Resolving Disputes

Mediation, arbitration and small claims courts are three ways small businesses can resolve disputes without resorting to the expense and time of a lawsuit.

Because an agreement arrived at through mediation does not have to be binding to the disputing parties, it is a more informal process that offers more potential for the parties to work together in the future. Arbitration does result in a legally binding decision; the arbitrator functions like a judge and the proceeding is more like a traditional court case. However, like mediation, it does not involve the time and expense of a court case.

A third option is small claims court. Each state operates its own small claims court and sets its own limit on the dollar amount that can be awarded.


If you are in a disagreement with a supplier or customer, mediation is a valuable step toward resolution. An obvious advantage is that it avoids the extended time frame and high cost of a court case; even more, its goal is to solve the problem, unlike a court of law where the thrust is to determine which party is in the wrong. With mediation, there is a chance that the business owner can regain a reasonable relationship with the other party.

The mediator cannot force a decision; he or she can only encourage a resolution to be made between the opposing parties. If an agreement has been made at the end of a mediation session, the two parties can go ahead and sign a contract or take the decision to a lawyer for review. If an agreement is not reached, going to court remains an option. Most mediations do result in a settlement, however.

How does mediation work?

The mediator who meets with you and the other party will most likely have had training in resolving conflicts. The amount of training varies, which is why it is important to find a mediator you are comfortable with before you start the process.

Even though mediation is informal compared to a court proceeding, a process has been developed that should lead to an outcome that satisfies both parties. There are six stages to the process:

  • Stage 1: Mediator’s opening statement, where the mediator makes introductions, explains the process and encourages everyone to be cooperative.
  • Stage 2: Disputants’ opening statements, in which each party describes his or her concerns and the other party is not allowed to interrupt.
  • Stage 3: Joint discussion, in which the focus is on defining the issues that need to be resolved.
  • Stage 4: Private caucuses, the heart of the mediation. The mediator spends time with each party individually, sometimes alternating with the other, as aspects of the situation are reviewed and new solutions may emerge.
  • Stage 5: Joint negotiation, where the parties meet together for direct negotiation.
  • Stage 6: Closure, the end of the mediation. At this point, a written summary is created by the mediator. An agreement may or may not have been reached.

Can mediation be used to resolve any kind of disagreement?

Mediation only works when both parties agree to the process, and it has historically been used to resolve disputes that involve small business issues such as contracts, leases and employment.

It does not work well if one party wants to use legal precedents or is looking for a large payment for some kind of wrongdoing. Mediation is not designed for many types of criminal cases.

Why would I want to use mediation rather than go to court?

Besides the advantages of lower cost and quicker resolution, you are not bound by legal precedent or a judge’s biases. Also, because mediation does not use the highly structured procedures that a court does, there is an opportunity to present all sides of the situation.

In mediation, you and the opposing party will work out a solution to your own dispute. Unless you freely agree, there will be no final resolution. And, although any kind of business dispute is likely to cause some personal tension, it is a more relaxed, friendlier process than a more formal legal situation.


Like mediation, arbitration is a faster and less expensive way to resolve a business disagreement. Unlike mediation, the decision of an arbitrator can be legally binding (although not always). Also, unlike mediation, the process of arbitration is similar to that of a court proceeding. Witnesses and evidence may be presented.

Arbitration has served as an effective business tool for decades. One study found that 90 percent of corporations surveyed had used mediation or arbitration and strongly preferred them to using lawsuits.

What are the most common types of business disputes that are resolved using arbitration?

Collective bargaining agreements have included arbitration clauses for many years. Arbitration is frequently used in compensation and employment issues.

Can arbitration be specified in advance as a way or resolving a conflict?

Yes, almost any contract can include a clause stating that disagreements will be resolved by arbitration. When you are drawing up a contract with a supplier or customer, you can specify arbitration as the way to resolve a disagreement.

Small Claimes Court

Small claims court is one of the ways a business owner can pursue collections and resolve other disputes without the length and expense of litigation. It is particularly effective for collecting unpaid invoices as it circumvents the use of collection agencies or lawyers, whose fees will take a big bite out of any proceeds. In fact, even the threat of small claims court can encourage voluntary payment, since many debtors want to keep their credit strong.

Other business disputes can be resolved as well. If a contract issue arises—for example, nonpayment due to a claim of poor quality work performed—the parties can get an answer quickly and inexpensively.

The dollar limits of small claims courts have been increasing, although there is a huge range within the United States. Currently, Virginia and Georgia are the highest with a top limit of $15,000, and Kentucky is at the low end with a limit of $1,500.

Tip: You have the most chance of success if you have a short, unemotional review of the facts of your case to the judge. Practice your presentation to the judge before you go to court. Written contracts, photos and other types of evidence that back up your story are permitted and will work in your favor. When you are in court, direct your eyes and your speech to the judge. Tell your version of the events directly and then state what you want as compensation for your claim.

What kinds of cases can be resolved in a small claims court?

Disputes revolving around money are one of the best uses of a small claims court. And evictions can usually be handled through the small claims system.

You cannot sue the federal government or a federal agency. Divorce, guardianship and bankruptcy are also outside the sphere of a small claims court.

Where do I go to file in small claims court?

Generally, you will use the court that is closest to the person you are suing, either his or her residence or business office. If the person or entity you are suing is located out of state or some distance from where you are, that may be a reason to pursue another path.

How do I know I will collect my money if I win in small claims court?

This is a legitimate concern. It may be that the person or business you have sued does not have the assets available to pay you. If you know your debtor has the resources to pay, you can garnish wages or look for another source of collection. One advantage—these court judgments have a long life span, so if the person or business does acquire assets, you may be able to collect in the future.

What if I lose in small claims court? Is there an option to continue pursuing my case?

Your options will depend on where the case took place. In some states, the only ground for a trial is that the judge made a mistake from a legal perspective. Other states allow an appeal within a fairly short period of time.