Arbitration Clauses Are the First Line of Defense for MCA Companies
Before a merchant cash advance company can drag you into a New York courtroom, it has to get past one structural problem: it already agreed, in writing, to keep disputes private. Arbitration clauses appear in nearly every MCA agreement, and for the funder, that is a feature, not a bug. The clause removes the dispute from public courts, strips the merchant of discovery rights, limits appeals, and places the proceeding before a private arbitrator whose selection process the funder often shapes.
What merchants frequently do not realize until it is too late is that the clause does not only govern breach of contract claims. It reaches everything. Fraud claims, RICO claims, unconscionability challenges — a well-drafted MCA arbitration clause sweeps them all into the private forum.
The FAA Controls, But It Is Not Unlimited
Federal arbitration policy under the Federal Arbitration Act tilts heavily toward enforcing arbitration agreements as written. Courts will compel arbitration if the agreement covers the dispute and the agreement itself is valid. For years, that two-part test was almost formality in MCA cases.
The climate has shifted. In MCA Servicing Co. v. Nic’s Painting, LLC, a New York trial court wrote in 2024 that it would not be used as a cudgel to enforce potentially illegal and/or unconscionable agreements, which reflects a broader judicial posture now visible across the Southern District. Courts are reading the second prong of that test more seriously when the underlying contract carries signs of criminally usurious lending.
What Delegation Actually Means for You
The most dangerous provision inside an MCA arbitration clause is one most merchants never read: the delegation clause. A delegation clause assigns to the arbitrator, not the court, the power to decide whether the arbitration clause itself is enforceable. In Precisionworks MFG, LLC v. Union Funding Source, Inc., Judge Schofield of the Southern District held that where such a clause exists, even unconscionability challenges must go to the arbitrator first.
This creates a closed loop. The company writes the clause. The clause sends all disputes to arbitration. Arbitration includes the dispute about whether arbitration was proper. One cannot challenge the process from inside the process without strategy.
A delegation clause does not just limit your forum. It limits the identity of the decision-maker on the most important threshold question in your case.
Class Action Waivers Almost Always Travel With the Clause
MCA arbitration clauses do not appear alone. They arrive bundled with class action waivers, jury trial waivers, and forum selection provisions. In practice, this means a merchant facing a $90,000 MCA dispute cannot join with a hundred other merchants in the same position. Each case must be brought individually, at individual cost, before an individual arbitrator.
The Supreme Court ruling in AT&T Mobility LLC v. Concepcion (2011) confirmed that the FAA preempts state-law rules that would invalidate class action waivers in arbitration agreements. MCA funders read that decision and drafted accordingly.
The Arbitrator Selection Process Deserves Scrutiny
Some MCA agreements name a specific arbitration forum. Others specify AAA or JAMS. A few, particularly those in the lower end of the market, name no forum at all or use proprietary processes that no independent body administers. The forum matters because the rules governing discovery, evidence, and arbitrator qualification differ significantly between institutions.
Where an MCA agreement designates a forum that has suspended the funder for non-payment of fees, that clause may be inoperative. The AAA and JAMS both maintain lists of companies that have failed to pay required fees and are therefore prohibited from using those forums. If your funder appears on such a list, the arbitration provision may be effectively unenforceable, at least under the named forum.
New York Law Treats Some MCA Agreements as Usurious Loans
This matters for arbitration because a finding that the MCA agreement is an illegal loan, rather than a purchase of future receivables, can void the entire agreement including the arbitration clause. In February 2024, a New York appellate court ruled that a particular MCA agreement constituted a criminally usurious loan, which carries a civil defense of unenforceability. You cannot arbitrate a void contract.
Whether a court will reach that threshold question before compelling arbitration, or whether it will delegate the question to the arbitrator under a delegation clause, depends entirely on how the agreement was drafted and which court is handling the motion. That variability is real and worth acknowledging.
An Arbitration Award Is Not the End
When an arbitrator rules for the MCA company, that award must be confirmed by a court before it becomes enforceable as a judgment. The confirmation process creates one final opening. Federal courts have refused confirmation of MCA arbitration awards where the underlying agreement showed signs of fraud in the inducement, where the arbitrator exceeded authority, or where the award violated public policy. In one notable instance a New York court declined to confirm an award and ordered a new hearing on the merits.
The window is narrow and the standards for vacatur are demanding, but it exists. A first call costs nothing and assumes nothing, and that call is often where a merchant first learns the award is not automatically final.
