This contract tip is about making sure your contract is with the correct legal entities.
I often see parties negotiate deals without knowing which counterparty entity will sign the agreement. They treat it like a secret.
I ask myself, “How did they do their diligence if they don't even know which entity is signing?”
The most common answer is they didn't.
Remember that the entity named in the contract is the only one bound by the deal. You need a company with sound finances to stand behind the counterparty's obligations.
Many companies lose sight of this critical requirement when they negotiate with a large international company. Often these large companies use one affiliate to sell the good or service and another to manufacture or provide aftersale services.
“But I'm doing a deal with [global brand]. Of course, they have money.” Globally they may, but the entity signing the deal may not.
This issue is incredibly complicated in cross-border deals, especially if your team is unfamiliar with business structures in the counterparty's country.
Do the diligence and verify that your counterparty has the means to stand behind the obligations. If the entity signing does not have assets, require the affiliate with a strong balance sheet to co-sign or provide a guarantee.
Do you have any nightmare stories that you could share about when a contract got these things wrong?
