I bring you glad tidings of a new post by Glenn West on Weil’s Global Private Equity Watch blog. It’s entitled On Naval Ramming Bows and Contractual Boilerplate—Are Standard “No Third-Party Beneficiary” Clauses Always a Good Thing?
To whet your appetite, I present you the key bits:
Glenn reminds us of the limited utility of no-third-party-beneficiary provisions:
While most contracts contain an express provision that negates any intent by the contracting parties to benefit any third party, the absence of a “no third-party beneficiary” provision does not create any presumption that there is an actual intent to benefit a nonparty; and that is so even when the parties know that their performance of the contract will in fact benefit a third party. Instead, what the law requires to permit a nonparty to enforce a contract between the actual named parties to a contract is a clear expression of intent in that contract creating rights in favor of that nonparty. The concept that someone can be an implied third-party beneficiary is overstated and largely a myth.
Including a no-third-party-beneficiary provision can help you avoid a fight with someone claiming to be an intended third-party beneficiary. But beware of unintended consequences:
Carefully determine which provisions of your contract are actually intended to benefit and be enforceable by a nonparty (typically affiliates in the private equity context) and carve those provisions out from the standard “no third-party beneficiary” provision, else you may find yourself trying to explain how the “no third-party beneficiary” provision does not trump the otherwise clear intent to benefit nonparty affiliates.
By the way, with Glenn you get some erudition with the contracts stuff. The Battle of Lissa! 1866! By contrast, I’m clearly something of an unrepentant vulgarian. *sniff*
Tim Murray recently wrote about this and mentioned Doyle v. Jewell, 2015 U.S. Dist. LEXIS 47766, *15 (D. Utah 2015) in which the court determined that a generic general disclaimer was insufficient to deny someone status as a third-party beneficiary where it appears that the contract may have been intended to benefit a third-party. The solution, he wrote, is to add a sort of “damn it, I mean it!” sentence and specifically mention the third-party to be excluded.
– Krumhorn
Thank you. That’s useful to know.
The Tim Murray article discusses many drafting pitfalls, many in ways that would make Ken nod approvingly, some not (such as favoring the incorporation of recitaIs into what Mr. Murray calls “the operative provisions” and Ken “the body” of the contract. This is the cite to the what I think is the correct Tim Murray article: https://www.lexisnexis.com/lexis-practice-advisor/the-journal/b/lpa/archive/2016/09/13/contract-drafting-landmines.aspx
Ken,
Sorry to be late to the party.
‘This agreement has no nonparty beneficiaries’ or similar seems a feeble way to go at the goal.
A fiercer way would be the two following sentences:
(1) ‘By this agreement, no party takes on any duty to a nonparty nor grants a nonparty a right to enforce any provision of this agreement, even a provision whose enforcement would benefit a nonparty’.
(2) ‘To the extent it can do so, each party [hereby?] disclaims, releases, and waives the right of any nonparty to enforce this agreement in whole or part’.
A court could refuse to give effect to the sentences, but all a drafter can do is all a drafter can do. If the parties want carve-outs for affiliates, do carve-outs.
My category of contract language analysis for the two sentences is as follows:
(1) The first sentence (a) negates a duty and (b) denies granting a right, so I’m guessing (a) language of discretion (by analogy to ‘is not required to’) and (b) language of policy (by analogy to — if memory serves — ‘is not hereby assuming the excluded liabilities’).
(2) The second sentence seems like language of performance used to express a condition (‘If we have power to waive, we waive’).
Cordially,
Wright