Merchant Account Liquidated Damages Explained:
What are Liquidated Damages? A “Liquidated Damages” clause in a merchant account agreement is a particularly sneaky method of charging excessive early termination fees when a merchant cancels an account before an agreed upon service duration.
Generally speaking, most merchant account agreements require that merchants sign to a commitment of an average of 2-3 years of credit card processing services from a certain provider. If merchants cancel service before the commitment expires, they are often charged a cancellation fee. Most merchant account providers simply charge a flat fee that, on average, ranges from $200 – $500 (varies by provider) for canceling service before the contract expires. However, some providers utilize a Liquidated Damages clause, which usually costs the merchants much more.
In legal terms, “Liquidated Damages” clauses are used in contracts to protect one or more parties from “injury” or “loss” caused by another party of the contract if the loss is “uncertain” or “difficult to quantify.” Merchant account providers that use this clause construe it to define that injury is caused to them by the loss of profit that would have been collected throughout the term of the merchant’s contract. In other words, under a Liquidated Damages clause, if a merchant cancels service while under contract, the merchant will have to pay all future remaining monthly fees plus estimated profit from processing fees as a cancellation fee. Often times, Liquidated Damages cancellation fees run into the thousands of dollars and catch most merchants by surprise. The largest fee this reviewer has seen was $7,500.
To make matters worse, the most dubious merchant account providers will include Liquidated Damages clauses into auto-renewing contracts that only allow merchants to cancel service during a small window of time, usually within 30 days of the contract expiration. It is important to note that the law in many states says that a Liquidated Damages provision will not be enforced if the penalty is unreasonably great in relation to the probable loss or injury. If you are experiencing this situation, you may want to contact your state’s attorney general to file a complaint.
It is inadvisable to sign a merchant account agreement with a Liquidated Damages clause as part of the cancellation penalty. Very often, merchant account providers that have this clause score very poorly in reviews and have numerous complaints filed against them. Check out our top recommended credit card processors, most of which offer month-to-month contracts and no cancellation fees.
Is a provider charging you a Liquidated Damages fee? Share your story in the comment section below.