Guest Analysis: New Case Decision Effects How ISOs Sell

Greyson Goody, J.D. 
January 10, 2014 – The California Supreme Court’s recent decision in Riverisland Cold Storage will have an effect on contract disputes. Riverisland changed the playing field on what evidence a court can consider in a contract dispute involving allegations of fraud.

A common dispute among merchants and ISOs surrounds the oral promises made by the sales agent to the merchant. Merchants often try to rescind the contract based on the fact that the ISO did not deliver on the sales agent’s promises. Before Riverisland, a court could not consider any of those statements if they contradicted the contracts terms. Thus, if the merchant agreement addressed these issues, the merchant could not claim anything to the contrary. The new law changes that.

Now, a merchant only needs to say the magic word of “fraud,” and all of the sales agents promises come in. Additionally, if the sales agent can’t be found to make a statement, the merchant can testify to what the sales agent said. This makes Chargeback disputes more difficult for the ISO, and allows for the ISO’s competitors to “coach” a merchant on how to avoid any cancellation fees.

Regardless of Riverisland, ISOs can still avoid liability. ISOs don’t have to drastically change any processes so long as they follow certain guidelines. By instituting compliance procedures after consulting with attorneys experienced in the industry, ISOs can maximize retention and collection profits, and avoid losses from merchants that claim fraud. The presence of a Compliance Program shows a judge that certain business practices are adhered to and enforced. This helps rebut the merchant’s claims, and lessens the effect of Riverisland.

Even without a Compliance Program, ISOs still have a chance at beating claims of fraud related to statements by sales agent. First, fraud is difficult to prove, and the Riverisland rule only pertains to one element. Second, merchants have a duty to read contracts before signing them. That mitigates the damage of a merchant’s claim that they reasonably relied on the sales agent’s statements.

ISOs should always be weary of their sales agents’ activities, as the best sales agents are often the ones that create the most liability. Creating tracking metrics for compliance helps an ISO avoid the cash crunch created by deals that fall apart due to errors by the sales agent.

For the full opinion see: Riverisland Cold Storage v. Fresno-Madera etc. Credit (2013) 55 Cal.4th 1169

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Greyson Goody  is a post-bar law clerk for Global Legal Resources.

The views expressed in the posts and comments of this blog do not necessarily reflect those of ETA.