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Not Your Lawsuit, Not Your Problem? Not Necessarily

| Jul 11, 2011 | Uncategorized

Due diligence is commonly associated with buying or selling a business — similar to buying real estate. And while due diligence is a term of art in some respects, it really represents a broader principle that all business owners should remember when negotiating any contract, no matter how large or small.

Here’s an example: A Seattle small business is evaluating vendors A and B for supply of a particular product. From all outward appearances, the two top vendor candidates are similar. Behind the scenes, however, Vendor A is in a major dispute with one of its suppliers. Not knowing this, the Seattle small business selects Vendor A and enters into a contract.

When the dispute between Vendor A and its supplier heats up, the supplier stops shipping the ingredients necessary to make the products that Vendor A supplies to our Seattle Small Business. Without Vendor A’s products, our Seattle small business is unable to produce its products for its customers. Not only does the business lose potential profits, but it now faces liability for its customers for their lost profits.

The chain reaction from a downstream vendor dispute can turn ugly quickly and it can be extraordinarily expensive to unwind.

The solution is due diligence and careful contract drafting. Investigate your vendor’s supply chain. Ask for references throughout that chain. Make sure they’re current with their suppliers and in good standing.

Once you’ve done so, ask the attorney you’ve engaged to draft your business contract to insert what are known as ‘representations.’  Contract representations are statements of fact in a contract, which, if they turn out to be untrue, can support a breach of contract claim.

A Seattle business law attorney can get creative in investigating the people and companies you do business with and provide you the maximum possible protection as your go forward. Protecting against hidden risks can be critical to the profitability (or even viability) of your business.

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