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ADR as a Tool for Fledgling Businesses

Alex McPherson, Co-founder & Partner, Ignition Law

Disputes in business are rarely enjoyable, but they are particularly distressing in the early days of trading. Fledgling companies can afford neither the cost nor distraction of a trip through the courts, and yet being the victim of an unpaid debt, for example, may be a matter of commercial life and death. Since the vast majority of court cases settle before judgment is given, there is strong justification for avoiding judicial proceedings from the outset. This article discusses alternative dispute resolution (“ADR”) as a tool for resolving early business conflicts.  

 

Alternative dispute resolution

 

In the United Kingdom, ADR is a blanket term for all methods of dispute resolution short of litigation and arbitration (which are generally non-voluntary). Its varieties are too numerous to cover in this article, and therein lies its central benefit. It can be as simple as a non-binding negotiation between the two parties concerned. If relationships are strained, an impartial mediator can be brought in to steer towards a solution. Early neutral evaluation makes use of a legal specialist, such as a QC or retired judge, to assess the legal merits of the arguments, and if technical knowledge is important the parties can opt to have their dispute decided via an expert determination. Often ADR outcomes are non-binding, allowing parties to nevertheless proceed to litigation if unsatisfied, but resulting agreements can also be enshrined in contracts or enforced by the courts.

 

Reasons for new businesses to consider ADR

 

1. Cash flow concerns

 

Even the most promising new business can be sunk by an interruption to cash flow. Successful court claims can take months if not years to pursue, with legal costs an added—and disproportionate, where the reward is small—strain on finances. A negotiation or mediation can be arranged and completed in a matter of days. Where time is particularly pressing, parties can agree for an impartial third party to make a binding determination of the dispute, providing them with certainty of resolution within a set time period.

 

2. The need for a creative solution

 

The injunctive or monetary relief typically granted by courts is not always the most practical reward for an up-and-coming business. For example, rather than repaying a debt to Party B, perhaps it would be preferable from an operational perspective for Party A to provide some other service free of charge. ADR allows parties to agree on imaginative, working solutions, rather than getting bogged down in legal rights and wrongs.

 

3. Reputational and privacy concerns

 

Maintenance of reputation and protection of know-how are crucial concerns for new businesses. Litigation is generally a public process; it carries the risk of secrets leaking to competitors, or damage being done to brand image. By using ADR, parties can agree that the details of both the dispute and any subsequent settlement are to be kept confidential. A common concern with ADR is that it will force participants to “show their hand,” weakening their case should they subsequently choose to walk away and proceed to court; however, ADR is generally conducted on a “without prejudice” basis, meaning any matters that arise during the ADR process cannot be referred to during subsequent litigation.

'ADR is generally conducted on a “without prejudice” basis, meaning any matters that arise during the ADR process cannot be referred to during subsequent litigation'

Alex McPherson, Co-founder & Partner, Ignition Law.

4. The importance of future business relations

 

Litigation is adversarial. ADR, by contrast, relies on a common effort to find a solution acceptable to all parties to the dispute; there are no winners or losers. This recharacterisation of the process makes it possible to solve disagreements and move forward without bad blood. Business contacts are valuable assets, and new companies are wise to seek to maintain working relationships wherever possible.

 

5. Cross-border elements

 

Using ADR, such as mediation, during disputes with an international dimension can help to circumvent legal technicalities such as issues of jurisdiction.

 

6. The preferences of the courts

 

Sometimes feuding parties are contractually required to consider ADR options. Even where not, the Civil Procedure Rules oblige them to explore the possibility of using ADR both before and during any subsequent litigation. Whilst no one can be compelled to use ADR, those who decline or delay its introduction must provide justification for doing so, and should these reasons be judged unmerited severe costs penalties may result. Failure to make use of ADR can therefore make any subsequent litigation victory feel a hollow triumph.

 

Conclusion

 

At the outset of any dispute, it is wise for prospective litigants to discuss options with their lawyers. ADR is not right for every situation, but where used it is generally found to be effective. The 7th Mediation Audit by the Centre for Effective Dispute Resolution (“CEDR”) reported an 86% aggregate settlement rate following mediation. Success is not guaranteed, and in order to get the most out of ADR parties must accept that they will have to compromise—but for new businesses, when the stakes are highest, this is often a price worth paying.

 

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