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Biggest cause of SME disputes revealed

Biggest cause of SME disputes revealed

conflict between two businessmen

It is neither employees nor government agencies that are the most common cause of disputes for SMEs, a new inquiry has found, which also revealed the massive costs facing businesses to resolve a stoush as well as where business leaders are seeking advice.

In releasing the results of its Access to Justice Inquiry (Phase I), the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) revealed the findings of its survey of 1,600 small businesses nationwide.

Among those businesses, payment times came out as the biggest source of conflict, accounting for close to half (44 per cent) of all disagreements.

Of these, 26 per cent related to the full amount being unpaid, while a further 18 per cent related to payments being made late.

“Our research shows 22 per cent of small businesses surveyed had been involved in a serious dispute in the last five years. Nine out of 10 were business-to-business disputes and one in 20 were business-to-government,” Ombudsman Kate Carnell said.

Three in five of these businesses had sought out advice from a lawyer in relation to a dispute, but half said that the anticipated time and effort needed to see the matter to conclusion was unreasonable.

Cost is also a major factor weighing on SMEs: the inquiry found that businesses are spending an average of $130,000 to get a resolution through formal channels, like court proceedings — double what it had cost only a decade ago.

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“The cost of disputes to small businesses is far-reaching. There can be significant financial loss; existing business relationships become strained; it is a time-consuming process and reputations can be seriously damaged,” Ms Carnell said.

The latter point helps to explain why two-thirds said that the dispute had resulted in the business relationship being severed completely.

“We found one-third of disputes are not escalated through a formal process; instead the small business owner sought to resolve it by speaking with the other party and coming to an agreement,” Ms Carnell said.

While businesses will almost universally liaise with the other party as the first step in resolving a dispute, only 80 per cent do so when conflict arises with a government agency.

Only half resolved in the business’ favour

As well as the constraints listed above, another factor weighing on the minds of business leaders in whether to formally pursue a dispute is the chances of a positive outcome.

According to the report, of the businesses that did escalate a “serious” dispute, only 57 per cent had actually achieved a resolution. Just half of those (29 per cent) resolved had been in the business’ favour, while 19 per cent were resolved to mutual benefit.

A further 27 per cent of matters were still ongoing. Some 9 per cent were resolved in the other party’s favour.

But a staggering 13 per cent of businesses abandoned the dispute resolution process midway through. Their reasons for doing so were:

  • Costs outweighed the potential gains (49 per cent)
  • Unlikely to win (24 per cent)
  • Lack of time (19 per cent)
  • Cost constraints (19 per cent)
  • Advised not to proceed (12 per cent)
  • Lack of confidence in getting a fair ruling (11 per cent)
  • Concerns over mental or physical health (11 per cent)
  • Reputational concerns (7 per cent)
  • Assumption that the other party would not engage in the process (6 per cent)
  • Potential to resolve the dispute another way (4 per cent)
  • Not understanding the procedures (4 per cent)
  • Trying not to damage the business relationship (4 per cent)
  • Concerns about retribution (4 per cent)
  • Dispute remains ongoing (3 per cent)
  • Other (6 per cent)

None of the businesses said that they were pressured by the other party to drop their complaint.

Where SMEs go to resolve disputes

According to the report, the below is a breakdown of where SME owners and operators are turning for advice and support to resolve disputes:

  • Lawyer/legal service – 62 per cent
  • Another business owner or manager – 18 per cent
  • Ombudsman – 14 per cent
  • Industry association – 13 per cent
  • Regulator (such as ASIC or the ACCC) – 10 per cent
  • Accountant/tax agent – 8 per cent
  • Friends/family – 8 per cent
  • Dispute resolution service – 6 per cent
  • Other government agency – 6 per cent
  • Internet search – 2 per cent
  • Local council – 2 per cent
  • Chamber of commerce – 2 per cent
  • ATO – 1 per cent
  • Bank/finance provider – 1 per cent
  • Other – 8 per cent

Phase 2 of the report will explore the court system and make recommendations on how dispute resolution procedures and overall access to justice can be simplified and improved for SMEs.

Biggest cause of SME disputes revealed
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