The Green Sheet Online Edition
August 8, 2024 • 24:08:01
Navigating ISO agreements: Key provisions for agents
Navigating independent sales organization (ISO) partnerships can be a challenging endeavor, especially when it comes to deciphering the complex contracts that come with these relationships. ISO agreements typically consist of two parties: the ISO itself, and a variation of different terms for the party that will engage in referring, marketing or re-selling the ISO's services on behalf of the ISO.
Some of the commonly referred to parties in an ISO agreement are identified as agents, referral partners, independent contractors and independent sales agents (for simplicity, I'll refer to all such parties herein as agents).
Agents often find themselves grappling with terms and conditions that can significantly affect their business trajectory, as they are on the receiving end of dense contracts laden with terms that might not always be in their favor.
For agents, understanding these contracts is not just about ensuring regular compensation; it is about safeguarding interests, anticipating potential challenges, and carving out a path for growth and stability. This article aims to shed light on some of the most critical provisions in these agreements, offering insight into how agents can negotiate more favorable terms.
Navigating residuals: Protecting the agent's income
In ISO agreements, an agent's compensation will often be referred to as "residuals" (or some variation thereof). Contract provisions related to an agent's residuals are of the utmost importance, as a vaguely worded or overly restricted residual clause can jeopardize an agent's compensation to a significant extent.
- Termination of residuals: Some ISO agreements have clauses that grant the ISO sweeping powers to terminate the agreement, and even worse, to terminate the ISO's obligations related to paying out an agent's residual compensation, based on broad factors and subjective reasons in favor of the ISO.
This gives an ISO carte-blanche to act as it deems necessary, which in turn can jeopardize an agent's financial stability. If an agent sees language akin to "in the event of [list of various reasons], ISO's obligation to pay residuals to Agent shall terminate," it is imperative to strike these clauses to the extent that the agent can do so.
- Punctuality and dispute resolution: An ideal contract should clearly stipulate payment schedules, ensuring predictability. Moreover, having a clear dispute resolution process can save both time and money in the long run. Agents should be cautious of clauses that limit the window for disputing payments made to the agent, especially when the dispute arises because of the ISO's actions.
An unfavorable dispute resolution clause might state "any disputes regarding payments not raised within 7 days are waived." A more optimal version of the clause would have language stating that "any disputes regarding payments must be raised within 30 days or otherwise deemed accepted. However, if the dispute arises out of ISO's negligence, fraud, or intentional misconduct, then the 30-day period shall not apply."
- Watch for minimums: Provisions that require agents meet minimum payment thresholds can delay compensation and are therefore important terms to look out for. While from the ISO's perspective, this might be a cash flow management strategy, from the agent's viewpoint, it is an unnecessary delay and a veiled insertion of language to pull back on compensation that is rightfully earned by the agent.
Typical language to be wary of might state something to the effect of, "payments will only be made when the Agent's total residuals exceed $500 for a consecutive three-month period." Agents should make sure to strike any language resembling the foregoing from the ISO agreement. Instead, agents should ensure that the clause has language similar to, "for as long as ISO continues to receive net processing revenue from merchants referred by agents, ISO shall continue to make payments to agents monthly, irrespective of the accrued residual amount."
- Planning for the future: What happens if the ISO merges with another entity or is acquired? The agreement should clearly spell out the continuity of the compensation process for the agent. Additionally, the agreement should ensure that an agent's right to compensation is not disrupted, even in the event of their untimely demise.
In the event of any transfer of an ISO's rights and obligations under the ISO agreement, agents need to make sure that the assignment language states that the agent shall continue to be paid its residuals in perpetuity, and it would be wise to throw in language that states something to the effect of, "in the event of an agent's death, the rights to agent's residual compensation under the agreement shall be transferred to a designated beneficiary or heir as stipulated in such agent's valid will, trust, or other legally recognized instrument."
Rights, assignments and restrictions
A successful ISO-agent partnership is built on the mutual respect of both party's interests, and agents should ensure that the agreements they are entering into reflect such mutual respect by not being overly one-sided in favor of the ISO.
This limitation can hamper an agent's growth and financial flexibility. Agents should be wary of any language in an ISO agreement that states the ISO has a right of first offer, which is a contractual obligation that gives the ISO the right to make the first offer on an agent's residual portfolio before the agent can hit the market and seek competing offers.
A right of first refusal, on the other hand, allows an agent to seek offers from third parties and then gives the ISO the right to match any such offer an agent presents to the ISO, for a specified period. If the ISO refuses to match the presented offer or fails to do so within the designated period, then the agent can sell its residual portfolio to another party.
Given that a right of first refusal is standard in ISO agreements, this clause generally should not pose many problems for an agent, so long as the language is crafted to ensure the ISO has a right of first refusal and not a right of first offer.
Agents should refrain from agreeing, to the extent possible, to the often overly broad non-solicit language that is frequently found in ISO agreements. These clauses are crafted in a way that places exceedingly broad non-solicitation obligations upon Agents which result in burdening the agent's potential business prospects.
Instead, agents should try to do three things: 1. limit the non-solicits to a reasonable period following termination of the agreement (preferably anywhere from one to two years); 2. ensure the non-solicit narrowly applies only to the merchants that the agent referred to the ISO and who were boarded and entered into a merchant agreement with the ISO; and 3. ensure that the agent is only taking on the obligation of non-solicitation for itself and if applicable, its employees – not an entire separate list of parties and/or entities that the agent has to take on an obligation for.
For example, a clause akin to the following is one that agents can try and emulate when negotiating with ISOs: "During the Term and for eighteen (18) months after termination of this Agreement, Agent will not solicit any referred Merchant to become a merchant with any other third-party provider of processing services.Additionally, agent will not directly and knowingly solicit an ISO employee or registered ISO sales agent for employment with agent during the Term and for one year after termination of this agreement. Notwithstanding the foregoing, if any such employee or registered ISO sales agent contacts agent directly without any overt act of agent or as a result of a general advertisement issued by agent, then the non-solicitation covenants of this section shall not apply."
Liability: Ensuring both parties are covered
The realm of liabilities is where many agents find themselves entangled in financial disputes.
- Chargebacks and losses: While agents should bear some responsibility, they should not be the first line of financial defense for ISOs. Ideally, any financial hit should first be deducted from the merchant's reserve account. If an agent sees language that states all chargebacks and losses are deducted or offset from the Agent's residual compensation, agents should attempt to strike such language to the extent they are able.
On the contrary, agents want the agreement to reflect that the ISO takes on full liability for chargebacks/losses, or at the very least, that in the case of a chargeback or loss, the ISO first goes after the referred merchant's reserve account before then going after the agent's residual compensation.
- Limitation provisions: Another key provision that agents should be on the lookout for is a limitation of liability provision. This clause essentially functions to establish a monetary cap for the maximum amount of monetary damages that an agent can recover from an ISO if such ISO is liable for breach of contract. This provision should be negotiated to eliminate the cap in its entirety, or as much as reasonably possible.
Furthermore, to protect the agent's interests, it is imperative to add an exception to any limitation of liability clause, ensuring that despite any and all limitations, "the limitation of liability shall not apply to (i) ISO's obligation to pay Agent's residual compensation under the agreement, (ii) each party's indemnification obligations, and (iii) damages arising out of fraud, willful misconduct, gross negligence, or breach of the implied covenant of good faith and fair dealing."
Mutuality: A two-way street
To further ensure a fair partnership, agents should look to negotiate these clauses:
- Indemnification, confidentiality, representations: These clauses are consistently drafted in a way that usually protects the ISO but exposes the agent to significant risk. A fair agreement should offer protection to both parties, ensuring that the risks and responsibilities are shared to an extent. If an agent sees that indemnification, confidentiality, and warranties and representations clauses are unilateral (meaning the language is drafted in such a way that these clauses only protect the ISO), the agent should negotiate these terms and ensure that the clauses are mutual.
An example of such negotiation would be to revise the language in each applicable provision to say "each party shall …" or "the parties shall …" to ensure that the ISO will indemnify agent, protect any confidential information that it receives from the agent, and will make similar warranties and representations, as applicable, to those made by the agent.
In conclusion, it is crucial for agents to thoroughly understand the implications of the agreements they are entering into with ISOs, so that agents can protect their interests and set their businesses up for success.
By being aware of key provisions around residuals, restrictions, liability, and understanding the importance of ensuring mutuality, agents can better evaluate ISO agreements and negotiate more favorable terms. As a result, by securing favorable agreement terms upfront, agents can avoid pitfalls down the road and focus on business growth and profitability, which in turn will lead to a profitable business relationship between the ISO and the agent.
Note: This article is for informational purposes only and does not constitute legal advice. Readers are encouraged to seek professional legal counsel regarding their specific circumstances.
An alumnus of the University of San Diego, School of Law, Arzumanyan has a proven track record of drafting, reviewing, revising and negotiating an extensive array of commercial contracts, including vendor, nondisclosure, employment, software-as-a-service, consulting and marketing agreements. Leveraging his prior in-house counsel background, Arzumanyan has also carved out a unique niche within the electronic payments industry as his transactional expertise now encompasses merchant processing, merchant banking and sponsorship, referral, independent sales office, and other related agency agreements. Contact him at larzumanyan@glrlegal.com.
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