Usually, an MCA provider will bring claims of breach of contract against an MCA merchant because they allege the merchant somehow breached the contract and are trying to recover their damages through litigation. It is crucial that you understand not only how MCAs work, but also the state laws that apply to them.
A review of breach of contract can be very detailed, and this article attempts to cover it in a broad summary. But first, to understand the issues, it may be best to review how MCAs and the contract process work.
In general terms, contracts are promises between parties that create an obligation between the parties. The obligation may arise in many forms, but it must be supported by an agreement between the parties, and generally, one party is obligated to pay money to the other party. In an MCA contract, the obligation is for the merchant to pay the advance obtained under the MCA agreement.
MCA companies expect to get their payments when and how stated in the contract - regardless of a merchant’s cash flow. Any disruption in that timing or failure to pay violates the terms of the MCA agreement. More than likely, an MCA lender will use the standard breach of contract provisions that are listed in the agreement as to their claim against you in the lawsuit. They will claim you breached the contract if you close or block your business bank account(s).
Personal Guarantee
The personal guarantee creates a liability to the individual signer.
An MCA company usually requires a merchant to execute a personal guarantee in conjunction with an MCA agreement. The personal guarantee is an agreement that the merchant, as an individual, will be personally responsible for all the debts of the business that arises under the agreement.
If you personally guarantee an MCA agreement for your business, and your business fails to make timely payments, the MCA can come after you directly for the unpaid balance of the money advanced to your business - and your personal property, like your home, and bank accounts are at risk. The funder may also place a lien on your property.
An MCA lender may also ask you to sign a security agreement in addition to the MCA agreement and the personal guarantee.
You may not understand that a security agreement is another type of contract. A security agreement is an additional legal document that the MCA obtains to make sure that you will pay back the money that you obtain from the advance.
When you sign a security agreement, you are giving the lender the right to take certain assets as collateral for your obligations under the MCA agreement. A covenant is a promise or an agreement made in a security agreement that specifies what you have to do under the agreement.
The Elements of a Binding Contract
The MCA agreement and any related documents comprise your contract. To be legally binding in New York, an MCA contract must have the following essential elements:
- Offer: It is essentially the term that includes how much money an MCA lender is willing to give you in exchange for future remittance of a certain percentage of your future revenue.
- Acceptance: Acceptance occurs when you agree to the MCA agreement by signing it and receiving the funds.
- Consideration in the world of MCAs and contract law in general is the actual thing of value in your contract. The advance given by the MCA and the percentage of the future revenue that you promise to pay in exchange for the advance are what constitute consideration.
Any issue in drafting a contract can be exploited by either party.
MCA providers often write MCA agreements poorly. They create many issues of contention in doing so. An experienced New York business attorney would be in the best position to review your agreement. An MCA lender who markets its product as “something other than a loan” (i.e., a merchant cash advance) may be operating as a lender, nonetheless, and their paperwork may make their business with you look like a loan as opposed to an MCA.
If it comes to a lawsuit, the MCA is the party bringing the action against you. They have the burden of proof. They must prove the essential elements of a breach of contract in order to win their lawsuit against you:
- The existence of a valid contract between the parties.
- The plaintiff’s (i.e. the MCA’s) performance of their obligations under the contract.
- The defendant’s (i.e. your) breach of the contract, and the plaintiff was injured by the breach.
New York Civil Pattern Jury Instruction 4:1 (2d ed. 2006, p. 594) sets forth the required elements for a breach of contract action. See JP Morgan Chase v. J.H. Electric of NY, Inc., 69 A.D.3d 802 (2d Dept., 2010); Furia v. Furia, 116 A.D.2d 694 (2d Dept., 1986).
Common Breaches of Contract
A contract is breached when one party fails to meet his or her obligations as stated under the contract. Some common breaches of contract include:
- Failing to provide services, as promised.
- Failure to timely pay or perform.
- Not meeting the deadlines in the contract.
- Performing contract in a way that does not match the purpose or goals of the contract.
Only damages stemming from a material breach of contract can be awarded. A material breach means the breach is so great it defeats the contract’s original purpose.
The MCA provider must prove there was a material breach in order to recover damages. A lawyer will review your agreement and see any flaws in the writing.
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