15 Nov Due Diligence—Key Element in Documenting the Deal
Commercial Contracts Due Diligence—Key Element in Documenting the Deal
In the for-profit and non-profit world, contracts are written to document deals and allocate risks between parties every day. The range of types of commercial contracts or agreements is extremely broad, but in every type of contract, basic steps can be taken to effectively document the arrangement while protecting your company’s interests. While due diligence is often thought of in the context of mergers and acquisitions, real estate or finance, due diligence is important to conduct before entering any new contractual relationship.
To begin, know who you are dealing with. Awareness of the parties and the business arrangement is a must to effectively evaluate the business risks and legal risks of the deal. Do you know the different party or parties you are dealing with? If not, begin with research and gather information, including from the party itself, to gain an appreciation for who they are and how they operate. Has your company ever done business with this party before? If so, take time to look at the previous contract and take into consideration how the parties have operated historically. In the due diligence process, examine the party’s record, how long have they been in business, information from referral sources, background checks, prior services provided and/or products delivered and whether they were timely as well as within budget. The conditions vary depending on the business and type of agreement, but these features need to be understood as part of the risk analysis.
In the end, the degree of due diligence varies from deal to deal and rests on various circumstances. Exercising some basic degree of proper and reasonable care to investigate a business or person prior to signing a contract needs to be part of any company’s internal policy. Once you have established an understanding of the party or parties, you can use this knowledge to examine the elements of the business deal and evaluate the risk. Conducting due diligence before entering an agreement is a prudent and important step to identifying business risks and legal risks both of which need to be carefully reviewed by the business stakeholders as well as legal counsel to document the deal in the best interest of the company. Due diligence can appreciably decrease the risks and protect your company’s interest, making the time and resources invested well worth it.
This article is a publication of MWH Law Group LLP and is intended to provide general information regarding legal issues and developments to our clients and other friends. It should not be construed as legal advice or a legal opinion on any specific facts or situations. For further information on your own situation, we encourage you to contact the author of the article or any other member of the firm.
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