PHOTO
25 July 2016
Payment disputes have increased this year, but there are options available to small operators other than going to court. Amal Loring, founder of Dubai-based training company MBD, was delighted when a local marketing firm agreed to pay her 20,000 dirhams ($5,445) for a training session with one of its clients. Her joy was short-lived given that nine months later she still had not been paid.
After confronting the company, Loring said she felt she had no choice but to pursue legal action. However, a lawyer advised her that it would "take about two years and [involve] a minimum of 50,000 pounds ($72,186) of unrecoverable costs" to take the firm to court. Loring decided it was not worth the time and possible legal costs to pursue the matter and decided to write the debt off.
Unfortunately Loring's story is not unique and she is one of many small and medium-sized enterprise (SME) owners in the United Arab Emirates (UAE) who struggle with payment delays and non-payment issues.
In the 2016 Gulf Finance SME Sentiment Survey, which polled around 200 UAE respondents about business performance in the first quarter of the year, 23 percent of respondents said it had become harder to collect late payments, compared to the previous quarter.
Late payments appear to be more common in the Middle East compared to other parts of the world as "people tend to be prepared to give agreed longer credit terms", such as 30, 60 or 90 days instead of upfront payment, says Keith Hutchison, a dispute resolution partner at law firm Clyde & Co.
According to a report released in May 2016 by international auditing and consulting firm PwC, tightened budgets and late payments exacerbated by the current economic climate are expected to fuel a rise in these types of disputes. The firm's 'Delivering during Change' survey, which canvassed 130 business owners and developers in the Middle East, revealed that 62 percent of its respondents had been recently involved in, or expected to be engaged in, a payment dispute during the next 12 months.
In such an environment, SMEs require feasible and affordable legal routes to recover debts and continue doing business effectively, especially when transactions aren't of high value.
Courting trouble
Litigation is often a last resort for cash-strapped SMEs, due to the potentially high costs and time involved. As in Loring's case, small business owners' first option is to try and resolve the case amicably with the non-paying party, in the hope they can maintain the working relationship with the debtor.
Other pre-litigation alternatives open to SMEs include the use of debt collection agencies. These can assist SMEs in recovering debts through reconciliation attempts, debt restructuring solutions and, at times, simply by adding independent pressure on debtors.
Ashutosh Lohia, a partner at ASGL Global, which supplies fruits and vegetables to restaurants and cafes under the brand name Fresh Culture, was owed 350,000 dirhams in unpaid invoices by a UAE restaurant chain. Before considering legal action, he decided to first try employing the services of a debt collection agency.
While there have been cases where debt collection has been successful, Lohia was told by the agency he approached that the most they could probably achieve was a 12 month post-dated cheque from the debtor. Frustrated by the options on the table, Lohia is now consulting with a lawyer in order to assess the options available to him.
An important option to remember when approaching a law firm or a debt collection agency is that most have certain thresholds in place when they agree to take on a case and usually charge a fraction of the claim value or recovered amount.
"The challenge that SMEs would face specifically is that lawyers are not happy to touch cases which are of a small value, like $10,000," according to Absolute Communications Group's Chief Executive Officer Victor King, who won a claim of approximately 500,000 dirhams in Dubai Courts against a technology company that owed his firm $10,000. However, King said one of the reasons he was able to bring the case to court was because he was able to employ a lawyer friend to represent him at a discount.
Similarly, Loring reports that when she approached a debt collection agency she was told it would not entertain cases valued below 100,000 dirhams.
Insurance solutions
Trade credit insurance (TCI) has also been highlighted as a potential security measure for SMEs facing non-payment issues. The solution protects businesses from financial risks by offering insurance coverage for unpaid debts in return for a premium. Hutchison says that TCI has the potential to "change the landscape" and it is only in the last two years that regional insurers started offering the solution.
"Over the next two years, it will go through significant growth as people become more aware of it," Hutchison said. Most TCI policies are based on a percentage of the contract amount.
Lohia has already opted to include TCI in his company's new contracts and considers it an investment worth making in case of a bad debt: "Instead of losing 100 percent, you might just lose 1 percent or 2 percent on the insurance amount, which you can always put up as markups in your business."
Legal experts and SME owners Zawya spoke to advise companies to do proper due diligence and thorough research on potential clients to mitigate risks of non-payment or payment delays.
"It is very important to obtain copies of the company documents when you execute a contract with an entity, and passport and Emirates ID of the individuals involved. This becomes critical when a cheque is returned for insufficiency of funds, for example," says Diana Bayazakoa, a partner at legal outfit Merritz which helps SMEs resolve late payment issues and prevent disputes.
Firms are also advised to seek legal advice, be cautious when setting payment and other terms in contracts, and ideally include a clause specifying a relevant arbitration authority or court as a jurisdiction for dispute resolution. Loring, for instance, has added Dubai International Financial Centre (DIFC) Courts as a jurisdiction in the dispute resolution clause in her contracts and also requires clients to pay 50 percent in advance.
SMEs can also approach foreign trade bodies and seek the assistance of government trade institutions such as Dubai Chamber of Commerce and Industry, which offers an assisted mediation process for members, Hutchison adds.
In the second part of this series, we will explore litigation through DIFC's Small Claims Tribunal, a common law judiciary for small claims and SMEs.
(Editing by Shane McGinley)
© Zawya 2016
Payment disputes have increased this year, but there are options available to small operators other than going to court. Amal Loring, founder of Dubai-based training company MBD, was delighted when a local marketing firm agreed to pay her 20,000 dirhams ($5,445) for a training session with one of its clients. Her joy was short-lived given that nine months later she still had not been paid.
After confronting the company, Loring said she felt she had no choice but to pursue legal action. However, a lawyer advised her that it would "take about two years and [involve] a minimum of 50,000 pounds ($72,186) of unrecoverable costs" to take the firm to court. Loring decided it was not worth the time and possible legal costs to pursue the matter and decided to write the debt off.
Unfortunately Loring's story is not unique and she is one of many small and medium-sized enterprise (SME) owners in the United Arab Emirates (UAE) who struggle with payment delays and non-payment issues.
In the 2016 Gulf Finance SME Sentiment Survey, which polled around 200 UAE respondents about business performance in the first quarter of the year, 23 percent of respondents said it had become harder to collect late payments, compared to the previous quarter.
Late payments appear to be more common in the Middle East compared to other parts of the world as "people tend to be prepared to give agreed longer credit terms", such as 30, 60 or 90 days instead of upfront payment, says Keith Hutchison, a dispute resolution partner at law firm Clyde & Co.
According to a report released in May 2016 by international auditing and consulting firm PwC, tightened budgets and late payments exacerbated by the current economic climate are expected to fuel a rise in these types of disputes. The firm's 'Delivering during Change' survey, which canvassed 130 business owners and developers in the Middle East, revealed that 62 percent of its respondents had been recently involved in, or expected to be engaged in, a payment dispute during the next 12 months.
In such an environment, SMEs require feasible and affordable legal routes to recover debts and continue doing business effectively, especially when transactions aren't of high value.
Courting trouble
Litigation is often a last resort for cash-strapped SMEs, due to the potentially high costs and time involved. As in Loring's case, small business owners' first option is to try and resolve the case amicably with the non-paying party, in the hope they can maintain the working relationship with the debtor.
Other pre-litigation alternatives open to SMEs include the use of debt collection agencies. These can assist SMEs in recovering debts through reconciliation attempts, debt restructuring solutions and, at times, simply by adding independent pressure on debtors.
Ashutosh Lohia, a partner at ASGL Global, which supplies fruits and vegetables to restaurants and cafes under the brand name Fresh Culture, was owed 350,000 dirhams in unpaid invoices by a UAE restaurant chain. Before considering legal action, he decided to first try employing the services of a debt collection agency.
While there have been cases where debt collection has been successful, Lohia was told by the agency he approached that the most they could probably achieve was a 12 month post-dated cheque from the debtor. Frustrated by the options on the table, Lohia is now consulting with a lawyer in order to assess the options available to him.
An important option to remember when approaching a law firm or a debt collection agency is that most have certain thresholds in place when they agree to take on a case and usually charge a fraction of the claim value or recovered amount.
"The challenge that SMEs would face specifically is that lawyers are not happy to touch cases which are of a small value, like $10,000," according to Absolute Communications Group's Chief Executive Officer Victor King, who won a claim of approximately 500,000 dirhams in Dubai Courts against a technology company that owed his firm $10,000. However, King said one of the reasons he was able to bring the case to court was because he was able to employ a lawyer friend to represent him at a discount.
Similarly, Loring reports that when she approached a debt collection agency she was told it would not entertain cases valued below 100,000 dirhams.
Insurance solutions
Trade credit insurance (TCI) has also been highlighted as a potential security measure for SMEs facing non-payment issues. The solution protects businesses from financial risks by offering insurance coverage for unpaid debts in return for a premium. Hutchison says that TCI has the potential to "change the landscape" and it is only in the last two years that regional insurers started offering the solution.
"Over the next two years, it will go through significant growth as people become more aware of it," Hutchison said. Most TCI policies are based on a percentage of the contract amount.
Lohia has already opted to include TCI in his company's new contracts and considers it an investment worth making in case of a bad debt: "Instead of losing 100 percent, you might just lose 1 percent or 2 percent on the insurance amount, which you can always put up as markups in your business."
Legal experts and SME owners Zawya spoke to advise companies to do proper due diligence and thorough research on potential clients to mitigate risks of non-payment or payment delays.
"It is very important to obtain copies of the company documents when you execute a contract with an entity, and passport and Emirates ID of the individuals involved. This becomes critical when a cheque is returned for insufficiency of funds, for example," says Diana Bayazakoa, a partner at legal outfit Merritz which helps SMEs resolve late payment issues and prevent disputes.
Firms are also advised to seek legal advice, be cautious when setting payment and other terms in contracts, and ideally include a clause specifying a relevant arbitration authority or court as a jurisdiction for dispute resolution. Loring, for instance, has added Dubai International Financial Centre (DIFC) Courts as a jurisdiction in the dispute resolution clause in her contracts and also requires clients to pay 50 percent in advance.
SMEs can also approach foreign trade bodies and seek the assistance of government trade institutions such as Dubai Chamber of Commerce and Industry, which offers an assisted mediation process for members, Hutchison adds.
In the second part of this series, we will explore litigation through DIFC's Small Claims Tribunal, a common law judiciary for small claims and SMEs.
(Editing by Shane McGinley)
© Zawya 2016
