get to the end of the process and you don’t like your lawyer because of the time and money it’s cost you,” he says. “In Australia, the cost of legal representation means that only the very rich and the very poor can afford a prolonged dispute. It comes down to who has the deepest pockets, rather than who is right.”

 

“Possession is nine tenths of the law and once another business has got your money, it’s hard to get it back from them.”

 

“I had one client who got a shonky deal from a telco reseller. The contract rolled out but the telco hadn’t closed the old contract and the business ended up paying $22,000 more than they should’ve.”

 

“The telco agreed to refund $9,000 of that, we went to court and got an order to pay it and as soon as the judgement was passed, the telco representative said to my client ‘good luck getting that from us.’”

 

The falling our facts

 

Government research from June last year suggests that around 20% of small businesses had a dispute in the previous five years, although COSBOA insists this figure is under-reported.

 

According to the Government stats, 4.6% of businesses have had to take legal action to resolve disputes, with just 1.8% utilising mediation as a way to come to an agreement.

 

While you are more likely to tussle with another business further down the track – businesses with more than $1 million revenue are more than three times as likely to have a legal dispute than those with less than $100,000 – it’s clear that start-ups are disproportionality hit by disagreements.

 

For example, the figures show that businesses under five years old are far less likely than older businesses to use mediation or legal action to resolve wrangles. It appears that many start-ups are unwilling or unable to take grievances any further than a few stern words over the telephone.

Paul Clements, founding principal and CEO of business advisory firm Clements Dunne & Bell, says that clashes are most likely to happen when a business isn’t faring well.

 

“You see disputes when a business is under financial pressure, which places pressure on the owners,” he says. “Disputes emerge that aren’t there when things are going well and everyone’s happy.”

 

“You often see a build-up of frustration. For example, one business partner may work fewer hours than another due to family commitments, but they have the same pay. Sooner or later, the harder-working partner will feel taken for granted.”

 

“When you are all friendly at the beginning, you can forget to document arrangements which lay out the rights and obligations of those in the business. Legal action is very expensive for small businesses and it’s always preferable to resolve these things before it gets to this stage with good processes.”

 

Getting tough on disputes

 

The stated aim of the new government proposals is to head off unnecessary legal cases through mediation. But will they have any impact?

 

The Melbourne-based lawyer we spoke to feels that the suggestions are a mixed bag for start-ups.

 

“The hotline looks like a waste of funds to me – that money could be used for an online system that narrows down the nature of complaint,” he says.

 

“The mediation is probably a good idea. To have an independent umpire to listen to the two sides would maybe solve 20% of disputes.

 

“But pretty much every court has compulsory mediation services, which helps as some people just want their day in court to get on their soapboxes. The court provides someone or you can pay for your own third party.”

 

“The problem is the enforcement of this new tribunal. Dodgy operators won’t be put off because they know the system and know what can and can’t be enforced.”

Enforcement

 

Small businesses looking to prise cash out of an unwilling payee can use the Corporation Act as a de facto debt recovery service. Businesses can apply to wind up a debtor if they are owed more than $2,000.

 

“The problem is that do you want to spend $7,000 going through the whole process in order to get $2,000 back, just to prove a point?” asks the lawyer. “You won’t. The Government needs to create an inventive to pay. There needs to be a bigger stick for enforcement rather than mediation that can’t be backed up.”

 

Colin Porter, founder of Creditor Watch, agrees that the courts’ powers of enforcement need to be beefed up.

 

“It’s great the Government has realised that there is a problem, but they should focus on what’s there rather than create another level of mediation,” he says.

 

“Local small claims courts are not expensive. You don’t need legal representation, you fill in a document and it’s not even mandatory to attend. We need to look at small claims courts for disputes over amounts under $10,000 and make them more user-friendly and enforceable.”

 

For small businesses drawn into a dispute, Porter advises: “I’d say you have around 160 days to resolve it. After that, you need to drop it or take it further.”

 

Top tips for resolving disputes


Write it down: from day one, you need everything documented. That means shareholder agreements, employment conditions and terms and conditions with suppliers and clients. Documentation is not only vital for resolving disputes, it can also nip them in the bud early on.

 

Have a clear business plan: having a comprehensive business plan can help minimise disputes. If you have a clear vision of what your business is, who you want to deal with and how you will cope with setbacks, it’s less likely that a disagreement will knock you off course.

 

Keep communication open: don’t cut all ties with a business that has wronged you, as tempting as it may be. “It’s better to get 50% out of them than nothing,” says Porter. “Keep talking in order to get what you can and then never deal with them again.”

 

Get a third party involved: a court clerk can act as a third party mediator, if needed. If not, any independent person agreed by the warring factions can help take the heat out of the situation.

 

Don’t rush to the lawyers: as tempting as it is to splash out on legal help, it’s not always the best option. Once you start paying legal fees, you feel compelled to recoup this money, potentially pushing your further into an unwinnable case.

  

Is it worth it? It’s natural to want justice if you’ve been done over by a supplier or client. But it’s vital to weigh up the cost of the dispute versus the cost of pursuing it. If the time and money involved in the latter is higher than the former, consider chalking it up as a bad experience and move on. Just make sure you never deal with them again.

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