MCA Arbitration Clauses and the Limits of Enforceability

The clause was drafted to end the argument before it begins. No suit, no class action, no appeal, no audience. The one term the drafters could not write into it is the term that decides everything: whether a court will enforce it at all.

Nearly every MCA agreement we have reviewed (the exceptions were old paper, and few) carries a mandatory arbitration provision. The provision routes any dispute between merchant and funder into a private forum and away from the courthouse. Along the way it collects waivers: the jury trial, the class action, the claim for punitive damages, and the right to appeal whatever the arbitrator decides. Some versions name the forum, fix the location, select the governing rules, and divide the costs of the proceeding. Some run a single paragraph. Others occupy several pages, and the length tells you little about the weight.

The clause exists because a private forum serves the funder: swifter, cheaper, and more predictable than open court. Behind closed doors no public record forms, no precedent accrues for the next merchant to cite, and no jury of fellow business owners weighs the funder's conduct. The decision binds the parties and instructs nobody else. For the funder, that privacy is the point of the bargain.

Grounds for Refusing Enforcement

Enforcement is never automatic. Judges in more than one jurisdiction have declined to compel arbitration under these agreements, and the refusals rest on a principle older than the MCA industry itself: a signed provision can be so lopsided, so hostile to one party's chance of being heard, that the signature stops mattering. Consent has limits, and the doctrine exists to mark them.

Unconscionability is the ground that succeeds most often. A clause one-sided enough to keep you from asserting your rights at all is a clause a court may refuse to honor. The doctrine carries two branches. Procedural unconscionability examines how the clause arrived: buried in fine print, presented without negotiation, signed by a merchant who had no meaningful alternative and, in most of the files we have seen, no idea the provision existed. Substantive unconscionability examines what the clause demands: a forum too distant to reach, filing fees that price the merchant out of the proceeding, discovery limits that keep a case from being built, remedies trimmed beneath what the law would otherwise supply. A clause can fail on either branch. The worst fail on both.

Consider the clause that orders a small business owner in Texas to arbitrate in New York, post a $10,000 filing fee, abandon every claim for punitive damages, and accept whatever the arbitrator concludes with no avenue of review. A court regarding that clause on its face may decline to enforce it, since a provision composed to make disputes impossible cannot pass as a method of resolving them. Whether the drafters expected the clause to be tested is a question I cannot answer from this desk.