As a business owner, you're more likely than most to either become a defendant in a small claims case or need to bring a small claims case to court. Small claims courts are courts of limited monetary jurisdiction that are utilized for the resolution of smaller disputes. The monetary limit in small claims courts varies by state. On the low end, Massachusetts allows awards of up to $2,000, while on the high end, Tennessee allows awards of up to $25,000 in some of its counties. Generally, most states allow awards of around $3,000 to $5,000.
Common Case #1: Contract Disputes
Contract disputes appear frequently in small claims court. Many small businesspersons find themselves in small claims court over this issue eventually. Let's examine how to pursue and defend a contract dispute in small claims court.
It's important to separate contract disputes into two categories. First are contract disputes with a participating plaintiff and a participating defendant. Second are simple collection matters. Collection matters are very common in small claims court. In a typical collection action, there's an active and participating plaintiff, but the defendant isn't participating. The defendant in a collection action has no defense to the dispute and almost never appears. Collection actions are simply a stepping stone by which a plaintiff advances an overdue bill to a court judgment. We'll cover collection actions first because they're generally simpler, and then we'll discuss contractual disputes. Then we'll talk briefly about collecting on loans, which are really a form of contract.
As stated, a collection action is initiated by a plaintiff to collect an unpaid bill or invoice. You should think of collection matters more as a pursuit than as a struggle. From that perspective, they differ from regular contract disputes. The plaintiff's goal in such an action is to advance the matter to a judgment. Once the plaintiff has a judgment, he or she (or it, because plaintiffs in collection actions are quite commonly business entities) can use the judgment to collect the debt through garnishment or levy.
In a collection matter, the underlying legal theory is breach of contract. At its core, a collection action is simply one party to a contract seeking to enforce the other party's performance. The collection plaintiff must keep this in mind: He or she must prove that a contract was made, that the plaintiff performed his or her end of the contract, and that the defendant did not pay or live up to his or her end of the contract. Collection actions are filed by parties ranging in size from enormous credit card companies to small mom-and-pop businesses.
Before proceeding with a collection action, you should always attempt to collect the debt through demand letters and other collection techniques. If all attempts to collect the debt fail, and if you have some certainty that you can recover, then you're ready to bring your collection matter to small claims court. Your case should be lean and simple. You'll want to prove the following:
- That you (or your corporate, LLC, or partnership plaintiff) and the defendant entered into a contract. Contract cases are much easier for plaintiffs if a written contract signed by the defendant was made and is brought to court.
- That you, the plaintiff, performed your end of the bargain. Prove this with photographs or copies of work you did, or a delivery receipt, or a statement, or copies of invoices. Be prepared to buttress your documentary evidence with oral testimony to the effect that you held up your end of the bargain by performing on time, and in all other respects in accordance with the contract.
- That the defendant has not paid on the debt.
Beyond that, you might suggest to the judge that the matter is simply a collections matter. If the defendant hasn't responded to your demand letters and bills, point that out to the judge. You want to tell a story of an uninterested and non-participating defendant if you can. If you're lucky, the defendant won't show up and you should easily win your case. If the defendant does show up, he or she will likely make some complaints about the quality of the work the plaintiff did; your collection matter may be a struggle after all.
Defending a Collections Action
Is a defendant's position in a collections matter totally hopeless? Even if the defendant's liability is absolutely clear, the defendant can still maneuver. A defendant's goal should not be to avoid the obligation but should be to get the plaintiff to accept less. Plaintiffs routinely take 20 or 30 percent on completely valid debts. Here's how you can minimize your liability. What a defendant has in his favor is the following:
- The plaintiff has to undertake a lot of work to collect the full amount of the debt. But the defendant must act early for this to be an effective strategy. Once the plaintiff has already gone through court, the plaintiff has done most of the work, and the defendant loses this advantage. Also, plaintiffs typically firm up their resolve to collect after they have been through the hassle of going to court.
- The plaintiff, even after he or she wins his or her case, still must collect the debt. Most folks don't realize how hard it can be to collect on judgments. In fact, many small claims judgments go uncollected. In many cases, collecting on the judgment requires more work and expense than winning the judgment at the small claims court hearing!
- So as a defendant in a collections matter, you need to act early, in the demand stage of the case. This is the stage where you have a shot at convincing the plaintiff to "compromise" the claim. You'll need to be prepared to pay immediately when the claim is compromised. The plaintiff will only compromise the claim for fast money.
- Your goal as a defendant in a collections matter is to communicate clearly to the plaintiff the following:
- That the plaintiff will go through a lot of waiting and work to prepare the claim, serve the complaint, secure a judgment, and then collect on the judgment.
- Any defenses or counterclaims, and the financial risk to the plaintiff, all depending on your specific facts.
- That small claims decisions are always unreliable, thereby increasing the risk.
- That the plaintiff will have trouble collecting-the most persuasive point of all. Unless your assets and stability are obvious or well known to the plaintiff, it would be quite easy to convince the plaintiff that collecting on the debt will be a frustrating and fruitless endeavor. You should politely suggest that you won't cooperate with the collection of a judgment (you are not legally required to cooperate; you have rights as a judgment debtor).
Contractual disputes differ from collection disputes. A collection matter is really all about collecting: The defendant doesn't really have a case; he or she merely seeks to avoid collection of the debt. But a typical contract dispute is, at its core, a disagreement over who breached the contract. So the roles of defendant and plaintiff will be to challenge each other on either the facts of the dispute or the law of contracts. Let's begin with a little background on contract law.
A contract is a legally binding exchange of promises or an agreement between parties to deliver goods, money, services, or other consideration. Contracts can be oral or written. Typically, one party is to receive money, but not always. At its core, a contract requires that one party make an offer, and that the other party accept that offer. Once the two parties reach a "meeting of the minds," the contract is secure. Offer and acceptance does not always need to be expressed orally or in writing. For example, partial performance (such as a down payment) can indicate acceptance without an express communication of intent to accept.
Typically some consideration, or something of value, must be brought to the contract by both parties. If I offer to give you a car and you agree to receive it but later I renege, this is not a contract because you did not give consideration to me. The legal concept of consideration is complex, but at its core, the doctrine of consideration simply requires that something of value be given by both parties to a contract. An exception is "quasi-contract," which I'll discuss in a moment.
An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract that is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, if you see a dentist, you agree to pay a fair price for the service. If you refuse, you have breached an implied contract to pay for the service, even though you did not sign an agreement to pay a certain sum of money.
A second type of implied contract is a contract that is implied in law, also called a quasi-contract. A quasi-contract doesn't require a meeting of the minds; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were she not required to compensate the other. For example, say a company accidentally installs a landscape lighting system in the lawn of the wrong house. The homeowner sees the company installing the lights in her own lawn. Pleased at the mistake, she says nothing, and then refuses to pay when the electrician hands her the bill. Will the homeowner be held liable for payment? Yes, if it could be proven that the homeowner knew that the lighting was being installed mistakenly, the court would make the homeowner pay because of a quasi-contract. Such a claim is also referred to as quantum meruit. These claims are rare, but it is good background.
Contracts Made Invalid by the Statute of Frauds
Finally, some contracts require that a contract be committed to writing and signed by the party against whom enforcement is sought in order to be enforceable. Note that only the party against whom enforcement is sought need sign to satisfy the statute, not both parties. This doctrine is known as the "statute of frauds." The term comes from an English law passed in 1677 called the Statute of Frauds and Perjuries. All American states have some form of statute of frauds, but every state's statute of frauds differs. Historically, the statute of frauds required a written contract and signature in the following types of cases:
- Contracts in consideration of marriage.
- Contracts that cannot be performed within one year.
- Contracts for the sale of an interest in land.
- Contracts to pay the debt of another.
- Contracts for the sale of goods above a certain value.
- Contracts in which one party becomes a surety (acts as guarantor) for another party's debt or other obligation.
Of course, each state differs slightly. For example, California's statute of frauds (Civil Code §1624) generally falls in line with the historical guidelines above. However, California's statute of frauds has no provision for contracts for the sale of goods above a certain value, but does carry a provision requiring a written contract, or other signed writing to enforce a promise to lend money in an amount greater than $100,000.
Preparing a Contract Case: The Litigant's Guide
First, is the contract in writing? If the contract is written, the plaintiff enjoys the upper hand and is halfway home. With a written contract, the defendant cannot impose the statute of frauds against the plaintiff. Furthermore, the defendant cannot alter the terms of the contract in his testimony (e.g., "I was only supposed to build a wall three feet high, not five feet high"). The defendant cannot deny acceptance (e.g., "we were still negotiating that agreement, and never came to final terms"). Also, a written contract indicates formality on the part of both parties, and a willingness to be legally bound.
If there is no written contract, the plaintiff will need to begin by establishing that a contract exists. The plaintiff will need to point very clearly to the moment the agreement was reached-state the time and place, and what both parties said (e.g., "we were in the defendant's front yard on a Friday afternoon. He said 'I agree to that price,' and then we both shook hands. I remember the defendant had his golf bag over his shoulder").
For the defendant, the opposite is true. Without a written contract, the defendant begins with the upper hand. The defendant can dispute the very heart of the case: the terms of the contract. Or, the defendant may argue that an agreement was never reached. Keep in mind that it is impossible to argue that an agreement was never reached if you partially performed the contract. For example, if a defendant made a partial delivery on a contract for the sale of goods, no judge in America will believe that the defendant did not agree to be bound to a contract.
The next stage in a contract dispute is where the meat is: the argument of who breached the contract, and to what degree. When a contract is breached by one party, generally the opposing party has no further obligation to perform under the contract. Contract disputes generally devolve into a he said-she said argument over how the opposing parties failed to perform. I worked on a case where the plaintiff, a home decorator, was seeking a refund of money spent to a defendant (my client) who had manufactured some custom roman blinds. The plaintiff was dissatisfied with the blinds. The plaintiff was also seeking some consequential damages to her reputation for the allegedly botched job (we'll discuss consequential damages in contracts cases in a moment). The defendant argued that the blinds were acceptable and that the plaintiff's objection was to the style of the blinds, not the quality. Most of the discussion focused on whether the blinds were up to the standards required by the contract. Ultimately, the judge ruled that the plaintiff was entitled to a partial refund, but not a total refund, since she received something of value, just a lesser value than what she wanted.
Plaintiffs sometimes seek consequential damages in small claims cases. The home decorator sought consequential damages because some real estate agents had seen the blinds and related the poor workmanship to her skills as a designer. We disputed that charge as factually improbable and outside of the range of damages typically allowed in contract disputes. The judge agreed. The only time that consequential damages are allowed in contract disputes is if it is determined that such damages were reasonably foreseeable or "within the contemplation of the parties" at the time of the contract. As a defendant, you always want to limit consequential damages by arguing that such damages were not contemplated and never discussed. And, as a preventative measure, you should never agree to clauses in contracts that allow the recovery of consequential damages.
Collecting on Loans
A loan is simply a contract to repay money. The most important points for plaintiffs to focus on is to demonstrate the loan either with a written document (written contracts or loan documents are always the strongest) or with proof that the loan was delivered to the defendant and that partial payments were made on the loan. Always be prepared to show a detailed statement of the payments the defendant made, if any. The small claims judge will be looking very carefully to make sure that you have credited the defendant for any sums he may have paid on the debt. As a defendant, you will want to show any and all payments that you made on the debt.
Common Case #2: Landlord-Tenant Disputes
Landlord-tenant disputes arise from the relationship between a landlord and a tenant, either in a commercial or residential setting. Leases are a special manner of contract that are governed by special rules. Our legal system views tenancy and rental security deposits as specially protected rights. Keep in mind that in some states, landlord-tenant disputes are not heard in small claims court. In most states, evictions are not heard because an eviction is the termination of a valuable right: the right to possess real property. It's more likely though, that the small claims court will hear a dispute over a security deposit, damage to a rental unit, or for back rent following the abandonment by a tenant of a rental property.
Disputes over security deposits are common in small claims courts. Generally, the amount in dispute is less than the jurisdictional limit, so these cases are a good fit. Tenants have the advantage here. Remember that a security deposit never really belongs to the landlord. In a sense, the deposit is held in trust for the tenant by the landlord, and can only be retained in very specific instances. I have seen a lot of landlords lose very badly in small claims court. A good example is a recent Massachusetts case involved the withholding of $500 from a $1,000 deposit. The landlord claimed that the unit was left in terrible condition, and that the tenants had taken two bar stools. The tenant (a colleague of mine) in the settlement phase, offered to accept $200 to settle the $500 claim. The landlord was stubborn, and probably figured that the former tenant would not pursue the matter. The tenant brought his case in small claims court. The landlord's evidence was weak; he had almost no receipts to substantiate the $500 in cleaning costs and furniture replacement. The tenant made clear that the unit was spotless and that the bar stools were at least 25 years old and probably worth $5. The tenant won the full return of his security deposit. In addition, the Massachusetts statute allows triple damages and attorney's fees, so the total judgment was nearly $3,500. The landlord appealed and lost the appeal as well.
Some important points to remember in a security deposit dispute:
- The law is on the side of tenants.
- The judge likely has a bias in favor of tenants. They tend to be less well off than landlords, and are commonly abused by landlords.
- A security deposit is property that belongs to tenants, not to landlords.
- The handling of security deposits requires that rules and laws be carefully followed.
- Victorious tenants in security deposit cases can generally bump up the damages by using statutory provisions that favor tenants.
- Make sure the small claims court will hear your dispute.
Cases to Recover Back Rent
Actions to recover overdue rent following the end of a lease are common in small claims court. These cases arise at either the end of the term of a lease, or when the tenant abandons the property before the end of the lease. Cases brought at the natural end of a lease are simpler. A plaintiff landlord should be prepared to introduce the lease into evidence, and to provide some sort of statement showing what rent was paid, and what rent was not paid. If any security deposit was withheld, the landlord should be prepared to offer substantial and meaningful proof that the withholding of the deposit was warranted. Defendants can use a withheld security deposit to counterclaim against a landlord.
Cases concerning the abandonment of a rental property are more complex. When a tenant abandons a rental property, the tenant may leave six months or more on a lease term. As a landlord, you will be tempted to sue for the entire remaining term of the lease. However, the law may not afford a landlord such a generous remedy. Landlord-tenant law generally requires landlords to actively and meaningfully "mitigate their damages" by seeking out a new tenant. So as a landlord, you need to show that you actively advertised the property, and showed it to potential renters. If the landlord does not demonstrate an active attempt to mitigate his or her damages, the defendant can keep his or her damages very low, despite the defendant's breach of the rental agreement.
Want more help winning in small claims court? Get the information you need to execute a successful case in Small Claims Court Guidebook (Entrepreneur Press).