How do you protect your business from the almost endless list of disputes that can land you in court and can destroy your business? Matthew Hourn reports.
In today’s litigious society, for small to medium enterprises (SMEs) even the smallest disputes, whether with competitors or consumers, can be potentially fatal to your business.
As an owner, running your business can take up most of your valuable time but you should ensure that you deal with disputes quickly and efficiently. If you don’t all your hard work could be in vain. The costs and the time spent dealing with a dispute can ruin your business.
SMEs face a wide range of potential disputes, including internal partnership disputes, key employees leaving and taking your clients, unlawful dismissal, occupational health and safety, as well as external disputes with competitors and consumers. Claims by consumers against SMEs for misleading and deceptive conduct regarding product quality are very common. With competitors, SMEs can find themselves instigating proceedings for breach of trademark and/or seeking to enforce debt recovery proceedings.
The list of potential disputes that could arise is almost endless. However, there are ways to reduce exposure to claims and/or to ensure that you are armed with the required evidence to instigate or defend claims. The key is to obtain legal advice on all written contracts and/or agreements to ensure SMEs are fully protected or have the required Alternative Dispute Resolution clauses in all contracts or agreements.
I recently acted for a company in proceedings for allegedly failing to provide a workplace free of sexual harassment. The potential damages were in excess of $100,000. However, the company had implemented an Equal Opportunity Policy and Anti-Discrimination Handbook that specifically dealt with sexual harassment in the workplace. The policy was in place at the time and was provided to all employees. This was sufficient in defending the claim brought by the employee.
I also acted for a company that sought to prevent an employee from setting up a competing business. Employees will leave your business, so how do you stop them taking your clients with them or using their confidential information to set up a competing business? The answer is to ensure that employment contracts have a restraint of trade clause which can arm the SME with evidence to seek an injunction preventing the employee from setting up a competing business.
Standard Terms of Trade
A properly drafted standard terms of trade can assist SMEs in ensuring that their goods are not lost when goods are sold on credit. A Retention of Title clause (ROT) should be included in all standard terms of trade. The basic ROT clause means that ownership of the goods supplied does not pass to the customer until full payment has been made. A properly drafted ROT clause will state that the supplier has the right to enter the customer’s premises and recover the goods if the customer does not make payment.
It is extremely important in insolvency matters, where the goods supplied to a company are not paid for and the company goes into liquidation. If, for example, $500,000 worth of computers are supplied to a distributor without a ROT clause in the standard terms of trade, the SME that supplied the goods would not be able to reclaim any goods, as the customer becomes the owner of the goods when delivery occurs. The SME may only sue for the sale price or damages for breach of contract. If the customer has become insolvent and the goods are the property of the customer, they can be sold by the insolvency practitioner.
The SME will be an unsecured creditor and will only be entitled to lodge a proof of debt in the estate and may find that there is no money payable to them. With a properly drafted ROT clause they would normally have the right to take possession of those goods.
SMEs should be aware of their responsibilities when making representations in relation to goods. Proper records should be kept at all times in relation to representations that the SME has made to the purchaser about those goods. Often SMEs find themselves defending claims where the purchaser has alleged that they have relied upon representations made by the SME which they allege misrepresented and are not suitable.
All employees of SMEs should be aware of any expressed warranties and should also note that in certain circumstances implied warranties are implied by either statute or common law. An implied statutory condition and warranties require traders and manufacturers to ensure that every product provided is suitable for the purpose for which it is supplied. It is essential that SMEs are aware of the potential liability they face if they exaggerate and/or misrepresent the quality of goods.
Partnership disputes can be the most expensive and ugliest disputes of all. Sometimes a relationship starts out as friends and associates pursuing the same goal, but if a partner seeks to leave the business and there is no mechanism in place to properly quantify the value of the partner’s share, partners can quickly become enemies. A perfect example involves two partners opening a business in New South Wales, where one wishes to move to Queensland to start a new life with his family. Both have contributed to the success of the business, but there is no mechanism in place to assess the partner’s value of the business. If this matter is not dealt with efficiently, litigation may be the end of the business as both partners focus on fighting the claim they have against each other, as opposed to running the business. However, a properly drafted shareholders agreement can set out how these disputes are dealt with, and allocate an alternative dispute resolutions system as opposed to litigating proceedings, and they will have in place a mechanism where an independent valuer values the goods.
These are just some examples of how SMEs can find themselves in dispute. However, one of the easiest and most obvious ways to ensure that SMEs are protected is to keep proper records, as documentary evidence is the most important weapon an SME will have in defending or instigating a claim. If the matter is brought before a court, in most cases the judge will look at the documentary evidence before he/she considers oral evidence. Although this may seem obvious, it is one of the key areas often overlooked by SMEs.
Alternative Dispute Resolution
Alternative Dispute Resolution (ADR) is an alternative to instigating proceedings in court. The name describing the process "Alternative" was created to describe the alternative to instigating proceedings.
The key is obviously to avoid disputes. However, disputes are inevitable in the commercial world. It is essential that SMEs take steps to ensure that they have sufficient evidence to defend claims and/or to instigate proceedings. Even though documents may be properly drafted and you may keep meticulous records, disputes are inevitable. However, before approaching the court to commence proceedings, SMEs should consider the ADR process.
SMEs should ensure that their standard contracts include an ADR clause which requires parties to utilise a mutual third person to help parties to come to an agreement before proceeding to litigation. The degree of influence that the third party has over the final outcome depends on the type of ADR the parties chose. The ADR process is less formal, less costly, and less time consuming than proceeding to court.
One advantage of the ADR process is that parties have control over the process, you are not required to wait until a judge is allocated and a hearing date is set. The process is informal, quicker, cheaper and designed to obtain a resolution so that SMEs can get on with running the business and earning money.
Another advantage of the ADR process is that with some SMEs t
he dispute may be confidential. Unlike the court system, where everything is on public record, ADR can remain confidential.
SMEs should ensure that the ADR process is not utilised by opponents as a tactical procedure to draw out the process and obtain information on how the SME may bring its claim.
The ADR process utilises a number of methods to resolve disputes. The most popular are negotiation, mediation, and arbitration.
I would recommend negotiation as the first step where parties are in dispute. If they are unable to reach an agreement it is advisable to then enter into either mediation or arbitration.
Negotiation is an informal bargaining process and the most basic and cost effective way of dealing with disputes. However, SMEs can utilise the services of lawyers and/or barristers to assist in the negotiation process. The people involved in the dispute communicate directly to try to reach an agreement without the costs of a mediator or arbitrator.
Mediation is a process where the mediator is a neutral and independent third party. Mediators are appropriately qualified lawyers or court registrars who help the parties to work out their resolution by exploring options to resolve the disputes. The mediator assists in identifying the disputes and providing avenues for resolution. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, but may advise on or determine the process of mediation whereby resolution is attempted. Mediation may be undertaken voluntarily, under a court order, or subject to an existing contractual arrangement.
Arbitration is a process in which the parties present arguments and evidence to a dispute resolution practitioner (the arbitrator) who makes a determination. Arbitration is a more formal process whereby the parties can be bound by the decision.
Dispute Resolution Tools
Where can SMEs go when they need help to avoid disputes and find mediation services?
http://Industry.gov.au provides a Step by Step Guide to Successful Resolution of Disputes and is provided by the Department of Industry, Tourism and Resources.
LEADR (http://www.leadr.com.au) is a not-for-profit membership organisation formed to promote and facilitate the use of consensual dispute resolution processes—ADR.
The primary role of the Office of Fair Trading (www.fairtrading.nsw.gov.au) is to administer consumer laws and to look after the rights of consumers. They also advise businesses and traders on fair and ethical practices. The aim is to achieve fairness for all in the marketplace. Informing consumers and traders on their rights and responsibilities is an essential aspect of this work. Being informed is the best defence consumers and traders can have against marketplace scams.
* Matthew Hourn is partner at law firm, Clinch Neville Long (http://www.clinchnevillelong.com.au).