Small Business Lawsuits in Small Claims Court

Find out why small business owners are increasingly turning to small claims court to settle disputes

When it comes to preparing for court, small business owners normally have two advantages over run-of-the-mill mortals. First, as a matter of course, they maintain a record keeping system. Depending on the type of business, this typically includes a good filing system to maintain bids, contracts, and customer correspondence, as well as a bookkeeping system that tracks payables and receivables. Taken together, these resources normally contain considerable raw material helpful to proving a small claims case. The second advantage is more subtle but no less real. It involves the average businessperson's organizational skill–that is, the ability to take a confused mess of facts and organize them into a coherent and convincing narrative. Of course, when one businessperson sues another, those advantages often cancel out, meaning that both sides are likely to be well organized and prepared.

More and more small business owners are turning to small claims court to settle business disputes when they have been unable to reach an acceptable compromise through negotiation or mediation. Small claims court offers them speed and cost efficiency. In several states, business-friendly changes in the law are making it easier for businesses to use the court efficiently.  

Contracts–The Most Common Case

In the majority of business cases one business claims that the other has broken a contract. If you're facing this issue, take a close look at any contract involved in your case. Specifically, ask yourself what were your obligations and expected benefits from the deal? What was the other person supposed to do and how was that person going to benefit?

Oral Contracts Are Usually Legal

Most oral contracts–except those for the sale of real estate or goods (tangible property) worth $500 or more, or those that can't be carried out in one year–are legal and enforceable if they can be proven. But when nothing has been written down, proving that a contract existed can sometimes be difficult. An exception to this rule applies when you did work for someone and weren't paid (for example, you are a commercial photographer and spend a day taking pictures of a hat designer's new creations), because the judge is likely to agree with your contention that, by implication, the designer must have noticed what you were doing, and you wouldn't have done the work unless the person had promised to pay you.

What is a written contract? It need not be a formal negotiated document with both parties' signatures at the end. Under the Uniform Commercial Code (UCC)–which has been adopted in all states and applies to the sale of goods but not services–a contract can be a letter or other written document that doesn't even state the price or time of delivery, only that the parties agree on the sale of goods and the quantity of goods sold. If it meets this modest requirement, any letter, fax, or other writing can constitute a contract.  

EXAMPLE: Hubert, a pest control operator, sends a fax to Josephine, the business manager of a company that manufactures rodent traps, saying, "I would like to order 1,000 gopher traps at $14 per trap." Josephine faxes back, "Thank you for your order. The traps will be sent next week." There is a contract. Indeed, even if Josephine didn't reply but instead promptly sent the traps, a contract would be formed based on the circumstances of the transaction.

Usual business practices and customs in a particular field are also commonly viewed as being part of a contract and can be introduced as evidence in small claims court to support or thwart your case. Thus, if Hubert ordered rodent traps in February and Josephine didn't send them until September, Hubert could present evidence to the judge that everyone in the rodent control business knows that traps are only saleable in the summer when rodents attack crops, and that Josephine's failure to deliver the traps in the correct season constituted a breach of contract.

Finally, keep in mind that contracts can be, and often are, changed many times as negotiations go back and forth and circumstances change. The important agreement is the most recent one.

The Sale of Goods

The Uniform Commercial Code (UCC), adopted by all states, contains special rules affecting contracts for the sale of goods. It requires you to produce something in writing if you want to enforce a contract for a sale of goods and the price is $500 or more, but it also provides that this writing can be very brief–briefer than a normal written contract. Under the UCC, the writing need only:

  • indicate that the parties have agreed on the sale of the goods, and
  • state the quantity of goods being sold.

If terms such as price, time and place of delivery, or quality of goods are missing, the UCC fills them in based on customs and practices in the particular industry. And where specially manufactured goods are ordered, the UCC doesn't require any writing at all once a party makes a significant effort toward carrying out the terms of the contract.

  • Example: A restaurant calls and orders 200 sets of dishes from a restaurant supply company. The dishes are to feature the restaurant's logo. If the supply company makes a substantial beginning on manufacturing the dishes and applying the logo, the restaurant can't avoid liability on the contract simply because it was oral.

Presenting Your Evidence in Court

In business disputes, the problem is often having too much evidence, rather than too little. Your job is to separate the material that is essential to proving your case from that which is less important. Organize both your oral presentation and the backup written evidence around the heart of the dispute, rather than trying to first fill in all the background information.

EXAMPLE: Alice, the owner of Ames Country Inn, hires Ted, an interior decorator, to freshen up the decor of her bed and breakfast. Ted submits an estimate, which Alice verbally accepts by telephone. Later, Alice stops by Ted's office to drop off a set of detailed architectural drawings. Ted works for three days on the new decor plan before Alice suddenly calls and cancels the deal because, "on second thought, I don't like the colors you are proposing." After Ted's bills are not paid and his demand letter is ignored, Ted files in small claims court, asking for three days' pay plus the money he spent on supplies. In court, Ted very sensibly begins his presentation like this: "Your Honor, the defendant hired me to prepare a detailed plan to redecorate the Ames Country Inn. I worked on the job for three days and bought $200 worth of supplies before she canceled our contract. Today, I'm asking for a judgment for my normal rate of pay of $80 per hour for the 24 hours I worked, plus the $200 for supplies. The total is $2,120."

Of course, there is more to Ted's story, which means, after stating the crux of his claims, he will need to fill in the key points. Ted should next make these points:

  • He and Alice had worked together before, and his work had always been acceptable and paid for.
  • He really did the 24 hours of work he claimed, as documented by drawings and worksheets he brings to court.
  • He has canceled checks covering an itemized list of supplies he purchased for the job ready to show the judge.

This should be enough to make Ted a winner. But as is true of all small claims litigants, Ted should also try to anticipate and deflect what he thinks will be the other side's key points. For example, in this instance, if Ted is pretty sure Alice is going to claim she canceled because Ted was using a design theme and colors she had specifically ruled out, he would be wise to make it clear that no such restrictions were contained in their contract.

Many businesspeople have employees, partners, or business associates who have intimate knowledge of the dispute. By all means, bring them to court as witnesses. A witness who is knowledgeable about the transaction is almost always worth more than a stack of documentary evidence.

EXAMPLE: Assume Ted's assistant, Doris, attended a preliminary meeting with Alice at which Ted asked Alice for a list of her suggestions. Also assume Doris can truthfully testify that when the subject of color came up, Alice just waved her hand and said, "You know I don't like purple too much, but it's really up to you–you're the designer." Aided by Doris's testimony, Ted should be a winner, even if Alice claims he violated their agreement not to use purple.

In some situations, having a witness testify as to the normal business practices in an industry field can also be helpful. Thus, if in your industry goods are normally shipped within five to 15 days after an order is received (unless written notice of a delay is sent), but the person you are having a dispute with claims you still must pay for goods that were shipped 90 days after your order was received, it would be a good idea to present an expert witness–or a letter from someone knowledgeable about relevant business practices–who could testify that unfilled orders are never good for more than 30 days.

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