What does “affiliates” mean?
Think of affiliates like branches of a big family. Imagine a family with several siblings living in different homes but connected under the same family name. Each sibling runs their own household, with their own rules and finances, but they’re still linked through family ties.
In business, affiliates are like these siblings: individual companies, each with its own operations, but connected through ownership or control by a “parent” company. They share a connection but don’t automatically share each other’s responsibilities or debts—unless there’s a specific agreement saying they do.
The illusion of efficiency in “and its affiliates” clauses
Many companies try to simplify service or licence agreements by defining a party to include its affiliates. In theory, this lets the underlying agreement cover the entire organisational structure without needing renegotiation as new affiliates or users are added.
But practical and legal issues reveal this approach to be less of a convenience and more of a ticking time bomb. Here’s why:
Separate entities, separate liabilities
- Individual obligations: The contractual obligations of one entity don’t automatically extend to its affiliates, even within a corporate family. Each entity within a corporate structure is legally separate, with its own obligations, liabilities, and assets. This principle holds even in tightly controlled parent-subsidiary relationships, where, unless explicitly stated, each entity’s responsibilities remain its own.
- No inherent guarantees: Parent companies are not automatically responsible for the obligations of their subsidiaries and vice versa. Holding affiliates accountable under a contract requires either explicit agreement or legal authority to bind them, which is often missing in broadly worded “and its affiliates” clauses.
Authority to bind affiliates
- Actual versus apparent authority: An entity cannot be bound by a contract unless the signing party has explicit authority to do so. Authority isn’t a blanket rule; it’s a factual question that hinges on specific powers granted within the corporate structure. Without this authority, attempting to bind affiliates results in misrepresentation and possible liability for the signer, leaving affiliates on precarious legal ground if they’re drawn into unforeseen commitments.
Complex compliance across jurisdictions
- Diverse legal frameworks: Affiliates may operate under different legal regimes, particularly in multinational organisations. By binding them without taking these variations into account, a company risks creating conflicting obligations. For instance, an affiliate in Europe may have GDPR requirements that complicate its relationship with a US-based parent company, especially if obligations around data processing or privacy conflict.
- Jurisdictional reach: Even if a contract names affiliates under the main party, it doesn’t mean those affiliates can be held liable in jurisdictions where they have no presence. A Canadian affiliate, for example, may not necessarily be subject to jurisdiction in a US-based dispute despite contractual language suggesting otherwise.
Common contractual pitfalls of affiliate inclusion
Let’s look at specific legal risks that arise when affiliates are bound in this sweeping manner:
- Ambiguity in affiliate definition: Does “affiliates” mean present ones, or does it include future entities added through restructuring, acquisition, or divestiture? This question is at the heart of many disputes, as changes to corporate structure may inadvertently alter contract obligations or void affiliate inclusion entirely. Specifying affiliates “at the time of signing” or clarifying which entities are included can help, but ambiguity often leaves room for litigation.
- Notice and indemnity obligations: Grouping affiliates can make basic provisions confusing. For instance, if one affiliate is entitled to indemnification, do all affiliates need to be notified, or just the main contracting entity? This ambiguity can nullify rights to indemnity if notice isn’t handled precisely. Similarly, indemnity provisions themselves become tangled, as it’s unclear if they apply to every affiliate or just the main party.
- Knowledge-based warranties: Many contracts contain warranties based on a party’s knowledge. Including affiliates in these warranties extends this standard to each affiliate, often unreasonably. For example, an EU-based affiliate might not have the same knowledge of US regulatory issues as a US-based parent.
- Insurance and liability caps: Broad affiliate inclusion can create conflicts in liability caps or insurance policies. If caps on liability apply to each affiliate, it’s unclear if this means individually or as a group. Worse still, applying indemnification provisions across affiliates may create insurance issues where directors & officers (D&O) coverage doesn’t extend to each named affiliate.
- Impact on data processing agreements (DPAs): If affiliates aren’t explicitly named in data processing agreements, this can raise questions about compliance with privacy laws. Including affiliates under a contract may create unintended global data protection obligations for each entity, potentially triggering obligations across jurisdictions, even where specific privacy frameworks like GDPR or CCPA apply.
Practical solutions to minimise risk
Use a limited affiliate liability clause
Instead of sweeping affiliates into the contract as parties, consider limited liability language that makes the main party liable for its affiliates’ actions if they breach the contract. Here’s an example:
“If an act or omission by an affiliate would constitute a breach of this agreement if committed by [main party], such act or omission shall be deemed a breach by [main party] itself.”
This keeps them out of the direct contract, simplifies compliance, and keeps responsibility within the main party without overextending liability.
Clarify the scope of affiliates included
Specify that “affiliates” refers only to those in existence “as of the date of this agreement” to avoid conflicts arising from future acquisitions, sales, or corporate restructuring. If future affiliates are essential, use “at any given time” or “at the time of determination” to address this flexibly, but be prepared to manage the additional complexity it introduces.
Third-party rights clause for affiliate benefits
If affiliates need to benefit from specific provisions, a third-party rights clause can grant rights without binding them to full-party obligations. For instance:
“This agreement grants rights to [main party]’s affiliates to the extent specified herein, without creating obligations on those affiliates unless expressly stated.”
Include specific named affiliates as signatories
For essential affiliates, it’s often simplest to add them as signatories. This ensures clear authority, formalises obligations, and reduces the ambiguity of broad affiliate definitions. Naming each involved affiliate clarifies responsibilities and limits potential disputes about who is bound.
Consider explicit guarantor language for parent-subsidiary relationships
If a parent company is intended to back a subsidiary’s obligations, specify this through a guarantee. This eliminates the expectation that parent companies are liable for affiliates’ obligations by default and instead formalises their responsibilities, if necessary.
Grouping affiliates wisely
Broad affiliate definitions may seem efficient, but they are often more like ticking time bombs than helpful shortcuts. The costs, both in legal and operational terms, can far outweigh any short-term convenience they provide. By addressing affiliates with a careful and narrow approach—holding only the necessary entities responsible while offering benefits to others as appropriate—businesses can achieve clarity, control, and reduced legal exposure. As with many things in contract drafting, precision and clarity go further than expedience and can prevent a lot of headaches for all parties involved.
How ITLawCo can help
At ITLawCo, we understand the complexities and risks involved in drafting contracts that impact multiple entities within a corporate structure. We specialise in tailoring agreements that address the nuances of affiliate inclusion, ensuring that obligations and rights are clearly defined and legally enforceable.
Our team brings a wealth of experience in advising on affiliate structuring, crafting limited liability clauses, and implementing third-party rights frameworks, all of which are designed to mitigate risk while allowing your business to operate efficiently across jurisdictions.
With our support, you can avoid the pitfalls of broad affiliate definitions and safeguard your organisation’s interests with contracts that balance clarity, compliance, and commercial sense. Let ITLawCo be your partner in creating agreements that work for your entire corporate family, without the unexpected surprises. Contact us today.