Can a party be an indemnified affiliate of a contracting party but not a third party beneficiary of that contract? A recent New York case (Diamond Castle Partners IV PRC, L.P. v. IAC/InterActiveCorp, 2011 N.Y. App. Div. LEXIS 1542 (2011)) highlights an interesting legal drafting issue that comes up often in deal documents.
Diamond Castle is a private equity fund that formed an acquisition vehicle, Panther, to acquire the equity of another company, PRC, for $286.5 million. Immediately after the closing, Panther was merged into PRC. The purchase agreement included two arguably contradictory statements:
(1) The seller, IAC, would indemnify Panther and all of its affiliates for any breaches of the purchase agreement; and
(2) There are no third party beneficiaries of the purchase agreement.
So when Diamond Castle, an affiliate of Panther, sought indemnification for an alleged breach under the purchase agreement, IAC argued that statement (2) above controlled. Obviously, Diamond Castle argued that statement (1) controlled.
The New York court agreed with Diamond Castle, reasoning that the only logical reading of the agreement was that affiliates of Panther were intended to be indemnified and that such indemnified parties were therefore not "third parties" for the purposes of statement (2).
Regardless of the results in this particular case, drafters of purchase agreements can remove any ambiguity on this point by more careful drafting. When drafting agreements, consider including a carve-out to the "no third party beneficiary" provision to specifically except third parties indemnified under other provisions of the agreement.
Special thanks to Jonathan P. Gill, Michael C. Hefter, and Kelly Koscuiszka of Bracewell & Giuliani LLP who brought the Diamond Castle case to my attention.
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