What other options do I have to recover debt from valuable customers?

July 2014

What other options do I have to recover debt from valuable customers?

Instructing solicitors doesn’t have to mean formal legal action.

Business owners can find themselves in a difficult position when they have outstanding unpaid debts from clients, but are concerned that starting the legal process could mean a large legal bill and loss of the client without the assurance that their litigation action will be successful. Fortunately, there are many options available to creditors, such as Alternative Dispute Resolution (“ADR”) which will we look at now.

Last year’s civil justice reforms brought an increased focus on ADR methods, such as mediation, to promote the early resolution of disputes, with the aim of making the court system more user friendly and accessible. The emphasis will increase further after the EU Directive on ADR for consumer disputes was adopted last year, requiring its transposition into UK law by 2015.

What is Mediation?

Mediation is often associated with family law, however commercial businesses can use mediation as an effective tool to recover unpaid debts. In simple terms, mediation involves both parties meeting in a neutral setting and communicating openly to find a satisfactory solution.  This is an informal process which can be resolved quickly and without the need to file documents or wait for your case to be heard in court.

Last year’s reforms have introduced an automatic referral process for mediation for all small claims. The referral does not impose mediation upon the parties but involves referral to a mediator to consider whether the case is suitable.

Of course, the increase in the small claims threshold from £5,000 to £10,000 means that the number of mediation referrals is likely to significantly increase. In addition, the process is likely to capture more cases that involve complex factual issues or substantive points of law where the costs of litigating will no longer be recoverable, but where the outcome (in terms of the amounts at stake) remains key whether you are an individual, SME or larger corporation with a number of ongoing money disputes.
Detailed below are the key stages in the mediation process:

1.    Preparation

Undertake a realistic assessment of your case and identify any strengths and weaknesses.

Consider all possible outcomes and your best case/worst case scenario. What represents a good outcome? Are there any issues which could be conceded to improve the chances of settlement?

Is any further information required? Ensure requests for documentation or clarification on any issues are requested from the other side prior to mediation, where possible.

If settlement requires authority from another source then discuss authority limits prior to mediation and look to obtain a mandate for settlement in advance.

2.    Timing

Considering mediation at the outset of a dispute can lead to early intervention which brings with it financial benefits.

In addition, early settlement can also avoid the dispute escalating which saves valuable management time and limits unnecessary disruption to your business.

Seeking to engage in mediation at an early stage may also allow customer or client relationships to be preserved for the benefit of the business in the future.

3.    Choice of mediator

For straightforward disputes on the Small Claims Track where the mediation is conducted by telephone, a court trained mediator should be equipped with the necessary expertise to undertake effective mediation.

However, if the dispute involves complex or technically specific issues, then it is worth considering a referral to a private mediator with specific knowledge or experience. The Civil Mediation Council’s directory can locate mediators in your local area and they can be contacted to determine area of expertise. The directory also provides confirmation of fixed fees for mediation based on claim value and length of mediation time required, for example for a £5,000 claim, 2 hours of face to face mediation costs a maximum of £100.

If paying for mediation ensure you have a good mediator who will provide ideas or suggest solutions rather than simply acting as a messenger between the parties.

4.    Venue

Whilst some claims mediation is usually considered suitable for mediation by telephone, it is worth considering whether this method is appropriate for your particular dispute.

Are there any issues which would be better dealt with by a face to face meeting, or is the relationship between the parties such that whilst a face to face meeting is not appropriate, a resolution could still be achieved by the parties committing to attending a venue in person.

If telephone mediation is not appropriate then mediation can take place at either parties’ premises or a party’s solicitors’ office or even a neutral venue if necessary.

5.    Costs and proportionality

To ensure the costs of dealing with any dispute remain proportionate, it is always worth considering whether mediation is appropriate.

Consider the true value of the dispute. This means not only the monetary sum involved but also the potential management and other staff time for dealing with the matter should litigation continue to a final hearing. In addition, consider whether there may be any potential reputational costs caused by engaging in court action. In such circumstances, early settlement will be vital. Always keep one eye on the value of the claim and the costs/expenses that are being incurred – if mediation is not an option at the start of the claim it doesn’t mean it shouldn’t be considered at a later stage.

Mediation can bring early resolution to disputes which may have otherwise been dragged out during the court process, leading to higher costs and potential reputational damage. A good solicitor would be able to advise which route would bring the best solution depending on the nature of a claim and the clients’ objectives. It makes sense to get used to it now, as it seems clear it’s here to stay.