Businesses flourish when they cooperate, but sometimes conflicts arise. Whether they originate from bad faith, honest misunderstandings, or differing opinions on how to react fairly to an unforeseen contingency, disputes imposes costs on businesses. The total economic burden created by disputes may be in the trillions of dollars per year.
Resolving disputes takes time and costs money. Businesses must choose a way to resolve disputes, balancing the value of the outcome against the cost and time required to achieve it. If you run a small business, you have probably found sometimes there is no good solution and your best decision is to give up and walk away.
In a increasingly interconnected global economy, the need for reliable, swift, and cost effective dispute resolution is more apparent than ever. Our longest standing means of dispute resolution, government run courts and traditional arbitration, are slow and costly.
Courts and arbitration do not offer effective coverage for disputes of all sizes. For small disputes concerning sums of under $1,000 and medium sized disputes involving sums of $10,000 to $100,000, the cost of courts may exceed the potential gains.
Mediation services only offer a partial solution. They offer a cheaper approach than arbitration, but they do not enforce their decisions. There are several recent technological innovations that offer somewhat lower costs and greater speed, but they are only available to a limited market or provide only a partial solution.
Traditional Approaches To Dispute Resolution
Small Claims Courts
For disputes involving smaller sums, a small claims court may be a viable option. In the US, the maximum amount for small claims disputes ranges from $2,500 to $15,000. You can pursue a resolution in small claims court without a lawyer, but if you do you risk bearing your opponents legal costs, and you will still spend a minimum of $500 worth of time and filing fees. If you choose a lawyer, your costs with exceed $1,000. Small claims courts do not work well for disputes under $1,000, and for disputes between $1,000 and $15,000, the cost can be a significant portion of the amount awarded in the event of victory.
Traditional Courts — For Disputes Over $100,000
Traditional courts are available for disputes involving sums that are too large for small claims courts. But there are fixed costs involved in filing suit. The legal system may be effectively unavailable for many disputes over sums between $10,000 and $100,000. The Institute for the Advancement of the American Legal system at University of Denver reports that their survey of American College of Trial Lawyers members revealed that they regularly turn away cases because it is not cost-effective to litigate them. According to the survey, the median minimum viable amount was $100,000.
Traditional courts are not cheap. Fortune 500 litigation costs were estimated at 200 Billion in 2008. Traditional courts are fast not either. World bank notes that the UN Commission on Human RIghts decided to step in on the issue of slow justice and assert a maximum waiting time of 2 years for regular cases. In the Maryland, USA, Circuit Court cases typically take 18 to 24 months to reach trial.
Alternative Dispute Resolution — Arbitration and Mediation
Mediators can resolve dispute relatively cheaply and quickly, but they do not enforce their decisions, so unless a business can rely on the good faith of their counter-party in the dispute, they may be near useless. Mediators are generally only effective when the parties are inclined to cooperate.
Arbitrators render binding decisions that courts will enforce, but they are expensive. Arbitrators charge at least $150 an hour and may charge over $500 an hour. Counting administrative fees of arbitration associations and arbitrators time, the minimum cost is often in the neighborhood of $10,000. The consumer and worker advocacy group Public Citizen points out that arbitration clauses in contracts discourage people from filing claims against corporations. The arbitration clause prevents a lawsuit, that a lawyer might take on contingency. Plaintiffs wishing to open a dispute where the contract requires arbitration may be faced with fees they feel they cannot afford.
Giving Up: It’s Not A Bug. It’s A Feature
One of the most popular alternatives for small vendors in disputes with larger businesses is: giving up. Because of the cost barriers to entry, and because the system favors a litigant with a large budget, in many cases, the smaller player in a dispute will see their only rational choice, faced with costs and risks they cannot afford, is to give up and accept injustice.
One who is critical of power might say the failure of the justice system to deliver justice for those with less economic power when they compete with those with more economic power is not a bug; it’s a feature. The “justice” system provides order to serve power.
Perhaps it is time for a new justice system, a decentralized system that can level the playing field and allow everyone equal access to fair, affordable, fast dispute resolution.
Promising Innovations
DIY legal agreements, smart contracts, smart legal contracts, and marketplace platforms offer a better option for some business agreements, but do not completely solve the problem of trust in business relationships.
DIY Legal Agreements
Platforms like LegalZoom help businesses save money by allowing them to create clear legal agreements quickly for a low cost using templates. Access to professionally designed contracts and affordable price helps business make clear deals that allow the to resolve dispute fairly when they arise.
Smart Contracts and Smart Legal Contracts
A smart contract is an electronically recorded agreement that automatically transfers funds when an action occurs. A smart legal contract includes language to make the agreement legally binding and enforceable in court.
This is important, because a smart contract is only as good as its inputs. If the contract receives wrong information, it may deliver incorrect results. Smart contracts save money when they work, but they don’t always work. Smart legal contracts can be enforced when they fail, but then high costs may be incurred.
Dispute Resolution/Reviews On Marketplace Platforms
Most online service marketplaces, such as Fiverr or UpWork, offer reviews. This allows an aggrieved buyer some recourse in a dispute; they can leave a bad review. This helps force sellers to treat buyers fairly. Some marketplaces offer the opportunity to review buyers as well, creating a mutual incentive for fairness.
Online service marketplaces may also offer dispute resolution services. The platform has central control of the dispute resolution and charges a fee to buyers and sellers. This may represent one of the best currently available solutions. It is still not great; if you look at the search results for “Upwork dispute resolution” you will see that several of the top ten results are long litanies of complaint. And you have to pay up to 20% for the privilege of being on the platform to access the dispute resolution.
What Next?
So…perhaps…if you deal with contracts worth between $100 and $100,000, you will agree: it’s time for a better way to make deals and resolve disputes. We have an idea! In our next article, we will explain how decentralized technology and voluntary participation can provide fair, fast, free justice for all.
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