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Article published in Issue Number: 070302

What to do when a merchant sues

By Adam Atlas, Attorney at Law

Once in a while, merchants are dissatisfied with the services they receive. Sometimes they are so unhappy, they make claims for damages and lost profits against everyone they believe is responsible _ from the acquiring bank on down.

As ISOs and merchant level salespeople (MLSs), you must be prepared to deal with these kinds of claims even though they are not part of what you bargained for when you entered the payments industry.

Here are seven tips to help reduce the chances you'll bear the brunt of your clients' legal claims pertaining to the merchant services they receive.

1. Privity of contract

This legal term refers to a contract in place between two parties. For example, whenever merchant services are provided, there is privity of contract between the acquiring bank and the merchant.

Card Association rules mandate that there be a written contract between the acquiring bank and the merchant.

Privity of contract is relevant to merchant claims against ISOs because, in theory, there is no privity of contract between ISOs and MLSs and the merchants they refer to sponsoring banks. To cut at the root merchant claims against you when they arise, immediately alert aggrieved merchants to the fact that your ISO (in most cases) has no contract with them.

Merchants should not be able to sue ISOs and MLSs on the basis of a contract. In most jurisdictions, the absence of a written agreement makes a claim much more difficult to substantiate.

2. Service providers

Recent insistence by card Associations that ISOs clearly identify the banks providing the merchant services the ISOs sell is actually helpful.

With correct education from ISOs on exactly who is providing the services (Acme Bank, not Acme ISO), merchants know _ from the beginning of the relationship _ that the bank is responsible for the supply and quality of merchant services.

3. Indemnification

When negotiating your ISO or agent agreement, ask for mutual indemnification. Indemnification protects one party to an agreement against loss or damage caused by the agreement's other party.

It is usually required of ISOs. But it is not always required of processors or banks. Processors or banks should indemnify ISOs or MLSs for claims made by merchants under merchant agreements relating to issues that are beyond the control of ISOs or MLSs. This is a negotiable point in most ISO deals.

4. Taking sides

ISOs and MLSs are in a tough spot when merchants make claims of poor merchant services.

When merchants appear to have strong cases (which may lead to a material claim against acquiring banks) ISOs have to decide whether to look out for merchants, who are their customers and on the winning side of a claim. ISOs backing winning claims by merchants can face scorn from acquiring banks for having supported merchants against them.

When merchants' cases are weak, ISOs do not want their customers to perceive them as being unsympathetic. ISOs have divided loyalties between merchants, who could always go to other processors, and acquiring banks, on which they depend for residual income.

Do one of the following: a) Withdraw and let the bank fight its own battle, b) be helpful in a neutral manner, or c) pick the side that you know to be right, on solid grounds.

5. Integrity

In the course of merchant-bank disputes over merchant services, questions inevitably arise over the terms of the agreement in addition to the inducements and promises made at the time of its formation.

As such, ISOs are often called upon to deliver documents and correspondence and to recall the circumstances of merchant solicitations. For this reason, it is helpful to keep complete and accurate records on all solicitations done by your organization.

You don't want a merchant-bank dispute to uncover some noncompliant part of your business that may be at the root of misunderstandings. Make a consistent effort to record all facts related to merchants you have signed. And be prepared for others to rely on the veracity and completeness of those facts.

If you are called upon to testify or give an affidavit, always tell the truth _ no matter how tempting it may be to lie for the sake of a merchant or bank. In law, the truth is your friend.

6. Mediation

Once a merchant-bank dispute flares up, there is no better party to mediate that dispute than the ISO or agent who established the relationship. No person understands the two points of view as well as you do.

As such, you are making an investment in the merchant by providing mediation. Both disputing parties stand to benefit from your intervention, in so far as it is neutral and helpful.

7. Prevention

By monitoring the satisfaction of your merchants, you have the ability to prevent many disputes. Remember, most ISO agreements have a service obligation on the part of the ISO or MLS.

Part of service is to ascertain whether your customers are happy and help them if they are not. Many merchant claims grow out of bank or ISO neglect.

Be careful not to protect unreasonable and dishonest merchants. When in doubt, ask yourself what you would want the ISO involved to do if you were the acquiring bank facing a merchant complaint.

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, e-mail Adam Atlas, Attorney at Law, at or call him at 514-842-0886.

Article published in issue number 070302

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