The gnolls think these demands that they alter their lifestyle to suit halflings (it's a halfling village) are unreasonable, and attack.

Well, their grievance is legitimate, but that doesn't give them license to hurt the party or the halflings. Can they manage to take them all out with various disabling spells and nonlethal damage? Maybe they'll be more amenable to compromise after they've been knocked out for a few hours.

Handicapping themselves like this means they take more hits than they otherwise might but they manage to capture the entire gnoll party with class levels (the noncombatants huddle pathetically in their encampment).

Huddling pathetically is kind of what you do when you're a DnD character with no class levels. Fortunately Margaret's character has leveled, so she can contribute a few HP to the post-battle healing fest. Now, will the gnolls discuss compensation with the halflings in a civilized manner, with the halflings aware that the party's policy in response to violence hasn't changed in the past twenty minutes? 

Xavier's playing the gnolls as very hard to convince, but they can be talked down if enough people roll high on their Diplomacy checks. The halflings kinda want revenge.

Nope. No revenge. If you take revenge they'll take revenge for your revenge and the next thing you know your grandchildren are embroiled in endless war. Don't do it. (So many diplomacy checks.)

They settle in to arguing about compensation. Xavier finds this way more fun than anyone else does so he will continue arguing with himself for some time unless any party members want to draw up a treaty.

Margaret is content to enjoy the spectacle of Xavier arguing with himself for a while, but if anybody else starts drafting a treaty she'll switch to observing that and chiming in with a suggestion or two.

Eventually they can sell both sides on an agreement, especially when it occurs to Sanjay to ask if gnolls can eat predators that might attack the halfling's livestock, and they can get on the road again and fight one wandering monster before the session's over.

"Well that was awesome! Very talky, but we got some combat in too." Margaret remarks to Brenda.

"Xavier gets like that sometimes. One time he just about performed a one-man play as some kobolds and some lizardfolk who were fighting over water rights," says Brenda.

"Well, it's cheaper than Broadway."

Brenda giggles.

Margaret follows Brenda out of Xavier's house and checks that nobody is right next to them. "So, uh, you remember how you said you wish you could make yourself invisible?"

"Did I? I guess that sounds like something I'd say."

"Well, I figured out how to make myself invisible. And I was thinking, if you wanted, I could make you invisible sometime, and we could go look around outside the Avalon. It'd need to be both of us if we did it now because I have to recast the spell every 20 minutes, but at some point I might try making an invisibility cloak that would let you go out on your own."

"- Margaret that was so dangerous -"

"I did a lot of research first. And simpler spells. And I didn't make the diagram myself, I copied it out of a book that promised it was good and I checked it over myself too."

"But the incantations, any time you hiccup you could die. I couldn't possibly."

"Well, if you don't want to I don't want to pressure you or anything. But I'm thinking of selling enchanted objects--there are some people who do it in Avalons or over the internet--so if I do end up making invisibility cloaks, do you want a freebie?"

"If you'd already made one, then - then yeah, I'd take one, but I just couldn't imagine - if you were showing me around outside and you tripped or a car honked while you were reincanting -"

"That's totally reasonable. Items are a lot safer than casting a bunch of times, and you wouldn't have to worry about us getting separated or losing track of time or something either."

"That too. I'd still want someone showing me around at least the first time."

"I can see that. I'd be happy to show you around town and non-invisibly open doors and stuff, if I get an invisibility cloak working."

"That'd be nice. But please, please be careful - cast sitting down and make sure you have enough air and everything -"