Financial management

When customers don’t pay: alternative dispute resolution

- September 29, 2011 3 MIN READ

Don’t throw your hands up in frustration when your debtors don’t pay. Take action. One option available is alternative dispute resolution.

You’ve sent your invoice. It is now overdue. It’s time to make The Call: “Regarding the invoice I sent a month ago, it’s now overdue. When do you think that will come through? … The cheque’s in the mail you say?” 

Polite chasing

When faced with this situation, start with the steps that can be considered ‘polite chasing’—this includes communicating face-to-face with your customer, and suggesting other payment options such as by instalment. (If you’re not sure how to handle these discussions, you’ll find a helpful guide to non-nasty debt collection strategies in this article). 

Some people would be content to keep working for this customer in the hope that somewhere along the line the money will magically land in their account—and yes, sometimes this does happen. However, I recommend that you become assertive about late payment as soon as politely possible, which demonstrates to your debtor that you are running a business, not a charity, and helps tame your cash flow which, after all, is the lifeblood of sustaining a business. 

Next steps – alternative dispute resolution

If these avenues have been exhausted, it’s time to consider your other options. First turn to non-legal avenues, which are termed ‘alternative dispute resolution’ and include mediation and arbitration. 

Want more articles like this? Check out the financial management section.

Alternative dispute resolution measures are worthwhile if you:

  • Have a strong case,
  • Want an independent, neutral party to preside over the situation, and/or
  • Want to avoid the high costs of going to court. 

Mediation involves an independent and neutral third party presiding over the case. A mediator will facilitate discussion between you and your debtor and assist in the negotiation process. This re-establishes any communication breakdown either party may have about the situation. 

Mediation isn’t usually used for straightforward cases such as one party not being paid. More often, it’s used in those cases where there is a misunderstanding about an element of the work contract. 

For example, your client may have given you a brief, which you fulfilled, but they then requested additional out-of-scope work, which you performed and charged for accordingly, but which they subsequently don’t want to pay for. 

Mediation will allow the parties to work through different aspects of the relationship and the requisite payment involved. 

If the mediation is successful, you and your debtor will reach a joint decision, which you will both agree to undertake. The mediator facilitates the discussion, but does not play a decision-making role or pass a judgement. Agreements reached during mediation are not binding. 

Arbitration is akin to mediation in its process, except the arbitrator makes the decision, not the parties, and the decision of the arbitrator is binding. 

Pros and cons of alternative dispute resolution

The main benefits of alternative dispute resolution are that you are able to better understand your client and the issue, without the discussion getting nasty. Rather than adopting prosecution/defendant roles, which positions each party against one another, alternative dispute resolution allows you to work together to reach a solution that both find mutually appropriate. There’s also no reason why you can’t continue the business relationship following resolution—most businesses do. 

Alternative dispute resolution doesn’t work in situations where neither of the parties involved are willing to compromise, or where communication is not a strong point. Sometimes the manner in which individual mediators or arbitrators handle disputes may also have a bearing on whether this form of reconciliation works. 

This is the first in a series of three articles. In the next, I’ll explain how a letter of demand can bring about resolution and in the third, the legal avenues available to you when you have a dispute with a debtor. 

In the meantime, have you ever participated in mediation or arbitration to resolve an issue with a client or supplier? Please share your experiences below.

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  • Andrew Caska

    Caska IP Patent Attorneys

    'Flying Solo opened up so many doors for us - I honestly don't know where I'd be without it"