Legal Writing

Having a Parent Company Enter Into a Contract ?On Behalf? of an Affiliate

By Ken Adams

A reader recently asked me the following question:

We frequently sign global services agreements that provide that the parent company is signing “for and on behalf” of an affiliate. What do you think of this practice?

I’m uncertain about having a parent sign a contract on behalf of an affiliate. (In any event, the words “for and” are redundant.)

Who has the obligations under these contracts? You have two choices. The affiliate could have the obligations, as in “The Affiliate shall ….” Or the parent could have the obligations, as in “The Parent shall cause the affiliate to …”

Given that it’s the affiliate that’s to perform the services under the contract, it would make sense to have the affiliate bear the obligations. The only reason to have the parent bear the obligations would be to make it liable for the affiliate’s failure to perform. But that could be accomplished more economically by having the parent guarantee the affiliate’s performance of some or all of its obligations.

But let’s assume that you nevertheless elect to have the parent bear the obligations. In that context, I think it’s unhelpful to say that the parent is entering into the contract “on behalf of” the affiliate. By signing the contract, the parent is assuming obligations that run only to the parent, not to the affiliate, so the parent is in effect entering into the contract on its own behalf.

So in answer to your question, I wouldn’t have a parent enter into a contract “on behalf of” an affiliate. Instead, my preferred option would be to have the affiliate sign and make the parent the guarantor. My second choice would be to simply have the parent sign the contract, without any “on behalf of” language.

One context where “on behalf of” might make more sense would be when performance is by a division. But I’d express the concept differently, as I noted in this post.

Full post as published by AdamsDrafting on July 16, 2008 (boomark / email).