If you want to refund the customer first close the dispute through Paypal by accepting responsibility and refunding the customer.
Then go to the sellers tab>Reports>Transaction Report
Search the transaction.
Then process the refund.
It will give you a warning that the refund failed, but you can do a "Partial Refund". Do the partial refund by entering "REFUND" and clicking "Confirm Refund".
The reason for the error is that you have already refunded the transaction in Paypal. But by going back into JVZoo after closing the dispute and refunding again the system will attempt to get back any subpayments on the order (affiliate and jvzoo payments).
If you prefer to challenge the dispute then you will only follow the instructions to refund in JVZoo after the dispute is settled if the dispute is decided in the customers favor.