It's almost a cliche that small business people have been among those worst hit by America's disturbing trend towards injecting the law into every relationship. Whether dealing with employees, suppliers or customers, business people must avoid countless legal minefields.
It's refreshing, then, to spot a glimmer of good news on the legal front. The recent widespread increases in Small Claims Court dollar limits make Small Claims an increasingly attractive arena in which to solve small business disputes quickly and cheaply.
Small business owners can use Small Claims Court in two main ways: to collect overdue bills or to resolve disputes with customers or other businesses.
Small Claims Court is particularly cost-effective for collecting unpaid bills because it eliminates the need for bill collectors and lawyers -- who often keep, as their fee, up to half of what they collect. Indeed, Small Claims works so well that in many courts over 60% of the cases are filed by businesses. Because a substantial percentage of these claims are uncontested by the defendant (they know they owe the money and don't show up), little preparation or court time is needed. And best of all, many defendants who don't want their credit rating damaged pay voluntarily somewhere between the time they receive a final demand letter threatening suit and the date the judgment is entered.
But if you think the Small Claims Court deck is stacked in favor of allowing small businesses to collect doubtful debts, think again. When defendants believe they have a good defense and fight back, they have an excellent chance of winning or at least of paying substantially less than the plaintiff claims. For example, in a study of 996 Small Claims cases that went to trial, the National Center for State Courts found that 20% of the time, the defendant won outright. In another 20% of the cases, the defendant was ordered to pay substantially less than the plaintiff demanded.
Disputes between two small businesses or a business and a customer are also common in Small Claims Court. Most involve a contract. Commonly, a business argues that goods or services were provided poorly, late or not at all. For example, suppose Ted, an independent graphic designer, sues Tip Top Excavators because it won't pay him for redesigning its logo and newsletter. Tip Top's defense is that because the work was both substandard and late, the contract was broken and no payment is due.
If the parties don't negotiate their own solution or arrive at one through mediation, each would have a chance to present their side of the story to a Small Claims Court judge. A succinct and well-organized court presentation is always important. And in a close case, chances are good that the side with the most convincing written evidence will have the edge.
For example, if Ted can produce a written contract (or other documents showing that a contract existed), a decent-looking sample of the redesigned newsletter, and a letter from someone with expertise in the field stating that the work met or exceeded industry standards, he will be in an excellent position. Ted would also be wise to try to rebut the likely points the business will make. For example, if the design work was a few weeks late, Ted would want to present a good excuse, such as the fact that Tip Top asked for time-consuming changes.
When Ted's presentation is complete, it will be up to Tip Top to back up its version of the story. It will want to present evidence that either the work was delivered so late that it amounted to a serious breach of the contract or that Ted failed to meet other important contractual specifications (designed a 4-color, 24-page newsletter template when the contract called for a 2-color, 12-page job). Again, the more hard evidence (such as a letter to Ted pointing out the project was over deadline and asking for immediate completion), the better Tip Top's chances.
After both parties have their say, it will be up to the judge to decide. And again, there is good news. Instead of waiting around for months, as can happen in regular court, the judge will either announce a decision on the spot or mail it out in a few days. Either way, both sides will know where they stand and be able to get back to business.
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