This sort of flips Eric’s #1 over. The operating company doesn’t have to have authority to bind its Affiliates because they’re just beneficiaries of the rights granted under the contract, until they order, at which time they’re executing their own order form which incorporates the terms of the agreement. So, for example, the license grant is to operating company and its affiliates (and so is the indemnity), the payment obligation is to, and breach claims are made against, operating company or an affiliate that orders directly. So my experience on the customer side is pretty different from Liz H’s on the vendor side, although I hear that argument all the time.

This isn’t an option for everyone, I know, because vendors frequently push back that they want to know who is on the hook, but that’s why it’s nice to be the 800-lb gorilla once in a while. The parent isn’t the guarantor and neither is the operating company if some other Affiliate does the ordering. And we have never actually had a problem with an Affiliate’s performance.

The one thing I’d really like to add to this conversation is that you have to examine your confidentiality provisions very carefully when you extend the benefit of an agreement to affiliates. When you thought about the deal with one party, you may have considered various kinds of people that the other party can disclose to — potential investors, contractors, employees — with different limitations applying to each. You have to work affiliates into that mix. The way I usually think of the maximum parmitted disclosure as being to (a) affiliates, (b) potential investors in the party or its affiliate, (c) contractors of the party, its affiliates, or the potential investors of the party or its affiliate, and (d) employees of any of them. Where you put affiliates in this heirarchy can be very important.

Chris Lemens

The vendor sales team wants the easiest solution that requires the least additional documents for signature. With this objective in mind, I will allow the license to extend to affiliates if:

- “Affiliates” is defined by ownership and control (this could get it’s own thesis) or, if possible, the licensed affiliates are specifically named on an attached exhibit, but if the company is constantly adding/merging entities, probably the parties won’t keep the exhibit up to date by addenda;

- signing party agrees to cause all of its affiliates to comply with all obligations of the agreement, including abiding by license restrictions and non-disclosure obligations

- signing party agrees to be jointly and severally liable for the acts and omissions of its affiliates

- any violation of the terms of the agreement by an affiliate is deemed a violation by the signing party such that vendor can terminate the agreement for all customer entities.

- customer’s indemnity obligations extend to losses caused by the actions of affiliates.

This only works if you have confidence that the party signing is sufficiently funded to support the commitments it’s making to be responsible for the affiliates’ activities. I may be missing something (hope not!) but this is how I contract my way through this common issue.

I agree with D.C.’s comments, and I have these further observations:

(a) This is often not a question of a “parent” company entering into a contract. Given today’s “matrix” structure of international corporate structures, one company entering into a contract is often a “sister” or “cousin” of the companies who will ultimately make purchases under it. (A “parent” company often doesn’t want to busy itself with “transactional” matters).

(b) It is generally not a good idea for one company to enter into a contract “on behalf of” another company. First, the relevant authority needs to be granted, which would be an administrative headache (although I accept that this can be achieved, e.g. through a web of service agreements). On that topic, I agree with the theory of Art’s comments, and side with Cletus’ views on assuming authority. Second, it is uncomfortable for one company to have the authority to bind another: this is because the company receiving the authority may be seen as operating the other’s business. I agree with Cletus’ approach: the various entities were created as “separate” for a reason (i.e. to “prevent mingling of legal obligations”)—if that reason still holds good, it is best to maintain that separateness.
Depending on the deal, I use either the “sublicensing” route, or “series of independent contracts” route (each of which incorporates the terms of the master agreement).

If a parent signs “for and on behalf of” a subsidiary without having such authority, I am not sure that the parent would be bound – again, I see this as the same as an individual signing without authority, when the individual would not be bound. Whether the subsidiary is bound will be governed by the laws on apparent authority, as the counterparty may in some cases be entitled to assume there is sufficient authority.

I think the agency method sounds as if it would be similar to this – it works provided there is actual authority (or if it can be assumed).

I quite like D.C.’s method – it avoids the need for any authorisations at all.

For sales deals where the subsidiaries are additional buyers, I’ve usually gone with a combination of Eric’s #3 and 4: The parent company signs a master agreement requiring the seller to honor a stated pricing schedule and other T&Cs. The master agreement states that both the parent and its subsidiaries can make purchases by placing orders referencing the master agreement. (The master agreement might even contain a template for the order form.) Otherwise, the master agreement doesn’t obligate the parties to do much of anything.

That way:

* When a subsidiary places a purchase order with the seller, the subsidiary doesn’t become a party to the master agreement per se; it’s a party only to its own purchase order agreement. The subsidiary is a third-party beneficiary of the master agreement, but only in the limited sense that it has the right to place orders at the stated pricing and under the stated T&Cs;

* The parent company avoids being liable for the subsidiary’s financial obligations under its purchase orders (unless of course the seller negotiates a guarantee from the parent); that’s something the parent company’s lawyers and finance people will usually want;

* If a lawsuit should come to pass over a particular purchase-order agreement, there’s little room for satellite disputes about who has standing to sue whom and who the necessary parties are.

Comments?

–D. C.