Friday, November 11, 2011

Multiple Parties to a Contract

Any contract may have 2 or more parties that sign and agreement. For example in dealing with a partnership all partners would sign the agreement or you would need a resolution from the partners that one of the partners is authorized to sign on behalf of the partnership.You could have a Supplier and their Subsidiaries all sign an agreement.You could have a buyer and all their subsidiaries sing an agreement.You could enter into a three way non-disclosure agreement, etc.

When you have multiple parties to an agreement there are several issues that need to be managed.

The first is managing your potential liability under the agreement. As a Buyer, if you bring a third party into a relationship with a Supplier, you don’t want to become liable for the third party’s actions. To do that you want to disclaim liability for that third party. For example you negotiate an agreement with a supplier for a custom product. You then want a third party to purchase the product. If you make them part of your agreement, unless you disclaimed liability for their actions and purchases, you could potentially be liable for that third party’s actions. Alternatively you could not have them be a party to the agreement.Since the product is proprietary to your company the supplier cannot sell it to the third party without your authorization. One way that I’ve managed this is to have a term in the agreement where the supplier agrees to sell the product to third parties that you authorize by letter at the price you negotiated. You allow the supplier to establish whatever purchase terms they need to protect themselves in their agreement with the third party so its clear that they are not relying upon you. If the third party was financially unacceptable the supplier could refuse to sell to the third party and you would need to purchase and resell the product to them.

The second issue when you have multiple parties to the agreement such as when you have a Supplier and their subsidiaries, in the event of a problem who can you collect from? Even though both parties signed the agreement each would only be liable for their own actions or inactions. If you want all of them to be liable up to the full extent of the potential contract liability you would need to add language in your agreement that the parties are jointly and severally liable. In doing this if the problem arose from one of their small subsidiaries, this would allow you to only go against that subsidiary and the parent company that has “deepest pockets”. Joint and several liability is similar to requiring a parent or company guarantee in the situation where the agreement is with the subsidiary and the parent company is providing a guarantee on the financial performance of the subsidiary.

Most companies should not want to sign an agreement that includes their subsidiaries. The first reason for that is from a tax perspective that want the relationship to be what's called "arms length transactions". Legally they want to keep the companies operating separately so parties dealing with the subsidiary can't make claims against the parent. The last reason is many times a subsidiary may not be wholly owned by the parent company. In some subsidiaries they may only have controlling interest.There are also countries that would not allow a foreign company to own a majority interest in a local company.In this situation them might own 49%, have another company own 40%, and have the remaining 11% owned publicly with restrictions against the local 40% owner from being able to purchase any of the 11% so they could never get controlling interest.Most parent companies simply do not want to be liable for the acts of subsidiaries that are not wholly owned.In situations where they do not have 100% interest they have to share with the other owners the profits that are made by that subsidiary. Since they don't get 100% of the profits why should they want to assume potentially 100% of any losses?

If you learned from this post, think about how much more you could learn from the book.
The book is only US$24.95 plus shipping. The hot-link to is above the date.