In negotiating a contract, a California business owner may find that an agreement with a subsidiary of a company should also involve that entity’s parent company as a party to minimize the potential for issues such as breach of contract. A recent case that reached the U.S. Court of Appeals for the 7th Circuit involved a suit against a parent company that was not a party to the actual contract in question.

The legal action occurred after the plaintiff company suffered losses because of a breach of contract by the subsidiary of the defendant. The subsidiary did not have assets that could be used to satisfy its contractual obligation, leading to the plaintiff’s effort to recover its losses from the parent corporation. While the plaintiff did negotiate with the parent company to sell its business to the subsidiary, the actual contract did not include the parent. In filing the claim, the plaintiff alleged that the parent corporation was a direct participant in the matter. Further, the plaintiff suggested that the parent company was an alter ego for its subsidiary.

The court rejected the allegations of direct participation and alter ego, indicating that in cases of statutory or tort violations, a parent company might be held liable along with a subsidiary. However, breach of contract was deemed in this case to apply strictly to the actual parties to the agreement.

Because business contracts related to a sale of a company can be complicated, it may be important to carefully review the potential outcomes if a breach of contract would later occur. In an effort to avoid these types of situations, it may be helpful to consider how losses will be recovered. In some situations, a lawyer may recommend adding an additional party to a contract to guard against losses.