MCA Arbitration Clauses: 5 Questions About Enforceability and Procedure

An arbitration clause in a merchant cash advance contract is typically enforceable under the Federal Arbitration Act. The exceptions you can raise are likely to be the same reasons that could revoke the underlying contract itself. But arbitration clauses in MCA contracts can be grossly abusive -- forums can be rigged against you, deadlines can be short, and failing to raise a proper defense early may waive the right to raise it at all.

The Federal Arbitration Act typically applies to claims under contracts that involve interstate commerce. MCA arbitration clauses are typically buried in the fine print of the contract and overlooked in the rush to take the money. But these clauses are typically enforceable, and require that all disputes with the MCA provider be handled in a private arbitration, not in the courts. There are a number of defenses and exceptions to enforceability you might try to raise, but those will likely apply to the MCA contract itself, rather than the specific arbitration clause.

Many merchant cash advances are in essence a predatory loan. They claim to give the merchant a lump sum upfront in exchange for a share of future revenue, but the math disguises a usurious interest rate more than 50 times the legal limit. If the contract is a disguised usurious loan the whole contract is illegal and the Federal Arbitration Act doesn’t apply, right? The Supreme Court has decided otherwise in Buckeye Check Cashing v. Cardegna (2006). Buckeye Check Cashing says that if the usury claim is targeted to the MCA as a whole, that claim belongs in arbitration under the arbitration clause, because it’s a general claim that the MCA is illegal. Buckeye Check Cashing is a hard decision to take, but it has been the law since 2006.

In 2019 the Supreme Court ruled in Henry Schein Inc. v. Archer and White Sales Inc. that if an arbitration agreement makes clear that arbitrability questions are delegated to the arbitrator, courts are required to follow that agreement - even if the case for arbitration is groundless - and may not make an independent arbitrability determination. This means that if you are absolutely certain that you are right that the MCA is a usurious loan and that the arbitration clause is therefore void, you still must raise your usury challenge before the arbitrator.

An Arbitration Forum Could Be Rigged

A lawsuit by New York Attorney General Letitia James suggests an arbitration forum could be rigged. After Rapid Ruling launched in 2019, some MCA companies started adding a clause to contracts saying that Rapid Ruling arbitrators would be the venue for all disputes. Rapid Ruling represented to the public that it was a neutral forum where impartial arbiters would review evidence from both sides. James sued online arbitration platform Rapid Ruling and its founders over what the state alleges were misleading representations that Rapid Ruling is a neutral, independent arbitration forum. James alleges that the rules governing Rapid Ruling arbitration hearings were secretly written by an MCA company. Rapid Ruling provided arbitration forums for about 3,000 cases in its first three years. In 97 percent of those cases, the small businesses did not appear. The MCA businesses nearly always won those cases.

Rapid Ruling arbitrators often awarded junk fees and padded attorneys’ fees. Nevertheless, MCA companies had no trouble using Rapid Ruling awards to get New York courts to enter money judgments against merchants. They used those judgments to garnish the wages and seize the assets of those small business owners who lost their arbitration hearings. James alleges that Rapid Ruling and its founders violated New York laws against unfair, deceptive and abusive practices. She also seeks civil penalties, restitution and damages for affected small businesses.

Vacate the Award

Is a lopsided award from a forum that is secretly tilted toward the MCA funders enough to vacate the award? Courts that hear challenges to arbitration awards under the Federal Arbitration Act (FAA) are really limited in what they can do with a bad award. Section 10 of the FAA permits courts to vacate awards in a few particular ways. You can challenge an award on grounds that it was procured by corruption, fraud, or undue means. You can challenge that there was evident partiality or corruption in the arbitrators or misconduct by the arbitrators. You can challenge that the arbitrators exceeded their powers. And that’s it. An arbitration forum secretly rigged against the merchant may be grounds to vacate an award, though. Timing matters, too. Under Section 12 of the FAA, you have to serve notice of your challenge to an award within three months after the award is filed or delivered.

Demand to Arbitrate

When you get an arbitration demand, it starts a clock ticking. Your time starts when you are properly served with the demand. In New York, a demand to arbitrate under an arbitration agreement must specify the agreement under which arbitration is sought, and must warn of the deadline. From then on, under New York’s CPLR 7503(c), you have 20 days to ask a court to stop the arbitration. Failing to ask the court to stay the arbitration in time may waive your right to make any further argument that you had no valid agreement to arbitrate or that it was not followed. But any provision in your contract that waives your right to ask the court to stay an arbitration is void.

Virginia has its own rules: there is a state law that arbitration clauses that require in-person arbitration hearings to be held outside of the state of your business’s principal place of business are unenforceable. There is also a requirement that the funder pay for arbitrators and arbitration administrative costs.

At the federal level, in Morgan v. Sundance (2022), the Supreme Court held that a party can waive the right to arbitrate by litigating in court. Morgan rejected the requirement that the other side show prejudice to claim waiver. Another case to know about is Smith v. Spizzirri, decided in 2024. Spizzirri held that when a claim is properly subject to arbitration under the FAA, the correct procedure is to stay, not to dismiss the claim, if a party asks. If a court sends your case to arbitration, the lawsuit isn’t over.

If you receive an arbitration demand in your merchant cash advance case, do not ignore it. Many business owners who used Rapid Ruling never appeared in those cases and lost. Arbitration hearings are just as serious as court hearings. You have to show up and raise defenses, or you could get a bad decision and lose the right to fight later. You may also have other defenses to raise beyond the ones discussed in this article. There are different procedural rules, like notice requirements and deadlines that you must comply with. Talk to a lawyer as quickly as possible.