Readers of this blog will be familiar with Glenn West and his articles on extra-contractual liability (click here for a copy) and on consequential damages (click here for a copy). You may recall that Glenn is one of my co-presenters in Koncision’s webcast “Drafting and Reviewing Confidentiality Agreements.”
Well, The Business Lawyer has just published another Glenn article (with co-author Natalie Smeltzer), Protecting the Integrity of the Entity-Specific Contract: The “No Recourse Against Others” Clause—Missing or Ineffective Boilerplate? You can be sure that it represents the definitive treatment of the subject. Go here for a PDF copy.
The one part of Glenn’s articles that might benefit from further attention is the proposed contract language. Glenn, have your people call my people!
Here’s the abstract of the new article:
When business lawyers form corporations and other limited-liability entities to be the specified contracting party to a written agreement, they generally assume that the contracting entity’s parent and affiliates will be insulated from the obligations and liabilities incurred in connection with that entity-specific contract. Too often, this assumption, which is based solely upon the protection provided through the modern limited-liability regimes created by various state statutes, is challenged by equitable and tort-based theories asserted by a disappointed counterparty seeking recourse from persons with whom it did not contract. These challenges are successful more often than is sometimes thought. The authors believe that the owners, directors, and officers of limited-liability entities would obtain substantial benefit from supplementing the limited liability granted through statute with a specifically negotiated contractual provision. While the “no recourse against others” clause commonly found in corporate indentures is a helpful starting point for developing such a provision, this clause may not be as effective against the modern threats to limited liability as some may think because it was originally created to guard against threats that have been largely assigned to the history vaults. Accordingly, consistent with the private equity industry’s modern adaptation of this clause in the context of the documentation of mergers and acquisitions, the authors propose an overhaul of the historical “no recourse against others” clause and an expansion of the use of this updated and modernized clause to all entity-specific contracts.