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The Green Sheet Online Edition

September 13, 2010 • Issue 10:09:01

Legal ease
Assignment provisions in ISO and agent agreements

By Adam Atlas
Attorney at Law

The seemingly innocuous assignment provision in an ISO or merchant level salesperson (MLS) agreement usually lies somewhere near the end of the document, along with other general and standard clauses such as governing law and severability.

You could easily overlook an assignment clause thinking it was standard, not negotiable and not worth studying. Instead, you should always read the assignment clause of your agreements closely.

The purpose of this article is to describe certain basic characteristics and functions of assignment clauses.

Assignment clause

Every contract gives each party a set of rights and responsibilities, also called privileges and obligations. Every once in a while, a party to an agreement wants to consider transferring to a third party some or all of his, her or, in the case of a business entity such as a corporation, its rights or obligations under a given agreement. That transfer is called an assignment.

The problem with assignments is that when you assign your end of a deal to someone else, the other party to the agreement may not want to be in a relationship with your assignee. The specific law applicable to assignment will vary from state to state; however, the law is generally more accepting of assignment of rights than obligations.

For example, in a loan agreement, you can imagine it being easier for the creditor to assign rights than the debtor. A well-drafted assignment clause should foresee that over the course of the agreement, either party may at some point wish to assign some or all of his, her or its rights and obligations.

A flat-out prohibition on assignment may be unreasonably stringent, while an unbridled right to assign may make each party too insecure in the relationship.

Processor's right to assign

A processor in a relationship with an ISO will wish to have the unfettered right to assign its rights and obligations under its ISO agreements. The basis of this right is that a processor, rightly, perceives the commitments made to it by its ISOs as part of its assets.

In order for assets to have the most possible value, they must be saleable. In simple terms, a processor will want to be able to sell its ISO portfolio by assigning, among other things, its suite of ISO relationships.

An ISO will, similarly, wish to have the right to assign its MLS relationships. It is common, although not necessarily always the case, that a processor will have the right to assign its ISO agreements to a third party. While these rights are common, it is also common to expect that the assignor (processor) will promise that the assignee under its ISO agreements will continue to honor the promises made to ISOs under them.

In simple terms, an assignment by a processor should not have the result of depriving an ISO of its rights under an ISO agreement.

ISO's right to assign

The right of an ISO to assign its ISO agreement will depend on the commercial relationship it has negotiated with its processor and is often subject to prior consent of the processor. However, that consent should not be unreasonably withheld.

For example, if an ISO wishes to assign its ISO agreement to a proposed assignee that has terrible credit and no ability to run an ISO business, the processor may be acting reasonably by refusing to consent to the assignment. On the other hand, an ISO wishing to assign an ISO agreement to a disinterested third party that is experienced, solvent and not a key competitor to the processor, might be reasonable and acceptable to a processor.

Three levels of assignment

Merchant acquiring sales agreements (ISO or agent agreements) are subject to three possible forms of assignment:

    1. The assignment of the whole agreement
    2. The assignment of only residual compensation rights under the agreement
    3. The right of the assignor to cause the acquiring bank to assign the underlying merchant agreements to another acquiring bank

Which among these specific rights are set out in your agreement will depend on the agreement in force between processor and acquiring bank, as well as the ability of the party opposite you to actually give you the right. For example, some ISOs make the mistake of giving agents a full portability right (item 3 above) when they themselves do not have that right to give.

Once you understand what rights you have managed to negotiate, make sure your agreement incorporates them.

Due diligence

The terms discussed in this article are not necessarily industry standard; this article should not be relied upon to describe industry custom. Naturally, your specific agreement and the relationship that it represents may have other considerations that relate to its assignment clause.

This discussion should be complemented by your study of your own clause within the context of your agreement, along with competent advice regarding the clause. end of article

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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