The arbitration clause says you cannot sue. It says you cannot join a class action. It says you cannot appeal. What it does not say is whether the clause itself survives legal scrutiny.
Most MCA agreements contain a mandatory arbitration clause. The clause requires that any dispute between you and the funder be resolved through private arbitration rather than in court. It typically waives your right to a jury trial, your right to participate in a class action, your right to seek punitive damages, and your right to appeal the arbitrator’s decision. Some clauses specify the arbitration forum, the location of the proceeding, the rules that will govern, and the allocation of costs. Some clauses are a single paragraph. Some are several pages.
The clause exists because arbitration, for the funder, is faster, cheaper, and more predictable than litigation. Arbitration happens behind closed doors. There is no public record. There is no precedent created that other borrowers could cite. There is no jury of small business owners evaluating the funder’s conduct. The proceeding is private, the decision is final, and the outcome does not become a weapon for the next borrower to use.
Challenges to Enforceability
Arbitration clauses in MCA agreements are not automatically enforceable. Courts in multiple jurisdictions have refused to enforce MCA arbitration clauses on several grounds. The grounds reflect the principle that a contractual provision — even one signed voluntarily — can be so one-sided or so fundamentally unfair that a court will not compel compliance.
Unconscionability. If the arbitration clause is so one-sided that it effectively prevents you from asserting your rights, a court may find the clause unconscionable. Unconscionability has two components: procedural unconscionability, which looks at how the clause was presented — was it buried in fine print, was there any negotiation, was there a meaningful alternative to signing — and substantive unconscionability, which looks at the clause’s terms — does it require arbitration in a distant forum you cannot reach, does it impose prohibitive filing fees, does it limit discovery to the point where you cannot build your case, does it restrict remedies the law would otherwise provide.
An MCA arbitration clause that requires a small business owner in Texas to arbitrate in New York, pay a $10,000 filing fee, waive all claims for punitive damages, and accept the arbitrator’s decision without appeal may be found unconscionable on its face. The clause does not facilitate dispute resolution. It prevents it.