It keeps on happening. Contracting parties allow “standard” boilerplate to potentially trump bespoke provisions of their acquisition agreements. This phenomenon is particularly prone to occur with “no third party beneficiary” clauses, classic and overused boilerplate that can often do more harm than good. Indeed, in a prior post to Weil’s Global Private Equity blog, no third party beneficiary clauses were likened to ramming bows that were once standard features of warships across the world based on a single battle where ramming supposedly figured heavily in the resulting victory for the winning side.[1] It turns out, however, that ramming never figured much in future naval battles and the installed ramming bows frequently just caused damage to friendly ships.
While contracting parties understandably do not want unintended third parties intruding into their contractual relationship, the idea that an unintended third party can actually become a beneficiary of the contracting parties agreement, even in the absence of a no third party beneficiary clause, “is overstated and largely a myth.”[2] Indeed, as noted by a recent Texas Supreme Court decision, “[a]lthough a contract may expressly provide that the parties do not intend to create a third-party beneficiary, the absence of such language is not determinative. ‘Instead, the controlling factor is the absence of any sufficiently clear and unequivocal language demonstrating’ the necessary intent [to benefit a specific third party].”[3]
That is not to say that there are not benefits to no third party beneficiary clauses in limiting or eliminating potential third parties from claiming to have rights to enforce the terms of the contracting parties agreement. But in most cases, the no third party beneficiary clause needs to be fully “bespoke” boilerplate not “standard” boilerplate or, like the ramming bows of old, the supposed benefits of the clause can backfire. It can backfire because many times there are specific provisions of an acquisition agreement that are intended to benefit and be enforceable by a third party (usually affiliates of the contracting parties); and case law has suggested that, even when that intent to benefit a third party is clear, a no third party beneficiary clause can override that otherwise expressed intent.[4] A notable example of intended third party beneficiaries in the private equity context are the private equity fund and its partners with respect to the non-recourse clause of an acquisition agreement where the only contracting party is the affiliated acquisition vehicle (on the buy side) or the portfolio holding company seller (on the sell side). There are other examples as well, of course, including obligations to continue indemnification and D&O protection for the former...
