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Online dispute resolution likely to become a godsend for SMEs, with Hong Kong at its heart

3-5pc of all international transactions end in dispute. E-commerce alone saw over 820 million disputes last year, with 35pc never resolved. Small firms in many cases read the numbers, and retire in horror to lick their (sometimes fatal) wounds.

PUBLISHED : Friday, 15 September, 2017, 11:24am
UPDATED : Friday, 15 September, 2017, 10:43pm

At the Asia-Pacific Economic Cooperation (APEC) forum, you know something is becoming important when officials generate an acronym for it.

So in Ho Chi Minh City a month ago, when the APEC Economic Committee decided to spend a day on something called “ODR”, I knew a big new initiative was afoot. The first challenge then was to discover what the acronym stood for without looking too stupid.

The usually infallible Wikipedia lays a fascinating array of false trails – the Oregon Department of Revenue, the Office of Disability Rights, the One-definition rule, Optical Diffraction Radiation, the Output Data Rate. Eventually, I stubbed my toe on the answer: Online Dispute Resolution.

If that all sounds dry as a bone, then the sound is misleading.

As soon as I discovered what it meant, I realised that the forum for 21 Pacific Rim member economies that promotes free trade throughout the Asia-Pacific region’s Economic Committee was right to be getting excited. And so should Asia’s businesses.

For four years now, business leaders gathering in the APEC Business Advisory Council (ABAC) have become increasingly animated by the need to help small companies get involved in cross-border trade and investment.

We have spent hundreds of hours exploring how the new technologies underpinning e-commerce and big data can make it possible, and potentially very lucrative, for the tiniest of start-ups in towns and cities across even the least developed of APEC’s 21 economies to find customers across the world.

We have also spent hundreds of hours showing how small local companies can piggyback on big multinationals to find lucrative roles along even the longest and most elaborate production and supply chains.

The consensus is that coordinated regional development of an internet-based mediation, arbitration and dispute resolution platform would not only slash the cost of settling disputes, but would settle them much more speedily, transparently and securely

One obstacle we have paid scant attention to, however, is the problem of business disputes – the lifeblood of our armies of lawyers worldwide.

What happens if a buyer in a foreign country refuses, or fails to pay, or if a supplier in a foreign country provides a container load of faulty components? And that is at the simple end.

Imagine what happens if you are one of hundreds of little companies spread through the 31 economies in which Apple builds its new iPhone X, and a supplier down the chain supplies faulty stuff?

Anatomy of an iPhone: What’s in it and where the parts come from

Even for big companies, the idea of an international business-to-business dispute brings on nightmares and hot sweats. But for a small company with the usual cash-flow and liquidity problems, who maybe has the family home hooked up as collateral for bank loans, any such dispute could be fatal.

Even today, with modest numbers of SMEs involved in international trade, the risks linked with a possible dispute can be huge.

Research in the European Union finds that over any three year period, just under one third of SMEs get involved in at least one dispute. Between 3 and 5 per cent of all international transactions apparently end in a dispute. In e-commerce alone, we saw over 820 million disputes last year.

With modern long supply chains, a single dispute involves an average six other companies spread across many countries, many differing legal systems.

Having to hire different sets of lawyers in five or six countries is a chilling prospect for even the largest and best legally endowed companies.

The EU data gets even more depressing: the average value of a claim is just US$52,700 – which means legal fees in even the most simple cases will gobble up most of the value of the claim.

US officials say the average international dispute takes 446 days to settle – about 15 months – and that US lawyers alone will cost on average US$1,200 an hour.

The mind boggles at the likely costs, but we are talking millions of dollars for even straightforward cases.

Research in the European Union finds that over any three year period, just under one third of SMEs get involved in at least one dispute

It’s not surprising, therefore, to learn that 35 per cent of all disputes are never resolved. Small companies in particular simply read the numbers, and retire in horror to lick their (sometimes fatal) wounds.

This raises an obvious and awkward question: of what value is even the most transparent and trustworthy legal system if for most ordinary mortals it is unusable because the costs of using it are impossibly high?

Justice that is available only to the rich is for most of us no justice at all. An SME being encouraged to build his or her business internationally is very reasonably going to be reluctant to take the plunge once they discover the likelihood and cost of disputes. Only the most naive or foolhardy would so blatantly flirt with ruin.

Hence the palpable excitement about online dispute resolution. The consensus is that coordinated regional development of an internet-based mediation, arbitration and dispute resolution platform would not only slash the cost of settling disputes, but would settle them much more speedily, transparently and securely.

Combine this with better education on dispute avoidance, and on use of “early case assessments” to encourage early settlement, and many of the barriers to small companies launching into international markets could plausibly be swept away.

At the end of the debate in Ho Chi Minh City, Hong Kong’s Justice Department found itself chairing the APEC process, with 12 other APEC economies co-sponsoring. Major meetings are being planned for February next year, and business input is urgently being sought

Given Hong Kong’s ambitions – and qualifications – as a regional hub for business dispute resolution, with well-developed and well-trusted mediation and arbitration services, it was perhaps not surprising that our Hong Kong administration was at the heart of the scrummage to play a role in developing such a region wide online dispute resolution infrastructure.

At the end of the Ho Chi Minh City debate, Hong Kong’s Justice Department found itself chairing the APEC process, with 13 other APEC economies co-sponsoring. Major meetings are being planned for February next year, and business input is urgently being sought.

This will hopefully quickly dovetail with work also being done in the Justice Department to develop eBRAM.hk – an online dispute resolution plan being tailored to big infrastructure projects likely to flow around China’s Belt & Road Initiative, as the state programme to build infrastructure along the new Silk Road is called.

The acronym is built around Belt & Road Arbitration and Mediation (BRAM). This seems to give priority to disputes over investment, rather than trade, and to larger companies, but overlaps clearly exist.

Perhaps at last we are nudging towards a world in which small companies can, without considerable fear, aim to build international businesses even at early stages of development. With SMEs accounting for over 90 per cent of Hong Kong companies – and much the same for many economies across the region – this should surely be cause to celebrate.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view.

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