Don't define a contracting party as “Acme Co. and its Affiliates”

This week’s musings on tech contracts…

This week’s musing addresses a simple point. We define a contracting party as multiple entities. Don’t even do it if you clearly define that party’s “Affiliates” or “Associated Companies” or whatever term you use. It makes no sense, and it can create a mess.

In other words, don’t do this: “This Agreement is by and Between Acme Co., Inc. and its Affiliates (‘Acme’).” Get rid of “and its Affiliates.”

Problems for the party with the affiliates

Contract-drafters often add this affiliates language in an attempt to include subsidiaries, parents, sister-companies, or other members of the corporate family. (That’s the group typically defined as “Affiliates.”) But what does including those other companies do? I’m not even sure. Does it mean each affiliate guarantees the performance of the signing company? Does it mean the other party can sue any of the affiliates in case of breach? If you’re the company with the affiliates, you probably didn’t mean to do that.

Problems for the other party

What about the other party? If you signed with Acme Co. and its Affiliates, can an affiliate perform your counter-party’s obligations? What if you don’t want that – if you wanted the counter-party to perform? Does it mean any one of the affiliates can direct your performance, assuming the contract involves direction? What if they disagree? And does it mean any of the affiliates can sue you under the contract? Ugh.

Getting affiliates involved the right way

If you want to involve affiliates, specify how. Acme could get the right to sublicense software rights to an affiliate, for example. It could get rights to delegate payment or collection to its affiliate. It could get the right to assign the whole contract to an affiliate. You can even limit affiliates’ liability: “The limits of liability in Section X (‘LoL’) apply likewise to Acme’s Affiliates.” You can address affiliates without making them pretend parties.

We cover issues like this and many more in our Tech Contracts Master Class™!

THIS ARTICLE IS NOT LEGAL ADVICE. IT IS GENERAL IN NATURE AND MAY NOT BE SUFFICIENT FOR A SPECIFIC CONTRACTUAL, TECHNOLOGICAL, OR LEGAL PROBLEM OR DISPUTE, AND IT IS NOT PROVIDED WITH ANY GUARANTEE, WARRANTY, OR REPRESENTATION. LEGAL SITUATIONS VARY, SO BEFORE ACTING ON ANY SUGGESTION IN THIS ARTICLE, YOU SHOULD CONSULT A QUALIFIED ATTORNEY REGARDING YOUR SPECIFIC MATTER OR NEED.