An Update on Making the Benefits of a Contract Available to Members of a Corporate Group

Via this post on the Delaware Corporate & Commercial Litigation Blog, I learned about a recent opinion of the Delaware Court of Chancery that’s relevant to how one goes about making the benefits of a contract available to members of a corporate group.

Here’s what MSCD 2.55–.56 has to say about that:

It’s commonplace that a member of a group of affiliated business organizations wants to enter into a contract with a supplier or licensor “on behalf of” itself and other members of the corporate group. Such an arrangement would facilitate standardization throughout the group and enhance the group’s buying power while limiting transaction costs.

But from the perspective of the supplier or licensor, such an arrangement would be problematic, in that the other members of the corporate group would be third-party beneficiaries but wouldn’t have any obligations under the contract, as they wouldn’t be party to it.

In Medicalgorithmics S.A. v. AMI Monitoring, Inc., C.A. No. 10948-CB (Del. Ch. Aug. 18, 2016) (PDF here), the court considered the argument that a member of a corporate group couldn’t be liable under a contract because it wasn’t party to the contract. Here’s what the court concluded:

The 2014 SAA was entered into “with the intent to create a separate Strategic Alliance Agreement for AMI Monitoring, Inc. and its Affiliates and Medi-Lynx Cardiac Monitoring, LLC, and its Affiliates.” The agreement includes “Affiliates” within its definition of “Parties” and defines the term “Affiliate” to include a “corporation or other entity controlled by, controlling, or under common control with Supplier or Buyer.” Joe, who signed the 2014 SAA on behalf of AMI, controls both AMI and Spectocor. Thus, Spectocor is an “Affiliate” and was intended to be a party to the 2014 SAA. This reason alone suffices to bind Spectocor.

So at least in Delaware, if a contract is signed by the parent of a corporate group and is explicitly for the benefit of members of that corporate group, that might be enough for members of that corporate group to be liable under the contract, even thought they’re not party to the contract.

But for the following reasons, that doesn’t mean it’s a good idea to assume that that’s the case.

First, I don’t know what the law is in other jurisdictions.

Second, MSCD outlines several structures you could use that would give the members of a corporate group the benefit of a contract while explicitly protecting the supplier or licensor. That would be the clearer and more prudent approach.

And third, including the defined term Affiliate in the definition of the (unnecessary) defined term Parties is clunky, in that each reference to a party would in fact be not only to that party but also to a swarm of affiliates buzzing around it. In many contexts that simply wouldn’t make sense.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

3 thoughts on “An Update on Making the Benefits of a Contract Available to Members of a Corporate Group”

  1. Ken:

    I totally agree with this. One of the things I tend to unfairly blame procurement departments for is putting “and its affiliates” in the defined term “customer” in the lead in to their form contracts.


  2. The lesson here is twofold: (1) Make clear who the parties are (affiliates parties or not?); and (2) Make sure each signer has power to bind and intends to bind the party on whose behalf the signer signs (can Parentco bind “affiliate” Subco? If so, does Parentco mean to bind Subco in this instance? Can Sub-1 bind “affiliate” Sub-2? If so, does it mean to do so here?).

    In the subject case the court held that the affiliate was a party to the contract and that the signatory for the affiliate had power to bind the affiliate. That is, the affiliate was not a nonparty beneficiary of a contract between others, but itself a party, hence liable on the contract.

    A different fact pattern would be this:

    Widgetco contracts with Acme to supply widgets to Acme and to nonparties Baker and Charlie. Widgetco does so, but Acme goes pear-shaped before paying Widgetco fully. Widgetco would love to chase Baker and Charlie for the balance, but has no contractual basis for doing so. (Equity might have something up its sleeve, or not.)

    I think the same generic issue comes up with credit cards. Papa gets a Bank card on his credit alone. He alone signs the credit agreement. But extra cards go to nonparties Mama, Sister, and Brother, who can charge things to Papa’s credit (sorry for the sexism). Papa becomes judgment-proof, leaving a balance. Bank wants to chase Mama, Sister, and Brother for the balance (plus interest, of course).

    I think the real-life outcome — I could be wrong — is that Mama, Sister, and Brother are liable for the specific charges each of them makes, but not for each other’s charges or Papa’s. That result, if correct, may be due to background law, possibly statutory. It smacks of compromise. –Wright

  3. On point first, I recall that there was a Massachusetts decision (sorry I don’t have name or citation) in which our state supreme court sensibly held that anyone other than the ultimate parent company cannot bind anyone up the ownership chain from it or down the other side (“sister” companies). A company controlling another can sign “on behalf of” the controlled entity, making it liable on the contract, on the theory that it is in a position to cause the subsidiary to fulfill its obligations. Unfortunately, I don’t recall if the case involved someone seeking to hold the parent liable for the sub’s debts or the other way around.

    If a corporate group wants to be able to have its far-flung affiliates take part in a contract–and I have done many deals in particular with telecom companies where that is exactly what they want–there are several options open. Some organizations have special subsidiaries (typically on the procurement side) for this purpose, but even without it, the appropriate methodology would be to have agency agreements in place among all the subsidiaries appointing either the parent, the specialized purchasing sub, or each other, as authorized to bind everyone in the group. That way, the signing entity can act, in the heading paragraph, for itself and as agent for the affiliates.

    If this is the case, the counter-party needs to be careful to verify the agency relationship, have an indemnification against lapses, and be sure that it has the right to refuse to deal with an entity that is not creditworthy if (as is often the case) the signing party disclaims liability for the affiliates’ debts under the contract. Oh yes, and (as I think you say in MSCD) there needs to be specification whether the affiliate is bound by the contract only so long as it remains an affiliate (or becomes one in the future).


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