Zomaron Inc. v. The Queen

Zomaron Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-03-13
Neutral citation
2020 TCC 35
File numbers
2016-1542(GST)G
Judges and Taxing Officers
Kathleen T. Lyons
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2016-1542(GST)G
BETWEEN:
ZOMARON INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 23 and January 24, 2019, at Toronto, Ontario
Before: The Honourable Justice K. Lyons
Appearances:
Counsel for the Appellant:
Jacob Yau
Yves St-Cyr
Counsel for the Respondent:
Charles M. Camirand
AMENDED JUDGMENT
The appeals made under the Excise Tax Act:
1. of the reassessment by notice dated January 12, 2016 for the reporting period from January 1, 2013 to December 8, 2013; and
2. of the assessment by notice dated March 24, 2015 for the reporting period from April 1, 2014 to June 30, 2014;
are allowed and the reassessment and assessment are referred back to the Minister of National Revenue for reconsideration and reassessment, in accordance with the Reasons for Judgment, on the basis that the supply of services rendered by the appellant for consideration received is an exempt supply of arranging for a financial service.
Costs are awarded to the appellant. The parties shall have 30 days from the date of this Judgment to reach an agreement on costs. Failing that, the parties shall have 30 days to file written submissions on costs. Submissions shall be no more than 10 pages.
This Amended Judgment is issued in substitution of the Judgment dated February 28, 2020 to amend the hearing dates as well as typographical errors in paragraph 21 and footnote 34.
Signed at Ottawa, Canada, this 13 day of March 2020.
“K. Lyons”
Lyons J.
Citation: 2020 TCC 35
Date: 20200228
Docket: 2016-1542(GST)G
BETWEEN:
ZOMARON INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Lyons J.
[1] Zomaron Inc. (“Zomaron” or the “appellant”) appeals the reassessment and assessment for the periods in issue made by the Minister of National Revenue. The Minister included in Zomaron’s net tax harmonized sales tax collectible on fees it received as consideration for its services in respect of Elavon Canada Company (“Elavon”) and First Data Loan Company, Canada (“First Data”) providing merchants with payment processing services for credit and debit card (“card”) transactions accepted by merchants for goods and services sold by merchants to customers.
[2] Elavon and First Data paid fees to Zomaron for its services which included, amongst other things, Zomaron negotiating with and obtaining from prospective merchants a commitment to receive card payment processing services from Elavon and First Data.
I. Issue
[3] The issue is whether supply rendered by Zomaron in consideration for the fees it received from Elavon and First Data constitutes an exempt “financial service” within the meaning of paragraph (l) of the definition in subsection 123(1) of Part IX of the Excise Tax Act (the “Act”) or a taxable supply.
[4] Zomaron asserts it was an intermediary “arranging for” card processing payment processing services, a financial service, to be provided by Elavon and First Data to merchants. Accordingly, Zomaron’s services in respect of the goods and services tax/harmonized sales tax in issue (collectively “GST”) constitutes a financial service defined in subsection 123(1) of the Act, and is therefore exempt from GST pursuant to Schedule V, Part VII of the Act. Conversely, the respondent contends Zomaron’s supply of services were preparatory and promotional that fall within an exception to the definition of financial services by virtue of the application of paragraph 123(1)(r.4) of the Act and thus is a taxable supply.
[5] Tarique Al-Ansari is the president and Chief Executive Officer of Zomaron to whom the executive management team reports. Mia Huntington is the Senior Vice President and General Manager of Elavon. Ms. Huntington’s testimony was largely consistent with that of Mr. Al-Ansari’s evidence. I found both to be credible witnesses.
II. Facts
Partial Agreed Statement of Facts
[6] The parties tendered a Partial Agreed Statement of Facts (“PASF”) and agreed to certain exhibits as evidence. [1] The PASF, in part, states as follows:
1. The assessments are for the periods from January 1, 2013 to December 8, 2013 and from April 1, 2014 to June 30, 2014 (collectively, the “Period”).
2. The amounts in dispute relate solely to consideration paid by Elavon Canada Company (“Elavon”) and First Data Loan Company, Canada (“First Data”) to the Appellant during the Period. During the Period, payments received by Elavon accounted for approximately 99% of the total consideration received by the Appellant.
3. The relationship between the Appellant (Zomaron Inc.) and Elavon commenced in October 2009 when the parties entered into a standard-form agreement used by Elavon to set out and formalize certain basic obligations of both Elavon and an ISO/MSP partner (the “Elavon Agreement”). A copy of the Elavon Agreement is attached as Exhibit “1”. A copy of the agreement with First Data (the “First Data Agreement”) is attached as Exhibit “2”.
4. Elavon and First Data are “merchant acquirers” or “merchant processors”, (collectively, the “Acquirers/Processors”) providing merchants with payment processing services for credit and debit card transactions (i.e. Visa, MasterCard, American Express and Interac). The Acquirer/Processor’s customers are the merchants at whose premises or on whose websites such payment cards are used by cardholders to pay for goods and services.
5. The Acquirers/Processors acquire merchants through various channels, including the use of Independent Sales Organizations (“ISOs”) and Member Service Providers (“MSPs”). The Appellant is a registered ISO (for Visa) and MSP (for Mastercard). IS0s/MSPs are registered with Visa or Mastercard and must comply with various rules and regulations, including the payment network regulations established by these credit brands.
6. The Appellant is primarily responsible for, inter alia, seeking out prospective merchants to receive card payment services provided by the Acquirers/Processors, negotiating with the prospective merchants the rates and fees of such card payment services, and may also negotiate certain terms and conditions related to such card payment services, to the extent provided in the Merchant Application form, attached as Exhibit “3”, in the case of Elavon. The terms and conditions that are included by reference in the Merchant Application are collectively attached as Exhibit “4”. The equivalent Merchant Application and terms and conditions relevant to First Data are attached as Exhibit “5” and Exhibit “6”, respectively.
7. The Merchant Application form is submitted to the Acquirers/Processors. Once approved by the Acquirer/Processor, the merchant becomes contractually bound to the Acquirer/Processor according to the terms negotiated in the Merchant Application and the terms and conditions included by reference.
8. Every time a payment card is used to pay for a good or service sold by a merchant to its customer, there are several layers of fees charged by various parties to the merchant. The aggregate fee charged by Visa and MasterCard (the card brands) and the card issuer (e.g. TD Bank, CIBC, Scotiabank, etc.) on all credit card transactions is called an “interchange fee”. The interchange fee covers the costs of the issuing bank and card providers and will vary depending on several factors, including the type of card (debit, credit or rewards cards) and the type of transaction and related risk (e.g. a retail transaction vs online transaction over the internet). For instance, a Visa card with travel points/rewards used on an eCommerce website will have a higher interchange fee than credit cards that have no rewards.
9. For each payment processing transaction it does for a merchant, the Acquirer/Processor charges a separate fee on each transaction, which is in addition to the interchange fee. The aggregate of the interchange fee and the Acquirer/Processor’s fee is known as a “buy rate”.
10. The Appellant’s revenue for the service it supplies to the Acquirer/Processor are calculated according to the formula contained in schedule “A” to the Elavon Agreement or schedule “A” to the First Data Agreement, as the case may be.
11. Generally, the Appellant’s revenue is calculated based on the difference between the amount that it negotiates with a prospective merchant and the buy rate (the “markup”). This mark-up is shared between the Appellant and the Acquirer/Processor. The Appellant’s share increases according to the monthly volume and size of the payment processing transactions processed by the Acquirer/Processor to the merchants recruited by the Appellant.
12. If the Appellant negotiates a rate with the merchant that is higher than the buy rate, the Appellant will profit from a transaction. If, however, the Appellant negotiates a rate that is less than the buy rate, it will incur a loss. Due to interchange fees varying across 100+ different card types, an Appellant may negotiate rates at a loss position for some transaction types and at a profit position for others as a pricing strategy in order to entice prospective merchants. Ultimately it is on the Appellant, to balance negotiating a competitive price with merchants and remaining profitable.
13. In addition to the duties and obligations set out in this standard-form agreement, the appellant provides numerous services to the Acquirers/Processors, including the following:
• The Acquirers/Processors rely on the Appellant to, inter alia, locate prospective merchants, complete with a prospective merchant the Merchant Application, and gather information including verifying if the merchant continues to comply with payment network requirements.
• The Appellant has considerable autonomy in respect of the negotiations involved with prospective merchants. This includes setting, establishing, and adjusting, inter alia, the following:
o rates and pricing in respect of each and every type of payment card;
o length of contract; and
o sale price, installation
o and, in the case of Elavon, merchant support.
14. The Acquirer/Processor is not involved in the negotiation process with prospective merchants. The Appellant may negotiate prices that are above or below the established buy rates, for example the Appellant may offer pricing to a merchant that is below the buy rate as a pricing strategy. In such circumstances, and subject to paragraph 20, the Appellant would incur a loss on each card transaction at that merchant.
15. As part of completing a Merchant Application, and in order to determine appropriate pricing during negotiations with prospective merchants, the Appellant analyzes all of the relevant factors, such as:
• type of business or industry;
• level of competition;
• volume of transactions;
• merchant location;
• size of each transaction;
• types of cards that customers would use at any particular merchant; and
• methods used by a merchant to process a card (such as via POS device, Internet, telephone, or otherwise).
16. The Appellant verifies the legitimacy of the merchant’s business, including conducting site surveys and reporting any indication that the merchant’s activities are anything other than bona fide sales of products or services and aids in ongoing compliance with policies such as anti-money laundering and know-your-customer requirements of the payment industry.
17. The Appellant spends considerable amount of time, effort and funds in delivery of these services, to ensure its employees are trained to explain the acquiring services to merchants, in conducting the verification of merchants and, in the case of Elavon, providing training services to merchants.
18. As consideration for its services, the appellant receives a portion of the transaction fee. The Appellant’s compensation is tied directly to the merchant transactions throughout the entire term of the relationship. The Appellant receives a portion of the fee paid by the merchant for every transaction processed through the Acquirer/Processor. The Appellant does not receive any separate remuneration for any administration or customer services rendered.
19. Both the merchant and the Acquirers/Processors have a high degree of reliance on the Appellant in its performance of these activities. The Appellant maintains an on-going relationship with both the merchant and the Acquirers/Processors.
20. The Acquirer/Processor reserves the right to accept or deny any potential merchant, on the basis of credit worthiness and associated risk of the particular business. The Appellant’s approval rate on merchants submitted to Elavon was over 98% during the Period.
21. For the services provided to the Acquirers/Processors, the Appellant received a total of $1,189,863.71 and $454,044.66 for its 2013 and 2014 reporting periods, respectively.
22. The Appellant did not collect and remit GST/HST in respect of the supplies at issue, taking the position that they were “financial services” within the meaning of subsection 123(1) of the Excise Tax Act (the “Act”) and were exempt from GST/HST pursuant to Schedule V, Part VII of the Act.
[7] For brevity, in these reasons I will refer to the Acquirers/Processors, Elavon and First Data, collectively as the “Processors.” I will also refer to the Elavon Agreement and the First Data Agreement collectively as the “Agreements.”
Witnesses
[8] Mr. Al-Ansari testified that, in seeking and soliciting prospective merchants, Zomaron educates merchants, partly using websites, on the payment processing industry (“Industry”) and the use of Zomaron’s services over those of other ISO/MSPs. Before becoming an ISO/MSP, Zomaron was required to find a partnering acquirer/processor; this entails several steps. [2] An ISO/MSP must then register with Visa and MasterCard, and Zomaron did so. Only then, he said, can an ISO/MSP sign up merchants to accept card payment processing services with acquirers/processors. An annual due diligence process is conducted by acquirers/processors. [3]
[9] Elavon is a merchant acquirer providing businesses with payment processing services for card transactions at the merchant’s premises or websites. It distributes payment processing services through multiple distribution channels. Ms. Huntington said these include ISOs/MSPs and some non-ISO/MSP channels like inside sales, tele-sales, and sales representatives. ISOs/MSPs provide services related to payment processing and approximately 65% of all revenues earned by Elavon in Canada are generated through the ISO/MSP channel. The level of service provided by an ISO/MSP to a merchant depends on the ISO/MSP; this gives an ISO/MSP the opportunity to differentiate themselves. She described Zomaron as providing the highest level of service to maintain the customer base. Zomaron represents between 5.5% to 6% of all of Elavon’s revenues in Canada.
[10] Ms. Huntington produced a letter from Elavon sent to Canada Revenue Agency in December 2017. It indicated, in part, that Elavon relied heavily on Zomaron and as an ISO/MSP it is responsible for identifying target market segments, lead generation, pipeline management of self-sourced opportunities, requirements gathering and solution design, point of sale equipment, as well as negotiating processing rates and terms with prospective merchants. After the merchant account is established, the ISO/MSP provides ongoing, first-line customer service to the merchant.” [4] Her testimony was consistent with its content.
[11] During the Period, 2000 merchants of varying sizes in various industries processed $2 billion worth of transactions annually and had signed up for payment processing accounts through Zomaron. [5] Currently, Zomaron has over 5000 merchants.
[12] Zomaron is required to comply with the governing rules and regulations of payment networks and other organizations. All of Zomaron’s sales agents are registered individuals with the Processors and are trained by Zomaron on the card payment processing Industry. They are also trained regarding the rules of the Financial Consumer Agency of Canada (“FCAC”)’s Code of Conduct (the “Code”) and fee negotiations. [6] Zomaron is subject to these rules and the Code, all of which are designed to protect merchants and provide guidelines to ISOs/MSPs upon signing up merchants, disclosing fees, switching processors, and the right to terminate agreements. Zomaron must submit information to FCAC to demonstrate compliance with the Code.
The Industry
[13] Generally, MasterCard and Visa provide the infrastructure within the Industry to participants to facilitate processing of card payments and transfer of funds electronically. MasterCard and Visa allow financial institutions to issue credit and debit cards to customers who then use the cards to purchase goods or services from merchants. Elavon, as a Processor, processes the card transactions via the network enabling the merchant to accept the card payments and then receive the funds for same.
[14] Industry participants and their respective roles are as follows:
i) The ISO/MSP connects a merchant with an acquirer/processor.
ii) The acquirer sets up the merchant account. The payment processor is the network that communicates the transaction electronically from the merchant’s place of business through to payment networks. [7]
iii) Combined, the acquirer/processor setup the processing account enabling the acceptance of the card payment by the merchant in its place of business and the processor then collects funds from the card issuer and deposits same into the merchant’s bank account and debits fees from the account monthly.
iv) The payment network or card brand (Visa, MasterCard, American Express and Interac) connects the card issuer (for example, TD Bank) with the merchant.
v) The card issuer issues the card to the cardholder/customer whom uses the card as payment to purchase goods or services from the merchant.
[15] Appendix I to these reasons is an overview depicting the flow of a transaction within the Credit Card Payment Processing network. To illustrate a typical transaction, assume the following: During negotiations, Zomaron and the merchant agreed that the merchant would pay 2% on all transactions that the merchant accepts from customers using such cards. The merchant, a flower shop, sells flowers to a customer for $100. TD Bank, the card issuer of the TD MasterCard, and MasterCard, the card brand, is the payment network that connects the TD Bank with the merchant. Elavon collects $100 from TD Bank (the customer’s issuing bank as it is a TD MasterCard) and deposits the $100 to the merchant’s bank account the next day. [8] The merchant nets $98. At month’s end, Elavon collects the $2 merchant fee (2%) from the merchant’s bank account which is then shared by various Industry participants as follows.
[16] Of the $2 fee, Elavon pays $1.50 (the interchange fee) to the card issuer and payment network ($1.30 and 20 cents, respectively). [9] The remaining 50 cents (the “mark-up”) is the revenue shared between Elavon and Zomaron; this is a negotiated split of 30% - 70%, respectively. Therefore, Elavon retains 15 cents and pays Zomaron 35 cents, representing its portion of the fee as consideration for services. Zomaron has the discretion to negotiate the mark-up with the merchant. During the Period, Zomaron retained 70% of the mark-up with Elavon and 75% of the mark-up with First Data.
Merchant Application
[17] In describing the negotiation process and how the merchant’s fees are determined, Mr. Al-Ansari referred to the document named “Merchant Application/Zomaron Merchant Services” (the “Application”) and said Zomaron has complete autonomy over all aspects of the Application. The Application is used by Zomaron in its interactions with merchants to input information. [10] For example: the final negotiated fees for various card types; processing services; the merchant’s commercial bank account information to enable Processors to deposit funds and debit fees monthly; the merchant’s selection of payment processing equipment; and the merchant’s background information.
[18] The Application also includes merchant representations, the terms and conditions. [11] During cross-examination, Mr. Al-Ansari stated that, though they are not clearly separated in the Application, the Application encompasses both Elavon’s and Zomaron’s terms and conditions. He pointed to the hyperlinks included on page 3 of the Application and Elavon’s merchant operating guide and terms of service. If accepted by Elavon, it and the merchant become contractually bound based on the terms and conditions negotiated and those incorporated into the signed Application that had been forwarded to Elavon; no further agreement exists between Elavon and the merchant. Zomaron’s service terms and conditions are on page 5 of the Application.
[19] To determine the risk associated with the merchant and ultimately negotiate the rates, Zomaron considers the merchant’s industry averages and analyses the merchant’s last three months of payment processing history provided by the merchant’s current processor. Mr. Al-Ansari said that determining the appropriate price, rates, and fees involve a multitude of factors that requires extensive business analysis so it can then conduct negotiations with merchants.
[20] Determining the rates engages multiple factors, such as: whether cards are physically presented (less risk) or payment is accepted over the phone (more risk); the average transaction size and monthly volume of transactions; the seasonality of the merchant’s business; the card types that the merchant accepts (or wants to) and its clientele; the sophistication of the merchant’s phone system; tip option; merchant surcharge feature for payment under a certain amount; and the frequency and mode (automatic or manual) that the merchant prefers to receive the money that is processed through the transactions. Cost varies based on the nature of the merchant’s business, the type of goods or services sold and whether these are consumed or received immediately (less risk) or received at a later date (more risk).
[21] Different Industry pricing methods also exist. In tiered pricing, card types are grouped for simplicity. Enhanced pricing (mostly for sophisticated merchants) provides greater transparency as merchants or its staff want to understand the different card types and features. Zomaron would charge “cost plus” or an “enhanced cost plus pricing” to the transaction in addition to the negotiated fee. Interac fees operate on a debit network rather than credit network, thus the negotiated fee will be a fixed fee.
[22] In addition to the basic transaction rates, Zomaron has the sole discretion to determine the fees to the merchant for other services or costs related to the card transactions. [12] Elavon will provide Zomaron with the cost of these other services and Zomaron has the discretion to mark up the cost and earn revenue, pass the cost along to the merchant, or price the service at a loss to Zomaron. While for some of these additional fees the mark-up is not shared between Zomaron and Elavon, the majority of the mark-ups are split between the two. Zomaron’s competitive advantage, Mr. Al-Ansari said, is it can lower the payment processing rates and can offer dedicated and local support and service to its merchants.
[23] Once the Application is signed, Elavon usually has no ability to adjust or change these rates. Ms. Huntington confirmed that Zomaron has full autonomy over pricing of transactions, as per Mr. Al-Ansari’s testimony, and said only in rare and extreme cases would Elavon approach Zomaron regarding pricing. For example, if Zomaron overlooked a rate or fee, Elavon would flag this and Zomaron would revisit this with merchant. Elavon would only provide input upon Zomaron’s request. Even if there was an underperforming fee, she stated that Elavon would simply reach out to Zomaron and discuss the pricing, but ultimately Zomaron has the right to implement the loss pricing strategy. Elavon merely provides Zomaron with a “buy rate”. The interchange fee and Elavon’s fee combined is the buy rate. Zomaron’s revenue is based on the difference between the amount it negotiates with a prospective merchant and the buy-rate.
[24] After the Application is completed and signed by the merchant, Zomaron’s sales agent forwards it to Zomaron’s office. Zomaron then performs a verification call, reviews the terms, fees and rates, submits the information electronically to Elavon and then connects the merchant with Elavon.
[25] In the Industry, the risk-reward is quite vast, Ms. Huntington said. She explained that Elavon may be transferring millions of dollars to a merchant during a year but only making pennies on each transaction. In determining the risk level, Elavon resorts to the use of actuarial sciences. The information in the Application provided by Zomaron and Elavon puts a lot of effort into understanding the merchant’s business and the financial risk.
[26] Upon receipt of an Application, Elavon’s underwriting team performs checks (credit, background and regulatory), satisfies screening requirements, reviews the nature of the merchant’s business and financials and conducts a risk analysis as to the products or services. Elavon has the right to accept or deny any potential merchant underwritten on the basis of credit worthiness and associated risk of the particular business. [13] When Elavon issues a merchant account, it is effectively agreeing to underwrite a loan to the merchant given that Elavon deposits the funds from the transaction shortly after the transaction is approved. This poses a significant financial risk to both. [14] For risk prevention, Elavon monitors the merchants and the transactions. Pre-approval, if Elavon wants modifications to be made to the Merchant Agreement, Elavon instructs Zomaron and it contacts the merchant. Once approved, Elavon sets up a merchant processing account and notifies Zomaron.
[27] Zomaron then acquires devices and sets up the merchant’s business with terminals and related equipment linked to the merchant processing account with the Processors so that the Processors can start processing card payment transactions. Zomaron provides ongoing service and support for the merchant processing terminals.
[28] Post sign-up, if a merchant experiences problems or wants to modify the price, Zomaron deals with it. In the latter instance, Zomaron will submit a “rate change form” to Elavon.
[29] Elavon very rarely communicates directly with merchants. All communication occurs between Zomaron and the merchant. Contacting the ISO/MSP rather than the Processor is an Industry standard. If a merchant contacts Elavon, a “pop-up box” appears in its system with Zomaron’s contact information. Elavon will redirect the merchant to Zomaron by transferring the caller or by providing the contact information. If a merchant contacted Elavon to change a rate or receive a lower fee, invariably Elavon refers the merchant to Zomaron. If a merchant called Elavon requesting cancellation of the account, Elavon defers the request to Zomaron to deal with and Zomaron attempts to save the account. For minor issues, however, like a terminal paper jam, Elavon will assist.
Agreements
[30] References to “sections” below refer to the sections in the respective Agreements.
[31] Mr. Al-Ansari said that the services provided by Zomaron for First Data and the terms and conditions in the First Data Agreement governing their relationship are virtually the same as those performed for Elavon, and Zomaron had less activity as it relates to First Data during the Period. I concur that there are similarities as between the Agreements. Hence, most of the focus in these reasons will be on the Elavon Agreement but the reasoning will equally apply to First Data.
(1) Elavon Agreement
[32] Explanations provided by Mr. Al-Ansari and Ms. Huntington of the services provided by Zomaron for Elavon are consistent and congruent with the contents of the Elavon Agreement; they each had a similar understanding as to the terms and conditions.
[33] The preamble to the Elavon Agreement reads in part:
PURPOSE OF AGREEMENT: The purpose of this agreement is to set forth the terms and conditions under which MSP shall refer to Elavon and Member prospective merchants meeting the qualifications of Elavon and Member for the purpose of providing to such merchants financial transaction processing services, and to set forth the compensation Elavon and Member shall pay to MSP for such referrals and other services as described herein.
[34] The term “Merchant Agreement” is defined in section 1.1.10 as follows:
Merchant Agreement shall mean a written agreement between (i) Elavon (and a Member to the extent required by the Payment Network Regulations), and (ii) a merchant, pursuant to which the merchant undertakes to honor Financial Transaction Devices.
[35] Section 2 describes the duties and obligations of Zomaron. Sections 2, 2.1, 2.2, 2.3, 2.5, 2.10, 2.10.1 to 2.10.3, 2.12 and 2.14 state:
2. DUTIES AND OBLIGATIONS OF MSP.
2.1 Recruitment of Merchants. MSP will actively, and through the use of all reasonable efforts, market the Merchant Services offered by Elavon and Member to prospective merchants. Such marketing services and assistance shall include, without limitation, the distribution by MSP of promotional and informational materials and supplies relating to the Merchant Services provided by Elavon.
2.2 Underwriting/Approval. All such referrals shall be communicated by MSP to Elavon in an approved manner. Elavon shall process any referral and corresponding merchant application in accordance with the credit and risk policies & underwriting guidelines and other practices and procedures then in effect for Elavon and Member (collectively, the “Underwriting Guidelines,” attached hereto as “Schedule A”). Such Underwriting Guidelines may be modified or amended from time to time and communicated to MSP in an acceptable manner as prescribed herein. Elavon and Member each reserve the right in their sole discretion to refuse to sign a Merchant Agreement with any merchant referred by MSP.
2.3 Merchant Agreements. Merchants referred by MSP and accepted by Elavon and Member have a direct business relationship with Elavon and Member and are required to enter into a Merchant Agreement that will govern the relationship between Merchant, Elavon and Member. MSP will not be a party to any such Merchant Agreement. Elavon will provide MSP with access to the approved form of merchant application and copies of the Merchant Agreements (currently comprised of “Terms of Service” and “Merchant Operating Guide”) that must be provided to all merchants in connection with the services offered.
2.5 Ownership of Referred Merchants. MSP acknowledges and agrees that any merchant that is a party to a Merchant Agreement does and shall have a direct business relationship with Elavon (and a Member to the extent required by the Payment Network Regulations). Subject to the Payment Network Regulations, and notwithstanding anything to the contrary in any Merchant Agreement, Elavon shall administer and control the Merchant Agreements and the relationship created thereby (such control shall include, without limitation, decisions regarding the continuance, amendment, assignment or termination of such Merchant Agreement).
2.10 Services Provided by MSP. In addition to the duties of MSP described elsewhere in this Agreement, MSP shall provide certain services to the Referred Merchants on behalf of Elavon and Member as set forth below. In the event of a failure to provide an adequate level of service, Elavon may, in its discretion, discontinue payment of any residuals for the affected Referred Merchant. As such, MSP shall provide the following services on behalf of Elavon and Member to the Referred Merchants:
2.10.1 Training. MSP shall provide to each Referred Merchant the necessary training with regard to the procedures and Payment Network Regulations applicable to the acceptance of FTDs, the operation of terminal equipment and the use of Elavon products and services. MSP shall initially train the Referred Merchants and will include, when appropriate, distribution of a merchant set-up kit. MSP shall also train new employees of the Referred Merchant as MSP deems necessary, provided, however, that regardless of the method of training employed by MSP, such training shall comply with the provisions of this Agreement.
2.10.2 Merchant Support. MSP shall provide reasonable ongoing support to each Referred Merchant and will make every reasonable effort to remedy any customer service problems encountered by such Referred Merchants. MSP shall supervise such personnel it may engage as employees or agents in activities hereunder. MSP shall have sole responsibility for all such personnel and shall assure full compliance by all such personnel with the terms and provisions of this Agreement.
2.10.3 Proof of Existence. MSP will provide appropriate proof of existence for each Referred Merchant in accordance with the Underwriting Guidelines.
2.12 Excluded Types of Merchants. MSP agrees that neither MSP nor any of its employees, affiliates, subsidiaries or agents will solicit an existing customer or merchant of Elavon or Member, or their respective parents, subsidiaries or affiliates.
2.14 Advertising/Sales Materials. All advertising and/or sales materials used by MSP shall be in compliance with the Payment Network Regulations. Elavon will give MSP notice of any non-compliance of which it becomes aware.
[36] Section 11 sets out the compensation buyout. Sections 11 and 11.3 state:
11. COMPENSATION BUY-OUT
11.1 Compensation Buyout. Elavon shall have the option, in its sole discretion, to offer to make a one-time payment to MSP to buy out MSP’s rights to receive Compensation for a Referred Merchant or group of Referred Merchants under this Agreement (the “Residual Buy-Out Payment”).
11.3 Transfer Option. Notwithstanding the solicitation restrictions set forth in this Agreement, MSP may seek to move those Referred Merchant accounts opened with Elavon to another processor or financial institution, provided that each merchant to be moved has processed with Elavon for a minimum of three (3) years. Elavon’s ownership of any such accounts to be moved will not terminate until receipt of written notice from each Merchant. MSP must give Elavon at least 90 days notice of its intent to exercise its rights under this provision.
[37] In response to questions put to him, Mr. Al-Ansari testified that references to “shall refer” and to “such referrals” in the preamble do not accurately describe the services Zomaron provided. Rather, it took several steps leading to the successful acceptance by merchants of the financial transaction processing of payments. [15] Ms. Huntington indicated that “shall refer” means recruiting, prospecting, soliciting and bringing together. Clearly, the Agreements, the PASF and witness testimony confirm Zomaron provided “other services” beyond recruiting. [16]
[38] Even though section 2.1 states Zomaron will “market” Merchant Services offered by Elavon, Mr. Al-Ansari refuted that as a misstatement and said that Zomaron does not have a relationship with Elavon’s marketing department. Typically, ISOs/MSPs do not conduct marketing services similar to a marketing agency and they have multiple partnering Processors. Processors include such provisions in an agreement so that ISOs/MSPs use their best efforts to sign up merchants with them instead of another Processor. Both witnesses said that Zomaron does not carry out any marketing, promoting, or advertising activities on behalf of Elavon. I accept their explanations on these aspects in light of other evidence that is consistent with that.
[39] With respect to section 2.3 and the reference to a “direct business relationship” between the merchant and Elavon, Mr. Al-Ansari indicated that simply means that the financial services are offered directly by Elavon. That is, Elavon deposits the funds into and debits the fees from the merchant’s bank account. Ms. Huntington said the Elavon Agreement had to be drafted that way because Zomaron was not a Visa or MasterCard member. Perhaps she was referring to something else or was mistaken as her comment about membership appears to conflict with Mr. Al-Ansari’s testimony to the contrary. I accept his evidence on that.
[40] Regarding section 2.5 and Elavon’s ability to control, Ms. Huntington explained that that was merely intended to allow Elavon to close a merchant account because of any potential concerns from a risk or loss prevention perspective.
[41] The reference in section 11 to “Compensation buyout” was characterized by Ms. Huntington as providing the ISO/MSP with an exit strategy where Elavon can buy back the residuals that the ISO/MSP would have received over time and Elavon can take ownership of that merchant. That occurs frequently within the Industry.
[42] As to the section 11.3 “Transfer option”, Mr. Al-Ansari said that effectively permits Zomaron to move a merchant’s open account from one Processor to another. He remarked that these provisions show the complexity in the Industry where the direct relationship is with the Processors for such purposes but Zomaron owns the merchant relationship. Ms. Huntington’s explanation was, because the Industry is very competitive and rate compression is quite frequent, the provisions caution against constant merchant transferring such that Elavon requires the merchant to stay for a minimum of three years.
(2) First Data Agreement
[43] The recitals of the First Data Agreement (titled the Marketing Agreement) state:
RECITALS
A. First Data has established and maintains a Merchant Program for the processing and settlement of Bank Card Transactions.
B. First Data wishes to contract with ISO to market the Program to prospective Merchants, and ISO is willing to perform such services, on the terms and conditions set forth in this Agreement.
[44] The terms “Merchant” and “Program Standards” are defined as follows:
“Merchant” means each merchant, with a location or multiple locations in Canada, solicited by ISO on behalf of and approved by First Data, to be a party to a Merchant Agreement.
“Program Standards” means the credit criteria, standards and policies and procedures established by First Data, to be used by ISO in connection with the solicitation of prospective Merchants and other policies, procedures, fines and penalties established by First Data, that are designed to promote Merchant satisfaction, to preserve relationships with existing Merchants, to facilitate the growth of the Program, and to ensure the financial safety or soundness of First Data and its Program. Attached as Schedule B is a list of certain categories of merchants who are always unacceptable under the Program. The Program Standards, including but not limited to the list of unacceptable businesses in Schedule B, may be modified by First Data from time to time in its sole discretion.
[45] Section 2 describes the obligations of Zomaron to First Data. It states, in part, that:
2. Obligations of ISO.
(a) ISO shall use its best efforts to solicit prospective merchants to execute Merchant Agreements with First Data and shall promote First Data’s Program as its preferred offering. “Preferred Offering” means that ISO will utilize First Data’s Program unless …. In furtherance of ISO’s solicitation of Merchants, ISO will (i) communicate to Merchants the existence and availability of the Program, provided that the nature and content of such communication shall be in the reasonable discretion of First Data; (ii) distribute promotional materials approved by First Data regarding the Program, to its Merchants; and