Late and non-payments are a persistent problem for SMEs in the UK. In recent years, the government has undertaken measures that attempt to change the culture, including the potential enlargement of the small business commissioner’s powers in relation to late and non-payments. Nevertheless, our study has found that there remains a gap in relation to a simple and streamlined platform which offers parties to resolve debt disputes out of court while having the ‘teeth’ to minimise the real risks of debtors evading payment and enforcement of judgments.
Based on our assessment of user and stakeholder needs and preferences, as well as a detailed legal and policy analysis of the current ecosystem for dispute resolution in the UK and relevant international experiences, Lawtech UK has today published a feasibility study and proof of concept for an online dispute resolution platform.
We recommend that:
First, the nature of the proposed platform should recognise SMEs’ need for maintaining business relationships in the context of debt recovery and debt disputes. While late and non-payment of debt can create significant cash flow problems, many SMEs may prioritise the need to keep an important client in the medium-long term over recovering the debt. Direct negotiations between the parties is the most common form of resolving disputes for SMEs in debt disputes. Dispute avoidance and management should be considered as part of a wider strategy to tackle these disputes.
Second, if formal routes are pursued to resolve debt disputes, SMEs generally need to be convinced of a high probability of success and a simple, fast, affordable, and just process. The effective use of technology on this platform can help to achieve such a goal but needs to ensure a user-centred and accessible system that caters for the specific needs of SMEs. At the initial phase of the process, helpful advice, orientation, and signposting for SME users can provide an attractive entry point into the platform. Moreover, the direct and active involvement of SME users must be a key part of the platform’s entire development process. Effective data collection of different users’ experiences will help to identify problems as well as opportunities for improvement, which is particularly important in the early stages of the platform’s development.
Third, there is already a plethora of dispute resolution processes and services in the UK available to SMEs to resolve debt disputes. The different processes and services have their own advantages and limitations. The proposed platform should not reinvent the wheel but needs to provide a superior solution in terms of time, cost, clarity of process, and enforceability of outcomes. A potentially unique characteristic of the proposed platform is the offering of a ‘one-stop shop’ for the various ADR and ODR providers in the UK and trade associations to offer their debt recovery and dispute resolution services to SMEs, while parties may track the end-to-end progress of the entire dispute resolution process on the platform (if possible, from invoice issuance to enforcement) based on a single, streamlined record of data.
Fourth, HMCTS reforms, including the OCMC pilot and other current pilots, reaffirm the move to integrate ODR into the substantive civil justice processes. As much as possible, the proposed platform should operate separately from the courts. Meanwhile, it should also support wider civil justice reform programme in the UK and complement current and prospective reforms undertaken by HMCTS. The platform would ideally resolve the bulk of SME debt disputes outside the civil courts, with the aim of reducing the caseload burden of the courts. At the same time, given the importance of gaining credibility and trust among users, the strategic integration of the platform with the courts is an important consideration. In particular, the outcomes of the platform should be linked to court enforcement processes in a streamlined and efficient manner.
Fifth, the platform should have a multi-tiered ADR process that relies primarily on negotiation and mediation to settle a vast majority of debt claims. For disputes that fail to settle, independent adjudication should be used within the platform. Decisions from adjudication are binding on the parties, with a fast-track enforcement route in the civil courts. This enforcement process may be achieved through changes to civil procedure rules. An alternative (and recommended) option is to introduce a statutory adjudication scheme similar to that of the construction industry, which could enable the platform to achieve the goals of speed, cost, clarity, transparency, and enforceability, as well as reflect the policy significance of tackling this pervasive problem for SMEs.
With the assistance of the SBC, industry bodies, and other stakeholders, a model dispute resolution clause regarding the use of the platform in B2B contracts involving SME creditors should be widely promoted. This could be done through an extension of the PPC framework and other SBC activities to include new initiatives such as a kitemark scheme for big businesses that demonstrate they take prompt payment seriously (for example, by including this model clause in their contracts with small businesses). In the absence of this contractual clause, if a SME creditor elects to use this platform to resolve a debt dispute, the statutory scheme should be triggered and require the debtor to engage with the platform.
Both parties must attempt to settle through negotiation and mediation on the platform. If the parties fail to settle, the dispute moves to adjudication. All stages of dispute resolution on the platform, from negotiation to adjudication, should be subject to a tight timeframe (for example, 14-21 days at each stage). Adjudication on the platform should ultimately result in a decision that is binding on the parties, unless/until revised by arbitration, litigation or parties’ agreement. If a party contravenes the adjudicator’s decision, the aggrieved party can resort to a fast-track route in the county court for a summary judgment and enforcement order. Like the construction industry scheme, the principle of ‘pay first, argue later’ should apply.
Overall, the timing is ripe for a platform such as this and any accompanying legislative and policy proposal, especially in light of the government’s priority to support SMEs as the engine of the UK’s post-Covid economic recovery.
*Using online dispute resolution to tackle the SME late payment crisis is published today by LawtechUK
The author is writing on behalf of the consortium commissioned by Lawtech UK to create the report