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.