Smaller businesses and commercial disputes - the dos and don’ts

1. What is the key advice you would offer to SMEs to avoid disputes with customers, suppliers and other strategic partners?

Good up to date and relevant standard terms and conditions ('STCs") are perhaps the best starting point in avoiding disputes with your commercial partners. These must be reviewed regularly and tailored if necessary to meet the idiosyncrasies of each relationship. I appreciate that it is often difficult for a smaller business to get a larger trading partner to deal on its own STCs but if relative bargaining strengths mean that you must accept the other party's, make sure that you understand what is expected of each party and try to negotiate relevant amendments. Strike out irrelevant clauses and it is always sensible to confirm whose STCs apply and to summarise each parties' obligations in a letter prior to commencing the relationship (especially when the contract was concluded orally). In short, make sure that both parties are crystal clear from the outset what it is that they have agreed and that the understanding is mutual.

Monitor closely the relationship as it develops and amend the governing contract if it becomes necessary. The nature of trading relationships does change over time and contracts can quickly become obsolete. Also, tacit acceptance of behaviour at odds to the wording of the contract can imply a change to the governing terms and conditions that may prove problematic later. This can be avoided by notifying the other party that you are happy for them to carry on that way for the time being but that it does not constitute a change to the terms of the governing contract (e.g. slippage of delivery dates).

Keep good lines of communication open with your trading partner. If you see difficulties arising, flag them up at the earliest opportunity. Prevention is always better than cure and in my experience; trying to hide a problem or ignoring it only serves to amplify it.

1. Do you think that smaller businesses in particular become the victims of disputes because of poor planning and relationship management with their commercial partners?

In my experience, there is certainly a tendency for smaller businesses to be more prone to disputes. I don't think that it is necessarily due to poor planning though, more a complete absence of it! Often in the excitement and euphoria of landing an important new client or customer, attention to detail lapses and there is a failure to address important issues relating to the structure of the trading relationship.

Attention and resources may well be diverted to operational concerns and there is a tendency to forget that the whole relationship is actually based around a legally binding contract and to just assume that it will sort itself out. It's the dull and boring bit, but it is essential to spend time and effort on it at the outset. The law does infer certain general terms and conditions into all contracts but the detail is up to you, and, as we all know, the Devil is in the detail! In short, allocate sufficient time and resource to formalising the contractual relationship. It may be tiresome when you want to get on with your business, but it can save a lot of wasted time and energy at a later date.As trading relationships continue, make sure that you manage them proactively. Disputes often arise out of simple misunderstandings combined with a lack of communication. If you are going to struggle to meet a delivery or a deadline, let the other party know as soon as possible. This puts them on notice and gives them a chance to protect themselves and mitigate any loss that they might be exposed to. It may be that they go elsewhere for a product or service for the time being, but that must be better than becoming embroiled in litigation.

1. Disputes particularly with suppliers can be very damaging for SMEs in particular. How can owner/managers of smaller enterprises handle the fallout when disputes occur?

When I was training, the senior partner and eminent litigation lawyer that I was working for once told me that if a dispute ended up going all the way to court, the lawyers had failed. Litigation is certainly an expensive, stressful and time-consuming process, and should be avoided if at all possible. However, sometimes disputes are unavoidable and you just have to roll your sleeves up and get on with it.If you do find that a dispute has arisen and that negotiations have broken down, forcing more formal action upon you, there are a few simple steps that you can take to ease the way. These include:

• Keeping accurate records of all phone conversations, discussions and meetings with the other party and retain any vital evidence (e.g. faulty goods) in a safe place. Collect all relevant documents to the dispute and file them carefully. You will need them later and they will probably have to be copied to the other side as well.
• If the value of the dispute is under £5000, have it heard in the Small Claims Court where informality and simplicity is encouraged. The use of lawyers is discouraged and many of the complicated court procedures have been done away with.
• Prepare a statement of facts whilst they are fresh in your memory. This needn't be too complicated, just a series of points that could be expanded upon at a later date if required.
• Let any staff that might have to become involved know at an early stage and keep in touch with them if they leave your organisation in the meantime.
• All of these steps will save you time and costs later on and will reduce the disruption and stress that clients often complain of when they are involved in litigation.

There are alternatives to the formal court process though and these can offer a means by which trading relationships can be preserved and disruption minimised. Alternative Dispute Resolution (ADR) is the principal alternative to court action. It offers a less formal environment in which to air grievances and has a number of advantageous characteristics including; speed, reduced costs, flexibility, commercial reality, confidentiality and that it relies upon the consensus of the parties, which therefore removes some of the adversarial element of the dispute which can help to prevent a complete breakdown in a commercial relationship.

ADR can take many forms - mediation, adjudication, judicial or expert appraisal or a working party to name but a few. They all offer a viable alternative to formal litigation, which can minimise the fallout of a serious dispute and even salvage and preserve commercial relationships that have encountered difficulties. The basic format is that the parties present their cases to independent experts who then reach a decision based on the evidence. There is no guarantee that ADR will be successful, but the experience of the leading ADR organisation in the UK suggests that over 85% of mediations under its auspices are successful, saving very substantial costs.

1. Often, financial issues (with late payment being at the top of the list) form the vast majority of commercial disputes that SMEs have to deal with. What are the practical steps that owner/mangers can take to avoid financial disputes?

The payment terms upon which you trade are up to you. 30 days is quite normal but you can require payment upon receipt of invoice if you like. You can also charge interest (Bank of England base rate plus 8%) to late payers, although your invoice must state that this will be the case. We are all familiar with the tendency of larger companies to bully smaller suppliers into accepting long settlement periods and with the severe difficulties that this can cause the smaller business. A recent study revealed that this problem is now at its worst since new legislation was introduced in 1996 to combat it, with large companies now taking on average 81.5 days to settle invoices. In reality there are few ways of dealing with this as the contract may be too important to you jeopardise the relationship. However, consider charging interest on late payments, offering discounts on early payment and invoice financing.

Perhaps the best way to avoid problems with bad debts is to investigate the financial well being of your trading partner prior to entering into a contract with them. This will obviously depend upon the relative bargaining positions of the parties at the outset, but if the contract is going to be vital to your business and will constitute a significant part of your turnover, it would be prudent to do a little spadework. Limited companies must file accounts at Companies House annually. These are available online now for a small fee and will give you a good idea of the financial health of a company. Unincorporated businesses are more difficult to gauge but you could request a letter from their bank or accountants confirming that the business is in good shape. You can also order credit checks on your customers. Best of all would be a deposit or bond.

Once you are trading though, keep a close eye on your credit control and don't allow trading partners to get behind with their payments. Insist that they keep to your terms and issue regular statements or invoices and be prepared to chase them up. Set up a system with standard letters that are sent out at specific times and do not accept any blustering.

An unannounced visit to collect an outstanding amount can be a very effective way of producing payment. Emails, calls and letters can be dodged. A foot in the door is much harder to ignore. Be prepared to pursue a debt all the way to court. It is relatively easy to obtain judgement for a genuine debt and the costs of pursuing it, and it greatly increases the options and methods open to you to obtain you money. It will also improve your position should the debtor become insolvent, although it will not guarantee that you will receive full payment of the debt in those circumstances.

1. Some disputes can be over intellectual property or copyright issues. How can smaller enterprises handle this kind of dispute when they arise?

Intellectual Property (IP) rights arise under a number of guises. From the more tangible Patent and Registered Trade Mark, to the more intangible Design Rights and Copyright. Often they can be acquired without the author or owner even knowing it. A good starting point then is to commission an IP audit by a qualified professional. Any identified rights can then be registered and protected in the appropriate way. Disputes over the violation of IP rights are dealt with in the same way as contractual disputes - litigation or ADR. However, as always, prevention is better than cure so good advice on protecting your rights, followed up with registration will save you a good deal of trouble. Indeed, in some cases, until the right is registered in your name, you cannot claim ownership of it and you could be copied and not be able to do anything about it.

It is always a good idea to keep a regular eye out for copycats. A Google search every now and again will help to show up anyone who is feeding off your good ideas. Even if they have not violated any formal IP rights, an action can be brought in 'passing-off' against anyone who is aping your business and feeding off your goodwill.

IP rights are relatively complicated concepts and good, timely professional advice on them is essential. However, they are often the lifeblood of a business and are well worth spending time and resources on protecting. You must move quickly to do this and it is often worth spending time doing so even before you start to trade.

1. Commercial disputes with a large supplier or customer could mean the SME potentially loses a client or a valued commercial partner. Are smaller businesses powerless when a dispute with a much larger business arises? Can the courts really help them?

Smaller businesses are nearly always at a disadvantage when they become involved in disputes with larger companies. The larger party can usually devote more time and resources (not to mention money) to a dispute and therefore enjoys a significant advantage over its smaller opponent. Often they will know that their business is vital to the smaller enterprise and will take advantage of this, knowing that the smaller business is unlikely to do anything to terminate the relationship. Justice does usually prevail, but that will be cold comfort to a small business that losses its main customer following a dispute, however successful its outcome. In practical terms then, the dice are loaded in favour of Big Company Ltd.

A court will always be impartial and reach its conclusions based upon the applicable law and relevant evidence. But litigation through the courts will nearly always antagonise and polarise the parties. However, a smaller business might find that ADR is a better forum in which to pursue a grievance against a larger undertaking, as the more informal environment will be more conducive to saving the trading relationship. ADR allows parties to explore solutions which are not available through litigation or arbitration and which can accommodate their commercial needs and interests. By way of simple example, a claim for money due can be settled by a discount on future services which may preserve, or even enhance, a business relationship.

The short answer to the question is that small businesses are equal to their larger trading partners in the eyes of the courts and they will therefore receive a fair hearing. However, litigation through the courts will probably destroy the relationship and, short of requiring the offending party to observe its obligations under the contract in question, the courts have no power to force a party to maintain a relationship with another after the case is over. Smaller businesses are not therefore powerless. They can seek redress through the courts should they decide to do so. However, practical commercial considerations may lead them to seek an alternative forum in which to air their grievance. One which will offer justice and at the same time a more commercial solution to the problem which will allow both parties to save face and hopefully continue to trade successfully with each other.

Andrew Wilson
Commercial litigation and insolvency solicitor