A businessman reluctantly facing his company's transition to a casual dress policy decided that he would simply cut off the sleeves and pant legs of his three-piece suit rather than shop for new casual clothing.

Implausible? Yes. But the man's "solution" is just as inappropriate as the practice of some institutions in using old contracts that just don't fit a new relationship between a credit card processor and its independent sales organization or agent bank.

A comprehensive, easily understood agreement is critical to a successful merchant-acquiring/sales agent relationship. When disagreement arises - over chargeback losses, for example - the lack of a well-tailored contract could result in disagreement and even costly litigation about how the responsibilities and liabilities should be allocated.

The existence of a solid agreement can head off both. There are six essential elements of such a contract between a merchant-acquiring institution and its sales agent. Signing a well-organized agreement written in plain English and then negotiating each of the remaining five elements will solve problems before they even develop.

The key elements are:

*A well-organized contract written in language all parties can easily understand.

*The responsibilities of the parties.

*The allocation of liabilities.

*The compensation structure.

*Merchant fees.

*Confidentiality provisions.

Take note of the following:

Using a contract that is easily understood, well organized, and comprehensive is the thread that ties together any solid arrangement. If you don't understand a certain provision, you can be sure the other side will interpret it differently than you do.

Further, you want someone looking at the document five years from now to know as precisely as possible what your intent was when the contract was signed.

A good standard is to make the contract so easily understood, in both language and content, that a judge unfamiliar with the technicalities of the business would easily be able to interpret it.

For example, in South Central Bank and Trust v. Citicorp Credit Services, which was decided on Aug. 22, 1994, the parties' failure to keep it simple resulted in litigation over who was responsible for chargeback losses between an agent bank and a merchant-acquiring institution.

The case involved a chargeback dispute between Citicorp Credit Services, acting as a merchant-acquiring institution, and its agent bank, South Central Bank and Trust. At issue was who was to bear responsibility for the chargebacks attributable to a bankrupt merchant.

Citicorp alleged the agent bank breached the agreement by not fully investigating the merchant, a railroad company. The bank alleged that Citicorp breached the agreement by failing to reject the business as an unacceptable merchant.

In an opinion spanning 50 pages, the U.S. District Court for the Northern District of Illinois, Eastern Division, held that the agreement allocated the duty to investigate the creditworthiness to the agent bank, and therefore that the agent bank was liable for the chargeback loss.

A clearer understanding (as reflected in a well-written contract) between the parties could have avoided the litigation.

The operations involved in the credit card processing business are complex, and therefore such agreements can be hard to write. Your best bet is to find a lawyer who understands the business and despises legalese.

You should detail who will be responsible for the many functions involved in processing credit card transactions. This is more true in independent sales organization and agent bank contracts than in other marketing agreements, because in the credit card processing arena the sales agent often performs more than mere marketing tasks.

An sales organization, for example, may be responsible for substantive functions such as generating and completing necessary merchant paperwork, training merchants on the program, and terminal installation and maintenance.

Tasks that should be covered include which party will produce and pay for merchant documents, who will be responsible for determining the creditworthiness of individual merchants, and which party is responsible for authorization, transaction, retrieval and chargeback processing.

Whether transactions will be settled through the sales agent or directly between the merchant-acquiring institution and the merchant must also be mentioned.

Which party will train merchants and respond to merchant questions, and who will be responsible for terminal installation and maintenance should also be covered.

A key element concerns the allocation of liabilities, including who will bear liability for losses incurred due to merchant negligence (for example, chargebacks) and uncollected fees.

Which party will be responsible for trying to collect merchant losses and uncollected fees and the compensation for performing that service should also be discussed.

You should discuss the compensation structure, outlining exactly how compensation is calculated and how it will be paid. Will a settlement account or a detailed monthly billing system be used?

A solid agreement will also cover whether compensation to the agent will continue as long as the acquiring bank maintains the underlying merchant agreement (in recognition of the value the agent added in bringing the merchant to the acquiring bank), +or whether the compensation ends when the agent agreement terminates.

This usually will depend on the circumstances surrounding termination; for example, if termination is caused by the agent's breach, the agent should have no right to continuing compensation.

Be certain to set forth the fees charged to merchants, including which party may change the fees and under what circumstances the fees may be changed. Usually, the party that initiated the change bears the cost of notifying the merchants of the change, but this should be specified in the agreement.

Finally, the contract should contain a confidentiality provision prohibiting the parties from disclosing to others (including competitors) confidential and proprietary information. The agreement should spell out in as much detail as possible the type of information protected, and the duty each has to protect the information from being disclosed.

If you have drafted the agreement, it's a good idea to include the agreement itself as information to be kept confidential, to prevent disclosure to competitors of the structure of your business.

Sticking with these six tailor-made elements in sales agreements will help ensure that your contracts will get your merchant-acquiring/sales relationships off to a good start.

Ms. Targan, a banking lawyer practicing in Farmington Hills, Mich., concentrates on electronic, merchant-acquiring, and retail banking.

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