Banner image

Hey! Who’s the Actual “Party” to This Contract?

blog-image
News & Blog Aug 09, 2017

Legally, the term “party” means an individual or entity that agrees to be bound contractually to one or more other individuals or entities. All parties have specified benefits and obligations found in the contract—or a legally enforceable agreement. Read this recent tale from federal court and keep its lessons in mind as you review the business succession documents prepared, whether they are due to a sale, or transition to internal players. It’s important to ensure that you protect your interest in royalties and income going forward and that you always ensure that you have a legally enforceable right in the event of a default or other problem after a deal has been negotiated.

The U.S. Court of Appeals for the Eighth Circuit was asked who the actual “party” was to a contract where one of the original parties assigned all its benefits to another entity. That entity wasn’t substituted or added as a party, and the contract was then terminated by the other party, leaving the assignee at a loss. The recent case, ACI Worldwide Corp. v. Churchill Lane Associates, LLC, No.16-1736 (8th Cir. Jan. 27, 2017) involved a licensing agreement between Nestor and ACI Worldwide Corp. (“ACI”).

Nestor agreed to license its software to ACI, who was contractually obligated to pay royalties to Nestor for the license. It’s key to note that the contract said that: (a) “the Licensing Agreement can be terminated unilaterally by one party if the other party becomes insolvent, transfers all of its assets, or otherwise ceases to conduct business”; (b) ACI would remain liable for royalties respecting “any sublicenses granted by ACI prior to termination”; and (c) “this Agreement may be amended only by the consent of both parties.” Since we’re talking about “parties,” that should be a tip-off to what happened next.

Nestor assigned the royalties from its agreement with ACI to Churchill, and ACI gave its express written consent to the deal. Nestor contracted with Churchill and agreed it wouldn’t amend the agreement without its consent. But Churchill didn’t acquire Nestor’s ownership of the software… and it didn’t become an actual “party” to the agreement. Plus, it didn’t get ACI’s buy-in not to amend the agreement without Churchill’s consent.

Nestor went broke and went into receivership. All its remaining rights in the agreement and the software were sold to another company, ATS. ACI wanted to purchase its rights from Churchill to the royalties under the agreement. When Churchill said no, ACI purchased the rights and interests in the software and Licensing Agreement ATS acquired from Nestor. ACI immediately terminated the agreement, purporting to act as both the Licensor (Nestor/ATS/ACI) and the Licensee (ACI). ACI told Churchill that the agreement was no longer in effect and that Churchill’s rights to the ongoing royalty stream were ended.

Churchill said its consent was needed for any termination or amendment of the agreement. ACI took them to court, seeking a determination that its termination was valid and that it owed no further royalties to Churchill. The District Court found that, because Churchill wasn’t a “full party” to the agreement, Nestor’s insolvency and sale of all its assets allowed ACI to unilaterally terminate its agreement…it didn’t need Churchill’s permission to change the agreement to cut out a clause that provided that the royalty stream from pre-termination sublicenses would continue in favor of Churchill post-termination.

On appeal, the Eighth Circuit agreed that Churchill wasn’t a “full party” to the agreement, but it held that its rights (as an assignee of the royalty stream) couldn’t be changed to cut off Churchill’s post termination royalties arising from sublicenses granted prior to termination. Churchill got some royalties back based on its assignee status and the law requiring a recognized assignee to consent to any modification by the original parties to the contract of the assignee’s rights. Still, Churchill lost all future royalties because Nestor was still the “party” that mattered as far as the termination provision.

The takeaway from this case is when you’re creating a succession plan for your company, and you’re considering an assignment of rights without permitting the assignee to become an additional or substituted “party” to the contract (and without allowing them to review the entire agreement to see what’s needed for the benefits remain effective and directly enforceable by the assignee)—you’re really doing them a disservice and creating financial headaches and heartaches for them in the future.

Churchill should have required that the licensing agreement be amended to add it as a party, detailing that all three parties were required to amend the contract, and that any termination of the agreement based on the insolvency of a party required the consent of the other two parties. That would’ve solidified their position to claim the ongoing royalties. It’s a good reason to work with a succession attorney who can eliminate the issue beforehand.

Contact Us

When considering an assignment of rights in a contract as part of your succession planning, be certain to review the particulars of how those rights are assigned with a qualified succession planning attorney. Talk with an experienced attorney about your options and whether you should draft an amendment to make the assignee the “party” that matters for any subsequent modification or termination of that contract.

Succession planning for your business should start today. Contact NM Law, APC (949-253-0000) to speak to an experienced succession planning attorney about the company you’ve built and your plans for its future.

 

Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.

NOELLE MINTO, ESQ.

Ms. Minto has been a business and estates transactional attorney based in California since 2003. Her practice is now located in Tustin, CA but represents individuals and entities based throughout the United States and abroad. Phone: (949) 253-0000, Email: info@mintocounselors.com

Testimonials

  • NM Law is an excellent law firm to work with! Noelle and her team are very thorough and knowledgeable. They explained the estate planning process to us and kept us informed every step of the way. We…

    Monique S
  • I greatly appreciate Noelle’s assistance in making difficult decisions. When she provides counsel I know she puts herself and her family in my shoes. I feel comfortable knowing my attorney has analyzed every angle and leaves out…

    Cinda H.
  • For those of you that are looking for the perfect attorney to handle any of your estate issues, well Noelle is the one for you! I can’t say enough about Noelle! She recently handled a case for…

    Suzie F.
  • One of the most important things you can do for your family is have a good Living Trust done by an attorney you can trust to take care of your business. I highly recommend Noelle Minto, an…

    Sandy Z.
  • Working with Noelle on litigation and transactional matters was truly a valuable experience for me. Not only was she a great communicator with clients and personnel, but zealous and passionate about her clients. I would recommend her…

    Darren S.
  • I’ve known Noelle as a colleague and friend for close to seven years. Working “across the aisle” in the fast-paced and partisan world of LA County politics, I found Noelle remarkable for her ability to quickly grasp…

    Kerjon L.
  • Noelle and her team were professional, courteous and diligent with my case. It was a small matter but they took it as though it was a large one. They reached a settlement quickly and very little effort…

    Doug S.
  • After my mother’s death, The bank locked all her accounts and the insurance company was playing games. Our family lawyer never call me back. I called Noelle for help! My paper work was not in order at…

    Randy B.
  • Noelle is awesome. Handled everything I needed in a timely manner. Very professional!

    Tammy W.
  • I have worked with Noelle on my Estate Planning and was very impressed by the way she handled my business. Noelle was extremely professional and available for all my questions. I would highly recommend anyone looking for…

    Zac C.
  • I have worked with many attorneys, and there are very few that I would ever recommend. Noelle and her team have gone above and beyond to help all of our clients that we have referred to her….

    Robert Sousa
  • I was first referred to Noelle Minto by my family law attorney Mike Monarch to provide oversight on my husband’s Trust conforming with our Post Marital Agreement. Her outstanding legal insights helped me to feel secure that…

    Sharon McCubbin
  • Noelle and Samantha and their team are amazing. They are extremely knowledgeable and professional (they are the best). They have and continue to support me and my family while dealing with my parents Will and Trust. Samantha…

    Greg Bishop
  • I had a great experience with Noelle and Samantha at NM Law. They were fast, clear and got the result we wanted under budget. I am very happy and impressed.

    John Arens
  • NM Law is an exceptional place to work! Our office is located in the City of Tustin, off the 55 Freeway, between the 5 and 405 Freeways. Our main cross streets are Redhill Avenue and Edinger Avenue…

    Samantha Smith
  • The N.W Law team in Tustin Ca was instrumental in achieving a just result in our family trust dispute. We had the privilege of being represented by Samantha Smith and her staff, during one of my saddest…

    Herman baldonado
  • Amazing service. So happy with the whole team!

    Mitchell Hilde
  • So glad to work with this team of professionals

    Noelle Minto
  • As an attorney who has used two other wills & trusts lawyers prior to seeing Noelle, I have a pretty good idea of what to expect and what it should cost. I recommend Noelle to anyone who…

    Lynne Boisineau
  • Highly recommend NM Law. I recently worked with Noelle and her team on my family trust and the process could not have gone smoother. Very knowledgeable and professional. I have since recommended all of my family members…

    Nathan Perkins
  • A very professional approach and action to fulfill our personal requirements

    Waldo ortega
  • My husband and I decided to update our 12 year old trust. We initally had a call with Noelle, and were instantly very comfortable with her approach. Noelle was great to work with, very patient, was willing…

    Cheri Ondatje
  • Vey helpful with good insight to take the proper steps with difficult situations and have my questions answered. Noelle and her team are professional and courteous and great to work with!

    Corine Cojocaru
  • Samantha and the team are professional compassionate and get the job done. She articulates very well what needs to be done. Her and the firm do Probate and Trust at its finest to protect their clients. She…

    Silvana Sarkis
  • I was referred to NM Law after dealing with a myriad of problems in settling a complicated Trust in Riverside County. At the initial meeting, Noelle Minto and Samantha Smith listened to the mess I was in…

    Aleathea Rayburn
  • Love this firm. I’ve worked on a wide range of legal issues with NM law, and the attorneys here are top notch, reasonably priced, and a pleasure to work with. They truly care about each of their…

    Colette
  • Ms. Minto, I want to thank you and your staff for the courtesy extended to us during our family’s pending emergency deadline. Mr. O’Grady spoke to my brother and gave us his best recommendation regarding my father’s…

    Abraham Torres

Charities We Support

We dedicate pro bono time, volunteer services, and a percentage of our gross revenue to these organizations. In 2023, we sponsored a refugee family of five to come to the United States and start a new life.

Each year our law firm decides as a group which charities to assist with our time, money, and expertise. Please feel free to click on any of the charities below and make a donation of your own.

  • Charities
  • Charities
  • Charities
  • Charities
  • Charities
  • Charities
Top