Having a Parent Company Enter Into a Contract “On Behalf” of an Affiliate

A reader recently asked me the following question:

We frequently sign global services agreements that provide that the parent company is signing “for and on behalf” of an affiliate. What do you think of this practice?

I’m uncertain about having a parent sign a contract on behalf of an affiliate. (In any event, the words “for and” are redundant.)

Who has the obligations under these contracts? You have two choices. The affiliate could have the obligations, as in “The Affiliate shall ….” Or the parent could have the obligations, as in “The Parent shall cause the affiliate to …”

Given that it’s the affiliate that’s to perform the services under the contract, it would make sense to have the affiliate bear the obligations. The only reason to have the parent bear the obligations would be to make it liable for the affiliate’s failure to perform. But that could be accomplished more economically by having the parent guarantee the affiliate’s performance of some or all of its obligations.

But let’s assume that you nevertheless elect to have the parent bear the obligations. In that context, I think it’s unhelpful to say that the parent is entering into the contract “on behalf of” the affiliate. By signing the contract, the parent is assuming obligations that run only to the parent, not to the affiliate, so the parent is in effect entering into the contract on its own behalf.

So in answer to your question, I wouldn’t have a parent enter into a contract “on behalf of” an affiliate. Instead, my preferred option would be to have the affiliate sign and make the parent the guarantor. My second choice would be to simply have the parent sign the contract, without any “on behalf of” language.

One context where “on behalf of” might make more sense would be when performance is by a division. But I’d express the concept differently, as I noted in this post.

Posted in Uncategorized | 13 Comments

  • http://www.ericgoldman.org Eric Goldman

    Ken, this is a really complicated problem. In fact, I had an LLM student working on a thesis to look at this problem.

    As the questioner notes, large conglomerates, typically multinational companies, often want an enterprise-wide deal with a vendor that covers both the parent company and all of the subsidiaries and affiliates in the organization. This standardizes the enterprise on a single vendor and can contribute to buying power that improves terms for the entire enterprise. But if you’re the vendor, how do you form the contract? Options include:

    1) Enter into a contract with the parent and treat the subsidiaries as third party beneficiaries (they get the benefit, but the obligations don’t directly bind the subsidiaries because of the lack of privity)
    2) Enter into a contract with the parent, treat the parent as a sublicensor, and require the parent to enter into separate sublicenses with its subsidiaries. This isn’t as crazy as it sounds because there are often intercompany agreements between parent and subs–but in some cases there aren’t.
    3) Enter into separate contracts with each legally independent subsidiary. Obviously, this can greatly increase the transaction costs and administrative time.
    4) Enter into a master agreement with the parent and then have the subsidiaries “join” the master agreement through an expedited contract formation procedure, which puts the subsidiaries into direct contractual privity.

    There are pros and cons to each of these choices. Usually the business client wants to cut corners and find an easy solution to this thorny problem. I don’t believe an easy legal solution exists.

    Eric.

  • Michael

    Isn’t this as simple as using, “Parent as agent for and on behalf of [subsidiaries] …” This makes clear that the parent is signing the agreement as agent for the subsidiaries, which are the principals under the agreement and hence have privity of contract with the counterparty. As agent, the parent would not have privity of contract with the vendor.

    If the intent is for the parent to also be bound, the contract could be drafted as “Parent on its own behalf and as agent for and on behalf of [subsidiaries]…”

    Any flaws in these suggestions?

  • http://www.drafterschoice.com D. C. Toedt

    For services deals where the subsidiaries are the service providers, I like Michael’s approach.

    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.

  • Ken Adams

    Yowza! I was blithely unaware of how subtle an issue this is. I’ll be revisiting it in detail down the road; in the meantime, chime in!

  • Art Markham

    I think “(for and) on behalf of” works, provided that the subsidiary has authorised the parent to sign the agreement on its behalf. If so, the subsidiary is bound as party to the agreement (and not the parent) in the same way that a company is bound if a director or individual authorised under a PoA signs an agreement, when the same form of wording is often used.

    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.

  • Larry Bell

    I would not be satisfied with the agency approach, unless I were presented with resolutions that were reliablly certified, or I received a reliable opinion of counsel, in either case to the effect that each subsidiary has duly appointed the parent as its agent for the purpose of entering into the particular agreement on behalf of the subsidiary and that the agreement will be valid, binding, and enforceable in accordance with its terms (subject to the usual equity and bankruptycy exceptions).

  • Cletus

    Regarding the agency suggestion above, can one necessarily assume a corporate parent has agency authority to bind its subs to a contract? I don’t believe this is always, or even often, the case. I face this issue very frequently, and always assume they are separate legal entities and were structured that way for a reason – i.e., to specifically prevent mingling of legal obligations. I typically strike generic references to “affiliates” in our contracts as that term is rather vague to begin with. I always qustion a client who purports to have authority to bind its subsidiaries (particularly where those subsidiaries are not even identified by name, but merely by a broad generic reference to “affiliates” or “subsidiaries”). Of course, I agree this often creates logistical difficulties and causes conflict with the business guys, but we generally find a way to make it work while still knowing that we have a clearly identified client and a binding agreement with consideration to all parties.

  • Simon Reeves

    I come across this issue a lot.

    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).

  • Liz H.

    I also deal with this a lot, mostly representing software vendors who want to sign one contract to license the entire corporate family as a customer.

    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.

  • Chris Lemens

    I’ve dealt with this a number of ways. Generally, when licensing software, I use the sublicensing approach, with a number of conditions that depend on the business we are in and our pricing model. When dealing with services, I usually do something along the lines of allowing the affiliate to adopt the agreement by placing an order under it. The mechanics of that depend on the service, of course. I;ve also seena lot of deal that are essentially agency arrangements if anyone ever thought about them — which they probably did not.

    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

  • 10803

    I don’t do it as parent on behalf of anyone. To grossly oversimplify things, we have a public holding company that has a number of operating subsidiaries, one of which employs everyone in the US, no matter which operating company they work for, and enters into all commercial contracts. This operating company is the sole party on the hook for performance obligations (payment) and breach, but we expressly state that the benefit of the contract extends to all Affiliates (using the Exchange Act definition), and in the section on ordering goods and services, we say that any Affiliate can place orders directly and that the vendor will look only to that Affiliate.

    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.

  • Sailaja M

    I believe there are also tax implications that a corporation needs to consider before it makes this choice. Is that true?

  • R.S.

    Many many weeks later but I consider Michael's option as an elegant solution with regard to contracts law but it might indeed have tax implications due to the "service" rendered by the parent company that way as an agent for its subsidiaries. Moreover – although this might be due to my Dutch law background and be different under Anglo-Saxon law – an agent is not allowed to sign on behalf of the Principal(s) unless specifically authorised to do so.

    If no inter-company service agreement is in place or the parent company is not explicitly allowed to sign on behalf of the Principal(s) then this might still be problematic tax-wise.