Protecting the Integrity of the Entity-Specific Contract: The 'No Recourse Against Others' Clause — Missing or Ineffective Boilerplate?

36 Pages Posted: 13 May 2015 Last revised: 20 Nov 2019

See all articles by Glenn D. West

Glenn D. West

Weil, Gotshal & Manges LLP; Texas Tech University School of Law; SMU Dedman School of Law

Natalie Smeltzer

Weil, Gotshal & Manges LLP

Date Written: December 12, 2011

Abstract

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.

Keywords: limited-liability; corporations; no recourse provisions; contracual liability limitations

JEL Classification: K12

Suggested Citation

West, Glenn D. and Smeltzer, Natalie, Protecting the Integrity of the Entity-Specific Contract: The 'No Recourse Against Others' Clause — Missing or Ineffective Boilerplate? (December 12, 2011). 67 Bus. Law. 39 (2011), Available at SSRN: https://ssrn.com/abstract=2605193

Glenn D. West (Contact Author)

Weil, Gotshal & Manges LLP ( email )

767 Fifth Avenue
New York, NY 10153
United States
214-746-7780 (Phone)
214-746-7777 (Fax)

Texas Tech University School of Law ( email )

1802 Hartford
Lubbock, TX 79409
United States

SMU Dedman School of Law ( email )

Dallas, TX
United States

Natalie Smeltzer

Weil, Gotshal & Manges LLP

700 Louisiana St
Houston, TX 77002
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
102
Abstract Views
668
Rank
486,817
PlumX Metrics