Time is money

Lawtech is helping small and medium-sized enterprises (SMEs) access legal advice on routine matters. Progress is also being made in online dispute resolution (ODR) and court digitisation. But SMEs still struggle to assert their legal rights, particularly around debt recovery and late payment.

According to the Department for Business, Energy & Industrial Strategy, SMEs account for 99% of the UK business population, 60% of jobs, and around half of private sector turnover. The EU defines an SME as a business with fewer than 250 employees and turnover of less than €50m or a balance sheet total of less than €43m, measures still used by the UK government.

SME legal needs fall into two categories: reactive, such as debt recovery, trade disputes or customer complaints; and proactive, such as drafting a new contract or business agreement. The Legal Services Board’s fourth ‘Small Business Legal Needs Survey’ of over 10,000 small businesses conducted in 2022 found that each year 32% of small businesses experience a legal issue (where professional advice would help). The most common concern trading, non-payment and late payments, followed by regulation, employment and tax. Regulation saw the largest increase in legal need. Brexit may be a factor: 23% of respondents said Brexit started their legal issue or made it worse (41% said the same about Covid-19).

While the economic downturn and higher interest rates and energy prices have not directly affected the number of legal cases involving SMEs, they have put more pressure on cashflow, increasing the number of late payments and customer complaints (sometimes to avoid or delay payment). ‘In terms of the big issues affecting SMEs, the cost-of-living crisis and rising costs are the main ones,’ says Jason Smalley, general counsel at The Legal Director, a regulated firm which provides senior general counsel to SMEs on a part-time basis. ‘SMEs are having to absorb huge price rises from suppliers which they’re simply not able to pass on to customers, making margins tight.’

'The average value of a dispute is £18,000 and the cost of resolving it is £17,000. Businesses have to decide whether to take the financial risk of pursuing a complaint'

Paul Wilson, Federation of Small Businesses

Paul Wilson, policy director at the Federation of Small Businesses (FSB), highlights payment disputes as the biggest problem. The FSB’s Time is Money: The Case for Late Payment Reform report, published in March, found that in 2022, 52% of small businesses had experienced late payment and 25% reported an increase in late payments.

Access to affordable legal advice and representation is another factor. Only a quarter of respondents to the LSB survey sought professional help with legal issues, while around half sought to resolve them alone or took no action at all. Most SMEs do not have internal legal capacity (6% of respondents to the LSB survey overall; 10% in London). They are more likely to have consulted accountants, trade bodies, and financial or tax advisers than solicitors.

While the survey revealed that many SMEs often do not identify business issues as legal problems (when they are), the most important factor is cost. Just 10% of respondents to the LSB survey viewed lawyers as cost-effective, and almost one in five small businesses used personal savings to pay for legal services. ‘Costs are often disproportionate,’ says Wilson. ‘The average value of a dispute is £18,000 and the cost of resolving it is £17,000. Businesses have to decide whether to take the financial risk of pursuing a complaint. And if they don’t dispute it, there’s a risk that the issue may keep happening.’

Lawtech

Online resources are at least helping businesses understand their options and identify appropriate advice. In 2021, the LSB and LawtechUK collaborated on research into SME legal needs. The study, conducted by Community Research, concluded that there was an important role for lawtech in providing affordable self-service solutions.

However, as Aisling O’Connell, regulatory policy manager at the LSB, wrote: ‘SMEs do not want to choose between lawtech and traditional providers – they want both. Legal professionals are highly trusted, and SMEs want to draw on their expertise, particularly when they feel that their legal issue is unique or particularly complex.’

Former competition lawyer Merlie Calvert is the founder and CEO of Farillio, a business support platform for SMEs which provides legal information and guidance. Businesses and individuals subscribe to Farillio, which also partners with insurance companies and law firms; a white label version of the platform provides the legal support that is included in many insurance policies. ‘People shouldn’t have to pay separately for access to justice,’ says Calvert. ‘The legal profession is obsessed with making it easier for people to instruct them, but your insurance policy may already include access to a 24-hour legal and tax advisory helpline. This means you can talk to somebody who is not looking to get more business from you. They are assessed on customer experience not billable hours and they don’t want you to have a claim. Insurers have been doing this for years – before the legal profession became obsessed with creating something new.’

Medium-sized enterprises

Lawtech is often more focused on the legal needs of small businesses, but medium-sized enterprises are equally vulnerable to the consequences of late payments, customer complaints and supply chain snags. Their running costs are higher and less predictable, thanks to multiple hikes in interest rates and energy bills. They also have more complex business structures, operations and responsibilities. Disputes, too, are likely to involve more money and higher risk. With an average dispute value of £18,000, Smalley observes: ‘One of the clearest blocks for SMEs is the £10,000 limit in the small claims court.’ SMEs using the courts are therefore forced into a more costly forum. For a small business operating in today’s economy, they often can’t afford to write off a few thousand pounds worth of debt or pay out on a claim. But this limit often means it’s uneconomical to get legal advice. SMEs are forced to either forget about the money or to tackle the legal system alone, dedicating time and effort to the process, which is antiquated and backlogged. This is definitely one of the most fundamental barriers for SMEs.’

The cost barrier contributes to inequality in the justice system as expert legal advice is a significant factor in the success of a claim. Rebecca Burford, partner at Charles Russell Speechlys, says: ‘Even where a business has a strong case it can be expensive to fund the costs of seeking the valuable legal advice required to best deal with the issue and give the greatest chance of success. Similarly, in cases where a small business has perhaps made an error, having early access to advice can, in the long run, help to mitigate overall exposure and may avoid expensive litigation costs.’

Stephen Rosen, a commercial litigation partner at Collyer Bristow, who handles contractual and company disputes, says the costs barrier is not limited to small businesses. Medium-sized enterprises may be involved in contractual disputes, mergers and acquisitions, and shareholder disputes where claims can run into the millions. ‘Even at the higher end of the SME market, the client’s costs are a relevant factor and may be a deterrent or a restriction on litigation (as is potential liability for the opponent’s costs), and of course this is more so at the lower end.’

'Even if a business has a strong case it can be expensive to fund the costs of legal advice required to best deal with the issue and give the greatest chance of success'

Rebecca Burford, Charles Russell Speechlys

SMEs of all sizes need to consider carefully whether a claim is worth pursuing or defending based on costs. Rosen explains that access to justice is not about turnover or profit; it is about whether a business can afford to pursue or defend a claim. He echoes Wilson regarding inequality of access to justice between SMEs, and big corporations that employ in-house lawyers and external firms. However, some SMEs may have recourse to alternative funding. ‘Litigation funding has provided access to justice for claimants, but only for a relatively small number of claimants,’ Rosen says. ‘It has, however, given SMEs more opportunity to pursue claims if there are litigation-funded groups and class actions which they can join in order to participate with other claimants. The access to justice gap is reduced to some extent by law firms offering conditional fee agreements and damages-based agreements, but law firms are necessarily cautious about taking on such cases because of the financial risks for them.’

Court digitisation

While lawtech companies and law firms provide affordable online self-service resources and legal support to SMEs for routine processes and advice, SMEs are still disadvantaged by the relatively high cost of litigation. Although progress has been made towards online dispute resolution and court digitisation, progress accelerated by the pandemic, it is still at an early stage.

HM Courts & Tribunals Service digitisation initiatives including online portals and helplines allow claims to be filed online and cases get to court quicker, but then the system slows down again. Furthermore, although courts in England and Wales continued to hear cases during the pandemic, a considerable backlog remains. However, digitisation is still a significant advantage because 80% of debt collection cases are resolved before they reach the courts. ‘For basic debt collection of relatively modest sums the Money Claim Online portal has been relatively effective in relation to recovering uncontested debts,’ observes Samuel Townend KC, barrister at Keating Chambers and Bar Council vice-chair. But he adds: ‘It is quicker and easier to commence legal proceedings online than through the post or at the court counter. It is once you get through the initial stages and debt is contested that court backlogs start to hamper effective dispute resolution.’ Townend cites the lack of investment in the justice system which has led to court closures, uneven digitisation (some courts and processes still require paper documents), and judicial vacancies exacerbating backlogs and delays.

Online dispute resolution

Digitisation is boosting ODR. Last week, IPOS Mediation and Resolve Disputes Online announced a joint venture to realise LawtechUK’s 2021 feasibility study and proof of concept for an SME ODR platform ‘for SMEs to recover unpaid debts, as an optional alternative to the courts’. Their platform, designed to help SMEs recover payments through online negotiation, mediation and arbitration, is expected to go live next year.

However, ODR is only effective when parties to a dispute are willing and able to negotiate. In practice, this often happens only after a legal case has started down the court route. Townend highlights the HMCTS small claims mediation service, which offers a free service to settle claims of up to £10,000. However, he has doubts about plans to make mediation compulsory. ‘Ultimately, parties in difficult cases want to explain their case to a judge and for the judge to tell them why they are right or wrong. That is important for confidence in the justice system. There is a tension between diversion [away from the courts] and speed of resolution, and access to justice and getting a final decision from a judge,’ he says, while acknowledging that delays in the justice system increase cashflow difficulties for SMEs.

Looking to specific industries for effective solutions, Townend cites statutory adjudication, a 28-day procedure for dispute resolution introduced to solve cashflow problems in construction supply chains that is now used to resolve most construction disputes. Adjudication, mediation and other ADR mechanisms can help to speed up disputes.

However, ADR is not necessarily low-cost. While it costs up to £10,000 to issue a claim in court, arbitrators charge £700 an hour and a complex case may require three arbitrators.

Townend highlights another route to justice in the form of licensed access and direct access to the bar – whereby businesses do not have to go through a solicitor to get expert advice from barristers. ‘There are a number of licensed accessed professions – accountants, [insolvency] practitioners and so on – with the right to instruct barristers directly. Some barristers hold a direct access licence which means that anyone can approach them directly. That can be one way of getting relatively cheaply the sort of advice that an SME might need.’

One final barrier to justice worth mentioning is a lack of clear communication about the resources available to SMEs – the first of the LSB’s ‘key asks’ of the government (see box). Looking ahead, as the profession engages with lawtech companies to increase online legal resources for SMEs, and digitisation facilitates cost-effective dispute resolution through the courts and other processes, technology may go some way towards addressing the SME justice gap. But it will still require action from the government, delivering on a legal support strategy.

 

Joanna Goodman is a freelance journalist