September 16, 2021

Contract Interpretation: Timing of Affiliate Status

All sorts of contractual provisions impose obligations on the parties and their respective affiliates.  But if you sign up for an obligation that covers your affiliates, is it limited to those who were affiliates at the time of the contract, or are persons and entities that subsequently become affiliates covered as well?  This Weil blog reports on a recent Chancery Court decision that addressed that issue. Here’s the intro:

When is a person’s status as an “affiliate” determined—when the contract restricting an affiliate’s activities is entered into, or at the time an alleged violation of the contractual restriction occurs? Stated differently, can a contracting party become responsible for an alleged violation of a contract restricting a party and “its affiliates” by the actions of a person after it becomes an affiliate, even though it was not an affiliate when the contract was entered into? According to a recent Delaware Court of Chancery decision, Symbiont.IO, Inc. v. Ipreo Holdings, LLC, 2021 WL 3575709 (Del. Ch. Aug. 13, 2021), the answer, at least in the context of a non-competition provision contained in a joint venture agreement, is that a person’s status as an affiliate is generally measured at the time of the alleged breach.

The blog goes on to explain that this means that if a party agrees to restrictions that will apply to its affiliates actions, it becomes responsible for an affiliate’s violation of those restrictions, even if the contracting party has no control over that affiliate but is instead controlled by it. In the case of a non-compete, it also doesn’t matter if the affiliate is just conducting its business as usual and was not itself bound by the non-competition agreement.

John Jenkins