ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

ISSN: 2454-6186 | DOI: 10.47772/IJRISS

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A Conceptual Exploration of Alternative Dispute Resolution (ADR)

as a Problem Solution Mechanism for SMEs

Norhafizah binti Mohamad Dasuki

, Norunnajjah binti Ahmat

, Nurul Ibtisyami binti Yasin

Mohammed Hariri bin Bakri

, Norain binti Ismail

1,2,4,5

Fakulti Pengurusan Teknologi dan Teknousahawanan, Pusat Pembangunan Teknousahawanan,

Universiti Teknikal Malaysia Melaka, 75450 Ayer Keroh, Melaka, Malaysia

Independent Researcher, Melaka, Malaysia

Corresponding Author

DOI: https://dx.doi.org/10.47772/IJRISS.2025.92800039

Received: 11 November 2025; Accepted: 18 November 2025; Published: 20 December 2025

ABSTRACT

This research explores the alternative dispute resolution mechanisms for business disputes among Small-

Medium Enterprises in Malaysia. In today’s fast-paced and competitive market, disputes are sometimes

inevitable. Additionally, conservative litigation also often leads to costly delays and strained relationships

between parties in disputes. Therefore, ADR offers a timely and more cost-efficient alternative by providing

businesses with tools to resolve conflicts while maintaining key relationships and minimizing operational

disruptions. This study will adopt a quantitative approach with interviews as supporting result. It aims to look

into ADR if it is perceived and instigated within business sectors, focusing on small and medium enterprises

(SMEs). Given the resource constraints that SMEs often face, ADR presents itself as a valuable option to avoid

the high costs associated with litigation. The study will examine the concepts, the factors and the barriers that

Malaysian businesses face in adopting ADR mechanisms in settling their business disputes. Eventually, the

findings are expected to offer practical amicable alternative to litigation, where ADR improve the way businesses

manage conflicts, contributing to a more harmonious and productive business ecosystem.

Keywords: Alternative Dispute Resolution (ADR), Mechanism, Overview, and Small Medium Enterprises

(SMEs)

INTRODUCTION

Business disputes are common challenge in the corporate sector and resolving them efficiently is vital in

maintaining a smooth operation of a company. Traditionally, litigation has been the go-to method for dispute

resolution, but it is often associated with high costs, lengthy processes, and damage to business relationships.

According to a study by the International Finance Corporation (2021), litigation costs businesses an average of

2-5% of their annual revenue, while 70% of small and medium enterprises (SMEs) report that legal disputes

significantly impact their business operations. Alternative Dispute Resolution (ADR), which includes methods

such as mediation, arbitration, and negotiation, has gained prominence as a more efficient solution. ADR offers

a faster, less expensive, and more flexible approach to resolving conflicts while also focusing on preserving

business relationships. The Asian International Arbitration Centre (2020) reports that ADR resolves disputes

60% faster than traditional litigation. In Malaysia, ADR has increasingly been recognized as a valuable tool,

particularly in the business sector, as companies seek to avoid the financial and time-related burdens of court

proceedings.

Despite the advantages, the adoption of ADR among Malaysian SMEs remains restricted. According to survey

by SME Association of Malaysia (2022), only 35% of SMEs actively practice ADR mechanisms, citing a lack

of awareness and understanding of its processes as major barriers. There is a need to explore how businesses

perceive ADR and the factors that contribute to businesses choosing ADR as a mechanism to settle their business

dispute. This includes examining whether businesses find ADR effective and identifying the challenges they face

when adopting it.

The focus on Small and Medium Enterprises (SMEs) is because they form a substantial part of the global

ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

ISSN: 2454-6186 | DOI: 10.47772/IJRISS

Special Issue | Volume IX Issue XXVIII November 2025

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www.rsisinternational.org

economy, particularly in developing economies like Malaysia, where they represent over 98% of total business

establishments (Tahir et al., 2021). The need for effective dispute resolution mechanisms is critical to ensuring

business continuity and growth in this sector. Alternative Dispute Resolution (ADR) methods, including

mediation, arbitration, and negotiation, are widely recognized for their cost- effectiveness, efficiency, and ability

to preserve business relationships (Lim, 2020).

LITERATURE REVIEW

Alternative Dispute Resolution (ADR) is a continuum of initiatives aimed at providing the disputing parties with

efficient, flexible, and accessible avenues to reach an agreement outside of traditional litigation. The main ADR

epistemology is to reduce the costs, time, and adversarial nature of conflicts, and at the same time, encourage the

results that affirm the relationship between people and ensure further cooperation. In a minimal example, as

represented in the conceptual map, ADR can be holistically understood in terms of its typologies, mechanisms

and implications of justice and cost-effectiveness. This figure 1 shows the concept of ADR.

Figure 1. Concept of ADR

Types of ADR

The typology of alternative dispute resolution (ADR) has provided a dichotomy between formal conflict

resolution mechanisms and informal dispute settlement. Formal methods, such as arbitration, adjudication or

tribunal-based processes, are formal and legally binding and are often embedded within statutory provisions or

institutional rules (Harris, Tuckman, and Snook, 2012). This set of approaches imposes a greater degree of

procedural certainty and enforceability, but at a price of procedural complexity. Conversely, less formal

processes like negotiation, conciliation or community-based mediation focus on dialogue and flexibility and

outcomes that are mutually acceptable instead of legal norms. Informal methods are especially beneficial to small

and medium sized players and parties with limited resources, as they lessen the use of legal experts and encourage

collaborative engagement. This informality versus formality contrast reminds us of the applicability of ADR to

business as well as social situations.

Access to Justice

One of the most obvious contributions of alternative dispute resolution (ADR) is the ability to expand access to

justice. Traditional litigation, however, has been broadly accused of being prohibitive and slow in terms of its

procedural timeframes, which discourages individuals and small companies from pursuing litigation (Taylor,

2019; Haddad, 2010). ADR will work around these barriers by integrating legal advisory systems and remote

legal help. The introduction of digital platforms, as well as online consultations and virtual hearings, provides

parties located in geographically distant or underdeveloped areas with a chance to receive cheaper counsel and

solve the dispute (Supriyadi, Amnesti, and Zulaicha, 2021). This legal remedy democratisation is consistent with

ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

ISSN: 2454-6186 | DOI: 10.47772/IJRISS

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the wider policy ambitions of the inclusivity and fairness of legal systems, especially of vulnerable groups like

small and medium-sized enterprises (SMEs), consumers and the marginalised groups (Sahin-Sengul and Kaya,

2025).

Cost Effectiveness

This cost-effectiveness aspect also goes a long way in supporting the attractiveness of ADR. Unlike litigation,

where the formalities of the procedure and professional expenses can be incurred within a very short period of

time, ADR helps provide resolution mechanisms that can save both financial and relational capital. Focusing on

practical and interest-based solutions, parties usually can achieve settlement in a much faster way and with a

fraction of expense (Brown, 2020; Bhushan, 2023). In a variety of industries, especially those related to

construction and international trade, ADR can provide cost-efficient judicial solutions that maintain the

sustainability of business without causing significant disruption (Ting et al., 2024). This focus on efficiency does

not compromise fairness but it re-conceptualises justice as a process that is affordable and sustainable.

Mechanisms of ADR

ADR mechanisms are numerous, although two modern modalities can be distinguished: Online Dispute

Resolution (ODR) and mediation. ODR is a technological development of ADR, where digital platforms,

artificial intelligence, and blockchain are combined to simplify the process of resolving disputes. ODR,

accelerated by the COVID-19 pandemic, allows holding hearings online, automated negotiation tools, and safe

digital documentation and makes ADR more efficient and accessible to the entire world (Bhushan, 2023; Francis

et al., 2025; Palanissamy, Magd, and Kesavamoorthy, 2024). Mediation, however, is still one of the widely used

ADR processes and is especially praised because of its relationship nature. In contrast to arbitration or litigation,

mediation is not the most combative but cooperative, allowing parties to come up with mutually agreeable

solutions in the presence of a neutral facilitator (Ahmed, 2023). The fact that it focuses on dialogue and bond

maintenance makes it a particularly suitable tool in the context of SMEs, whose continued business relations are

usually at risk. Institutionalisation of adjudication and mediation. In other jurisdictions, including Malaysia,

formal bodies, like the Construction Industry Payment and Adjudication Act (CIPAA) 2012, have formalised

adjudication and mediation as the standard means of conflict resolution in the industry (Ting et al., 2024).

Emerging dimensions and implications

Mapping allows identifying that ADR is not a single-dimensional process but a system on several dimensions. It

strikes a balance between the predictability of formal and the adaptability of informal protocols, combines

human-oriented mediation and technology-based ODR, and seeks justice that can be fair, affordable, and efficient

at the same time. The speed with which it is being introduced into the legal and commercial ecosystems can be

viewed as an embodiment of a paradigm shift: conflict resolution becomes not only a legal enforcement issue

but a means of maintaining cooperation, making it resilient, and favourable to sustainable development.

In the case of SMEs, they are of a drastic implication. ADR provides solutions to overcome resource

inadequacies, increase access to justice, and embrace digital transformation. However, there are still difficulties

in the form of awareness, cultural acceptance, and legal infrastructure. The only way to stop these restrictions is

through the joint action of policymakers, law institutions, and academic researchers to become more integrated

into the SME ecosystem with ADR (Meskic, 2025; Haddara, Gøte, and Langseth, 2021).

The Functions of Adr as a Dispute Resolution Mechanism In Smes

ADR mechanisms serve as an alternative to litigation, offering several advantages that are particularly suited to

SMEs. First, ADR is typically more cost-effective and faster than litigation, helping SMEs avoid the financial

and time-consuming burden of court procedures (Mustafa, 2022). According to Fan et al. (2020), ADR

mechanisms allow parties to maintain control over the dispute resolution process, enabling more collaborative

solutions.

Several key factors motivate SMEs to adopt Alternative Dispute Resolution (ADR) mechanisms instead of

traditional litigation when resolving business disputes. These factors include cost-effectiveness, time efficiency,

confidentiality, flexibility, and the potential to preserve business relationships.

ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

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Cost-Effectiveness

One of the most significant reasons SMEs turn to ADR is the cost savings compared to traditional litigation.

Litigation often involves high legal fees, court costs, and the potential for prolonged proceedings, which can

strain the financial resources of SMEs (Harris et al., 2020). ADR processes such as mediation and arbitration

typically have lower costs because they are less formal and do not require extended pre-trial procedures like

discovery and extensive document filing (Tahir et al., 2021).

Mediation, in particular, is favoured for its cost-efficiency. According to Ahmad and Azeem (2019), mediation

allows parties to resolve disputes without the need for expensive legal representation, making it more accessible

to SMEs with limited financial resources. Even arbitration, while sometimes more costly than mediation, tends

to be less expensive than litigation, especially when parties agree to fast-track arbitration processes (Menkel-

Meadow, 2021).

Time Efficiency

Time is another critical factor influencing the adoption of ADR by SMEs. The judicial system can be slow, with

disputes often taking years to resolve, especially in cases of commercial contracts or cross-border disputes. Fan

et al. (2020) highlight that one of the main reasons SMEs choose ADR is that it significantly shortens the time

required to resolve dispute.

Arbitration, for instance, typically allows parties to set their timelines and avoid the lengthy procedural

requirements of court systems (Wilhelm & Keenan, 2020). In contrast, traditional litigation is subject to the

court’s schedule, which can result in significant delays. Kritzer (2021) notes that SMEs, which rely on quick

resolutions to maintain business operations, benefit from the faster processes associated with ADR mechanisms.

Time efficiency in ADR not only helps to resolve disputes quickly but also minimizes disruption to business

activities.

Confidentiality

Confidentiality is another major advantage of ADR, particularly in sectors where sensitive business information

could be disclosed during dispute resolution processes. Litigation is generally public, meaning that any business

disputes that go to court can be accessed by the public and competitors (Lim, 2020). For SMEs, which often

operate in highly competitive markets, this can be detrimental to their reputation and long-term business

relationships.

ADR processes, however, are conducted in private, and the details of the dispute, as well as the outcomes, can

remain confidential. According to Ismail and Hashim (2021), the confidentiality of ADR allows SMEs to protect

sensitive commercial information, such as trade secrets, proprietary methods, and client data, while resolving

disputes. This aspect of ADR makes it particularly attractive to SMEs that want to avoid negative publicity or

the disclosure of critical business information.

Flexibility

The flexibility of ADR procedures is another factor driving their adoption among SMEs. ADR processes are

more adaptable compared to the rigid structure of litigation. In mediation and arbitration, parties have the

autonomy to design the process to suit their specific needs, including choosing the mediators or arbitrators,

determining the scope of evidence, and setting their schedules (Stipanowich, 2019). This flexibility is especially

beneficial for SMEs that may lack the resources to engage in lengthy legal procedures or need solutions tailored

to their business realities.

For example, Mustafa (2022) notes that SMEs can use ADR to avoid strict procedural requirements and tailor

the dispute resolution process to meet the needs of both parties. In arbitration, the parties can even choose

arbitrators with specific expertise in their industry, which can lead to a more informed and efficient resolution

(Wilhelm & Keenan, 2020). This flexibility allows SMEs to maintain greater control over the dispute resolution

process compared to court litigation.

ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

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Preservation of Business Relationships

Perhaps one of the most compelling reasons SMEs opt for ADR is its potential to preserve business relationships.

Litigation is inherently adversarial, often resulting in strained relationships between the disputing parties. In

contrast, ADR methods, particularly mediation, emphasize collaboration and communication, allowing parties

to resolve disputes amicably and potentially continue their business partnerships (Menkel-Meadow, 2021).

Tahir et al. (2021) emphasize that the ability of ADR to preserve business relationships is vital for SMEs that

rely on long-term partnerships with suppliers, clients, and other stakeholders. Mediation, in particular, fosters

open communication and mutual understanding, reducing hostility and enabling the parties to work together after

the dispute is resolved (Stipanowich, 2019). This preservation of relationships is especially important for SMEs,

which often have fewer clients and partners than larger corporations and are more vulnerable to disruptions in

their business networks.

Moreover, Lee and Rahim (2021) suggest that SMEs are increasingly incorporating ADR clauses in their

contracts, ensuring that disputes are resolved through these mechanisms rather than through litigation. This

proactive inclusion of ADR in contractual agreements provides SMEs with a predetermined path to dispute

resolution, mitigating the risks associated with litigation.

Barriers Faced By Smes in Adopting Adr as A Dispute Resolution Mechanism

Despite its advantages, several barriers prevent SMEs from fully embracing ADR. One of the most significant

barriers is the lack of awareness about ADR options. According to Mustafa (2022), many SMEs are unfamiliar

with the availability and benefits of ADR, leading them to default to litigation even when ADR offers a better

solution.

Another key barrier is the perceived complexity of ADR mechanisms. SMEs may view arbitration processes as

too formal and similar to litigation, leading to concerns about costs and enforceability (Tahir et al., 2021). Lee

and Rahim (2021) found that the perception of ADR as a complicated and costly alternative to litigation deters

many SMEs from incorporating it into their business contracts.

Cultural resistance is another issue. In some regions, SMEs are more likely to resolve disputes informally or

through litigation, either due to tradition or a lack of trust in non-judicial processes (Harris et al., 2020).

Additionally, the costs associated with arbitration can still be significant for smaller SMEs, particularly in cases

where the proceedings become protracted or when international arbitration is involved (Stipanowich, 2019).

Besides that, the legal enforceability of ADR outcomes remains a concern for SMEs. Although arbitration

decisions are legally binding, enforcing those decisions across borders can be difficult, particularly in cases

involving international contracts (Menkel-Meadow, 2021). Moreover, while mediation often results in voluntary

settlements, there is no guarantee that both parties will comply with the agreement, creating uncertainties for

SMEs.

ADR offers SMEs a viable and effective alternative to litigation, particularly in terms of cost, time efficiency,

and relationship preservation. However, awareness, accessibility, and perceptions of ADR present significant

barriers to its wider adoption. Addressing these challenges through increased awareness, legal reforms, and

accessible ADR services can facilitate more SMEs to adopt these mechanisms, ensuring their long-term growth

and sustainability in a competitive business environment.

ADR in Business Dispute Resolution

Alternative Dispute Resolution (ADR) has become a widely recognized method for resolving business disputes

in recent years, offering advantages such as efficiency, cost savings, and confidentiality over traditional litigation.

The growing complexity of business relationships, particularly in cross-border transactions, has spurred increased

reliance on ADR mechanisms like mediation and arbitration to handle disputes efficiently (Wallgren, 2022).

In the business context, disputes often arise around issues of capital, loans, or other financial matters (Ningsih,

2019). As observed by the Illinois Bar Commission, ADR techniques can spare businesses the high cost and wear

ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

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and tear of litigation by enabling a more collaborative approach to dispute resolution (Abe & Ouma, 2017).

Consistent with this, research has shown that ADR can be an effective "soft approach" for resolving business

disputes, particularly in the Indonesian context (Ningsih, 2019). This soft approach is noted to align with the

local legal culture, where some people tend to be reluctant to solve their disputes before the formal legal system.

(Sarira, 2016)

Despite its advantages, the adoption of ADR in the business world has been limited. A survey of membership

found that only 1.4 percent had any experience using ADR methods, suggesting a need for greater awareness and

utilization of these techniques (Alessa, 2022).

Business Dispute Resolution

Research highlights that businesses, especially small and medium enterprises (SMEs), increasingly prefer ADR

due to its speed and flexibility in resolving disputes. Compared to litigation, ADR allows parties to reach

agreements without the long procedural delays inherent in court systems (Susskind & Cruickshank, 2021). SMEs,

which often face resource constraints, benefit greatly from the cost-effectiveness of ADR, as it reduces both legal

fees and time away from core business operations (Smith & Morrison, 2020).

Globalization has further expanded the role of ADR, particularly in resolving international business disputes. In

cross-border transactions, where varying legal frameworks can complicate litigation, ADR provides a neutral

forum for resolving conflicts. As outlined by Carita Wallgren (2022) in her study on international business

mediation, ADR processes such as arbitration are increasingly favored due to their enforceability across different

jurisdictions. This is particularly relevant for multinational corporations seeking to avoid jurisdictional biases in

foreign courts (Susskind & Cruickshank, 2021).

Effectiveness of ADR in Malaysia

In Malaysia, the adoption of ADR mechanisms has been growing steadily across various sectors. A study by

Razak and Abdullah (2021) showed that mediation and arbitration are being used more frequently in resolving

commercial disputes, particularly within the construction and financial sectors. This aligns with global trends

where businesses seek quicker and more private solutions to disputes (Razak & Abdullah, 2021). The Malaysian

government has also implemented policies to promote the use of ADR, which has encouraged businesses to

explore it as a viable alternative to litigation (Smith & Morrison, 2020). A study in Penang revealed that while

many participants were aware of ADR, over half believed it was underutilized in Malaysia. This indicates a gap

in public knowledge and engagement with ADR methods (Leow, 2024).

Alternative dispute resolution has emerged as a prominent approach to resolving conflicts and disputes outside

the traditional court system (Noone & Ojelabi, 2020). It has emerged as a prominent approach to resolving

conflicts and disputes outside the traditional court system (Noone & Ojelabi, 2020). Besides that, ADR

encompasses a range of techniques, including mediation, arbitration, and negotiation, that provide alternatives to

traditional litigation. These methods have gained recognition for their ability to offer more flexible, cost-

effective, and timely resolutions to disputes (Sukaenah et al., 2020). A primary benefit of alternative dispute

resolution is its ability to maintain relationships between parties, crucial in sectors where sustained cooperation

is vital (Alternative dispute resolution mechanisms, 2023).

The effectiveness of alternative dispute resolution has been explored in several studies. One study highlights the

use of restoration advisory boards as a form of dispute avoidance or resolution process in the environmental

context (Sarira, 2016). Another study provides evidence on the effectiveness of mediation in resolving a wide

range of disputes, including those related to contractual terms, construction damages, personal injuries, and

damage to property and the environment. (Storrow & Coleman, 2020).

Barriers to ADR Adoption

Despite its benefits, several challenges remain in the widespread adoption of ADR, particularly in smaller

usinesses. According to a study by Susskind and Cruickshank (2021), lack of awareness and insufficient training

in ADR processes are common barriers. Many businesses, especially SMEs, are unfamiliar with the procedural

ICTMT 2025 | International Journal of Research and Innovation in Social Science (IJRISS)

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aspects of ADR, which may deter them from opting for it as a dispute resolution method. Additionally, in certain

sectors, there is still a cultural preference for traditional court litigation, which presents another hurdle to ADR's

full integration into the business community.

CONCLUSION

The use of ADR as a dispute resolution mechanism is poised to continue growing, particularly as businesses seek

to resolve conflicts efficiently and preserve relationships. As awareness and training improve, it is expected that

ADR will become the preferred method for resolving business disputes in Malaysia, particularly among SMEs

and multinational corporations operating in multiple jurisdictions. Increased media campaigns and institutional

support are recommended to enhance awareness and encourage the adoption of ADR practices (Leow, 2024).

Future research should focus on overcoming barriers to ADR adoption and exploring sector-specific benefits that

could further promote its use. By employing ADR mechanisms, businesses can resolve disputes efficiently,

thereby strengthening trade ties and fostering a conducive business environment

ACKNOWLEDGEMENT

Special thanks to Universiti Teknikal Malaysia Melaka and Fakulti Pengurusan Teknologi dan Teknousahawanan

for their support throughout the research process.

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