his column is a commentary on a troubling, yet rampant practice in the electronic transactions business: parties being bound by rules they have never seen. I challenge readers of this column (including the Associations) to send me a copy of a single current ISO agreement that deals logically with the application of Association Rules.

Rules Apply But They Are Secret

As readers know, the relationship between processor and ISO is almost always made subject to the application of the rules of the relevant credit card associations, such as Visa or MasterCard. These Association rules are often defined in ISO agreements as the "Rules."

It makes perfect sense that an ISO should be bound by the Rules because the ISO is a key link in the chain from merchant to ISO to processor to bank. However, one of the "Rules," of which ISOs may not be aware, is that only member banks have access to the Rules. In addition, member banks are not allowed to disclose the content of the Rules to other parties, such as ISOs or merchants that are bound by the Rules.

Any reasonable person will realize that (a) the Rule to not disclose the Rules to entities that are not member banks and (b) the standard ISO contract clause stating that the "ISO shall be subject to the Rules" are two completely incompatible concepts. Nonetheless, to my astonishment, these two incompatible concepts are in virtually every ISO relationship existing today. At the most recent Electronic Transactions Association (ETA) event in Boca Raton, Fla., I asked a vice president of Visa and a vice president of MasterCard (who both made presentations on interchange) to explain to me how banks are supposed to deal with this fundamental contradiction.

The response I received was that banks have an obligation to take those parts of the Rules that apply to ISOs and spell them out in ISO contracts or ISO policy manuals, without disclosing the rest of the Rules that are to be kept confidential. After reviewing many ISO deals, I have yet to see one where this requirement of Visa and MasterCard was implemented. This survey includes the biggest names in the business today.

Obviously it would take a lot of effort, and lawyer time, to sit down with the Rules (that are many volumes thick) and extract those that actually apply to ISOs for inclusion in a properly drafted ISO agreement. I have yet to negotiate opposite a bank or processor that has gone through this procedure.

What's An ISO To Do?

Before signing an ISO agreement that makes the ISO subject to the Rules (and does not provide the ISO with any access to the Rules), at the very least the processor and ISO should have a laugh about the silliness of this kind of agreement. If you are an ISO, and you feel like getting more than a laugh out of your processor with this kind of situation, I advise the following solutions:

• Copy to Be Provided: Request that the ISO agreement be re-worded so that the processor covenants to provide the ISO with a copy of the Rules. When the processor fails to deliver the Rules, and if the ISO violates one of them, the ISO may be able to use in its defense the fact that the processor failed in its obligation to deliver a copy of the Rules.
• Bound By Only Rules Provided: Request wording in the ISO agreement to the effect that the ISO will be bound by only those Rules actually provided to the ISO. This will help to motivate the processor to consider which Rules apply to the ISO.

• Provide Rules Upon Violation: Request wording in the ISO agreement to the effect that a copy of a relevant Rule will be provided to the ISO when it has been violated after which the ISO will have a reasonable cure period to come into compliance with the Rule. If you are an ISO, whether or not you actually see a copy of the Rules, I advise that you comply with them. Please also set realistic expectations for an ISO. I do not expect a bank or processor to agree to provide a copy of the Rules or remove an application of the Rules to ISO agreements.

Currently, you are likely to be asked to comply with Rules that you have never seen. In the event that you are held to be in violation of those Rules, I recommend that your attorneys use, as their first argument, the argument that the Rules do not apply since they were never made known to the ISO.

If you are an Association, bank or processor, I also recommend setting realistic expectations. I would be very surprised if any judge would hold an ISO liable to comply with a Rule that has never been made known to the ISO.

Of course, I am not encouraging ISOs to avoid complying with the Rules, but I am simply providing my view that the majority of ISO agreements today are very poorly drafted in relation to the application of the Rules.

The result of this poor drafting is to weaken, I believe, the application of the very Rules that the Associations so eagerly seek to enforce.

I am surprised that the legal teams in the Associations and banks persist in including this ambiguity in ISO agreements. Going one step further, I am surprised that the lawyers for the Associations, banks and processors have not given their clients better advice on this subject.

There are enough complexities in the electronic transactions business. I think we should all make an effort to get rid of the usual nonsensical Rules clauses in ISO agreements.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by e-mail: atlas@adamatlas.com or by phone: 514-842-0886.