Weighing up your options

The four basic options

Whether you engage a lawyer, agent, or do it yourself, we would say that there are always four basic options to resolve any dispute. These apply to situations in which you are just simply owed money.

You may say, "There is no dispute - they know they owe me, and they can't deny it!" However, the four options remain a useful way to think about how you will proceed, regardless of whether they are going to argue about it.

Some options carry higher risk in your particular circumstances, in the sense that you still might not get paid, but may have to spend more time and money on the problem.

Other options will have less risk, in the sense that you don't have to spend a lot of time and money, but you are still likely to get some return.

Some options may deliver justice, but some can result in a commercial settlement of the matter - without ever finding out who was right and who was wrong.

So what are these options?

If you want to talk through how these options relate to your particular circumstances, contact our Dispute Resolution team on 1300 795 534 or we.assist@smallbusiness.nsw.gov.au.

1. Defer, do nothing, write-off

This means you will defer any action for now, wait to see what else happens, and live with the problem until circumstances change. This also includes writing-off debts that you know are not worth pursuing.

This is a low cost and low risk strategy, but doesn’t change the situation. Sometimes though, we can’t change things.

This option doesn't always seem acceptable at first, but for lower value debts, or those in which you know the other side has gone broke, fled the jurisdiction, or just isn't worth pursuing. In this type of situation, the sooner you can make the decision to defer, the sooner you can move on and pursue other more profitable deals.

Most businesses carry some sort of provision each year for having to write-off debts they can't or won't pursue. Does the value, or the prospect of success, mean that this one is something you are better off absorbing into your bad debt provision?

Is this such a rare occurrence that, if you never see that final payment, that you can take this as a one-off, and perhaps learn something that you can factor into your future deals?

Maybe in this situation, the other party will have better prospects of paying some or all of the debt in time? Although you may be keen to take swift action, pushing someone to bankruptcy or insolvency usually means you will only see a few cents in the dollar, if anything at all. So the question to ask yourself would be, "Can they trade out of their difficulties over time?"

2. Private negotiation

Again, this is a low cost option. You will have to be prepared to give something to get something.

This usually involves some sort of compromise, but is otherwise low cost, and you lower the uncertainty over whether you will be able to finalise your problem if you negotiate.

Negotiation usually only costs you your time, and the amount of money you may have to compromise on (but it is money that you may have otherwise spent on lawyers, or had to write-off in any case, and hopefully much less).

The lower uncertainty comes from at least knowing where the problem is headed. Well negotiated deals (out of court settlements) are less likely to be defaulted on, although this can still be a risk if you have not come up with a good deal for both parties.

By using this method, you are now negotiating on what can actually be done, not just a deal that looks good on paper, but the other party simply cannot perform. The paper deal might feel good (remember the original deal probably felt good!) but unless you are able to assess the genuine willingness and ability of the other side to pay, the deal may not be worth the paper it is written on.

In order to know how committed the other side is to the new deal, you may have to consider how they see going to court. If they have a lot to lose, then they are more likely to take a deal and stick to it. If they have nothing to lose, then when push comes to shove, they may not be willing to honour the deal you've made.

Using a third-party settlement conference service, such as a mediation, can help you to quickly assess these risks.

3. Use a third-party to run a settlement conference

There are usually some costs involved in using a third party to run a settlement conference. However, this is often a much less expensive that going through a court process and is normally considered low risk.

You would tend to choose mediation if you think that private negotiation between yourself and the other side is going to be too difficult, uncomfortable, or awkward.

You may also be feeling that private negotiation does not carry the same chance of getting a deal, as the level of trust between you and the other side may have been damaged. Using a neutral third-party, who can help both sides make the best decision possible given the circumstances, is often a very useful way forward.

The costs are usually far lower than court action, but for a commercial mediator, you would be paying in the hundreds, if not thousands. You would normally contract them for the day, or for enough hours to either get a settlement across the line, or to give feedback as to whether a settlement is possible. If no settlement is possible, then at least a mediator can confirm that you should be taking one of your other options.

4. Go to court

This can be the high cost and high risk option. Legal fees can be difficult to control, and as with all court cases someone has to lose.

Whilst this is the last of the four options (Defer, negotiate, or use a third-party for mediation), this is often the first option to be considered when chasing a debt.

Situations in which someone owes you money are usually going to be considered a civil matter. This means that it is between two private individuals or companies, and would not involve the police or a government regulator.

LawAccess (NSW Department of Justice) has an excellent resource online to help you understand what is involved in going to court for a small claim (under $10,000). For claims of more than $10,000, this guide is still helpful, however, given the value of the claim you may also wish to seek legal advice.

You can take legal advice at any stage to obtain some guidance about what to do. However, the lower the amount of money involved, the less worthwhile it is paying a legal professional. Initial advice might cost you in the hundreds of dollars, but running a case is likely to costs thousands, even tens of thousands for complex litigation.

For most people, going to court is time consuming and stressful, even if they don't spend much money on the case. You must ask yourself whether your time is better spent doing other things that are more productive, especially for low value matters, or those in which the other party has already lost all of their money.

You may get a judgement, but if you can't get paid, there is little point in having gone through the court process.

This harsh reality is frustrating for many people in small business. This is why it is important to think about how you will manage debts at an early stage, and keep the options of negotiation and mediation on the table for as long as possible.