Protecting the Integrity of the Entity-Specific Contract
Author | : Glenn D. West |
Publisher | : |
Total Pages | : 36 |
Release | : 2019 |
ISBN-10 | : OCLC:1304315600 |
ISBN-13 | : |
Rating | : 4/5 (00 Downloads) |
Book excerpt: 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 risks 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.