by Mitchell Breit
A plethora of class action litigation has surfaced over the past several years as a result of onerous contract provisions in point of sale terminal leases with small business owners. Often the owner has no idea that the provisions exist because they have not seen them, or they are hidden in the contract’s fine print. Even more troubling, in many instances allegations against lease finance companies have included claims that unscrupulous sales agents have forged storeowner signatures on pages of contracts the owners have never seen. This article will address these frequent legal complaints, and offer some helpful hints for small business owners to avoid being trapped into leases that create ongoing headaches and financial turmoil.
Understand your Contract
As a threshold matter, any small business owner should be sure to read and understand the entirety of the point of sale terminal contract. Although this might seem obvious, several cases have been brought against leasing companies alleging various ways in which sales agents “hide the ball.” In one such case, a plaintiff owner alleged that the sales agent flipped through the contract pages on a clipboard after “explaining” the contract’s terms without fully revealing the pages’ contents, and then had the unsuspecting business owner sign the contract. In another case, a plaintiff alleged that several pertinent pages of a contract purporting to contain his signature that bound him to provisions he would have never agreed to, were never shown to him and that his signature was forged. While defendants have argued in such instances that the claims are far-fetched and fabricated, they have been seen enough in litigation that caution is warranted.
While many unsuspecting small business owners understandably do not read the fine print of a multi-page contract – often trusting the person presenting the offer – experience tells us that this is particularly unwise with point of sale terminal contracts. They frequently contain provisions allowing the leasing company to bind lessees to terms that often place new owners in untenable financial arrangements if their businesses fail. Among those provisions are those that allow the leasing company to:
- Collect outrageous late payment fees, i.e., those that bear no relationship to the amount owed;
- Collect additional penalties for early contract termination;
- Accelerate all outstanding payments through what is called a liquidated damages provision after contract termination or default so that the entire amount under the contact is due immediately.
- Many also contain:
- Arbitration clauses prohibiting the owner from pursuing whatever claims he may have against the lessor (e.g., counter-claims for violations of debt collection practices or wrongful reporting to credit agencies) in a court of law;
- Choice of law provisions allowing the lessor to apply state laws more favorable to it; and
- Forum selection clauses requiring the defaulting owner to appear in a court far from his home to dispute amounts allegedly owed.
- Some fine print in contracts requires the owner to obtain insurance against loss or damage to the terminal equipment, and then when the owner does not obtain that insurance, the lessor adds a monthly charge above the agreed upon payment, which it collects through “authorized withdrawals” from the owner’s business account.
In a case brought by the New York Attorney General against a leasing company, the lessor attempted to collect reimbursement for personal property taxes and administrative fees by making electronic withdrawals from former customers’ accounts, even after their lease contracts had long since expired. In another case, after a defaulting owner was dunned by a leasing company with an acceleration of all outstanding debts, and received notices that threatened to report him to credit agencies, the owner sent a late payment check on the personal account he shared with his wife. Thereafter, the lessor used the routing code on the check to make unauthorized withdrawals from his personal account for amounts it claimed he owed.
Advice for Success
While not all leasing companies are unscrupulous and many provide honest and much needed services to the new small business owner, there are easy and obvious ways to avoid being saddled with an undesireable contract:
- Review and discuss the terms of the contract with the sales agent and ask for explanations of terms that are unclear;
- Confirm what each penalty provision in the contract means;
- Make sure to limit authorized deductions from only your business account;
- Confirm in writing the total amount that will be due each month;
- Ask whether you are required to insure the equipment, and what the cost to you will be if you do not;
- Make sure to ask for a copy of every page of the contract you have signed and/or initialized at the time of execution. Do not accept a promise that it will be sent at a later date;
- If there is an acceleration clause, confirm that you will get credit for the return of the equipment and that there is a “mitigation” clause, i.e., one that explicitly sets forth what the lessor will do to re-lease or re-sell the equipment and what credit you will receive in the event that is done.
The small business entrepreneur, anxious to get a business up and running, can use credit card terminal leases to his and his customers’ advantage, but he should enter into such contracts with a watchful eye for fraud.