ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Wednesday, September 20, 2017

Don't worry, corporate entities themselves get confused about their corporate structure...

I have actually seen a bunch of cases lately where people have either sued the wrong company in a complicated corporate structure (understandable) or where they have brought suit on behalf of the wrong company, which seems less understandable to me since you should presumably know your own corporate structure and which companies are bound by which contracts. But, as a recent case out of the District Court for the District of Columbia, Washington Tennis & Education Foundation, Inc. v. Clark Nexsen, Inc., Case No. 15-cv-02254 (APM), shows: not always. 

The parties entered into an agreement where Clark Nexsen would design a tennis and education facility. About a year after entering into this agreement, Washington Tennis & Education Foundation, Inc. ("WTEF") assigned "all of [it]s right, title and interest" in the contract to Washington Tennis & Education Foundation East, Inc. ("WTEF East"), a related company that was not a party to this lawsuit. After growing dissatisfied with Clark Nexsen's performance under the agreement, WTEF sued for breach of contract. Clark Nexsen moved for summary judgment that WTEF lacked standing to sue because all of its contractual rights now belonged to WTEF East by virtue of the assignment. 

The court agreed with Clark Nexsen. WTEF and WTEF East were two separate and distinct legal entities. It was true that they were related but they had separate boards of directors and separate records, etc. WTEF was not entitled to bring claims on WTEF East's behalf. Once WTEF assigned the contract to WTEF East, it became a "stranger" to the agreement and could not enforce it. 

WTEF tried to argue that it and WTEF East were, for all intents and purposes, the same. However, the court pointed out that WTEF created WTEF East in order to put itself in a position to secure extra financing. The court said that WTEF couldn't have its cake and eat it, too: If it wanted to have separate entities when it was advantageous for it to do so, then the court was going to treat them as separate entities even when it became disadvantageous. 

WTEF also tried to argue that it was a third-party beneficiary of the contract at issue, but there was nothing about the contract that indicated WTEF should be treated as a third-party beneficiary, and in fact the contract explicitly disclaimed that the contract should be construed to have any third-party beneficiaries. Nor was there anything in the assignment agreement indicating WTEF should now be treated as a third-party beneficiary of the original contract. In fact, the assignment agreement named Clark Nexsen as a third-party beneficiary to it, so it was clear the parties had thought about third-party beneficiary issues and had not given such status to WTEF. 

The court ended up dismissing all of WTEF's claims but maintaining jurisdiction over Clark Nexsen's counterclaim moving forward. Not a good outcome for WTEF. Double-check your corporate structure before deciding which entity needs to sue on a contract. 

http://lawprofessors.typepad.com/contractsprof_blog/2017/09/dont-worry-corporate-entities-themselves-get-confused-about-their-corporate-structure.html

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