Before entering into any legal relationship, it is essential to conduct some degree of research into the party with whom you intend to contract. This is intended to prevent problems in the future, such as defaults or contractual breaches. Some simple, timely inquiries will allow you to take all the necessary precautions to protect your interests. The following steps are recommended for this type of investigation.

The cornerstone of any relationship is trust. From a purely legal perspective, the term closest to trust is good faith. They are closely linked concepts that involve remaining faithful to one’s word and maintaining the standards of honesty expected of any person engaged in a legal commercial transaction.

According to Article 7 of the Spanish Civil Code (‘rights must be exercised in accordance with the requirements of good faith’) and Article 1,258 of the Spanish Civil Code (‘contracts are concluded by mere consent and from that point they are binding, not only as to the performance of the matters explicitly agreed by the parties, but also as to all consequences which, by their nature, are in accordance with good faith, custom and the law’ ), good faith is a guiding principle in contracts and legal transactions. It is the standard of conduct to be applied to the behaviour engaged in by subjects of law in bilateral relations.

The expectation that the other party will act in good faith, together with the prospective benefits from the contractual relationship that can be obtained in the future, may result in failure to exercise a prudent level of caution. Do you really know who you are contracting with? The impression that you have formed of the other party may not accurately reflect essential aspects such as their equity and their economic and financial situation.

It should be borne in mind that the rate of litigation in civil and commercial matters in Spain is twice the average of that in the European Union. In the best case scenario, the average length of time for these proceedings is 8-10 months for the first instance but they may take longer due to the already strained court system (aggravated by the delays caused by COVID- 19).

In addition, the desired outcome may not be achieved: even if a favourable judgment is obtained, if the counterparty is insolvent it will not be possible to recover the amount due or receive compensation. A simple assessment before the start of any legal relationship or even after signing a contract can save you a lot of trouble.

How to assess the other party’s situation

Carrying out a preventive assessment of the equity and financial situation of the person with whom you are considering entering into a legal relationship is much more common than it seems. However, this analysis can only be conducted with respect to legal persons, not with respect to natural persons, since personal data, including those related to their economic or financial situation, are not publicly accessible.

The basic information about a legal person can be obtained from certain registries and official bodies that are publicly accessible, where you can obtain data such as:

  • Who the company’s directors are.
  • The assets that the company owns.
  • If the company’s financial statements for the more recent period have been filed.
  • The profits and losses and the situation reflected in the latest financial statements.
  • If the company has links to other companies.
  • If it has outstanding debts, liens or obligations.

However, performing this task does not simply involve consulting the public records and obtaining the information: one must have the ability, knowledge and experience necessary to analyse it, interpret it and draw the relevant conclusions. That is why it is advisable to engage a legal professional to make these preventive assessments of the assets and the economic and financial situation of the counterparty.

The quality and depth of an analysis by a professional will always be greater than that carried out by someone who is not used to this type of inquiry. Besides, the economic cost of a good analysis prior to entering into the legal relationship is not significant, compared with the problems that it can help prevent.

It is more economical to pay a lawyer’s fees for a preliminary assessment      than the time and costs involved in suing or prosecuting the other party in the event of a dispute!

When to make an assessment of the counterparty’s situation

The counterparty’s situation can be assessed at one of two times:

  1. Prior to signing a contract or entering a legally binding agreement with another party. This gives you an idea of the business risks involved before making a decision to proceed. It also makes it possible to adopt additional safeguards if you are not clear about any particular points.
  2. After signing the contract: in case of non-payment or any other problem, having the necessary information about the other party in advance allows you to act more quickly in order to defend your interests.

Regardless of when the assessment is carried out, two scenarios are possible: the outcome may be positive, in which case everything is ok; or the outcome may be negative, in which case it may be advisable to either terminate the operation or take additional measures. Whatever the outcome, having assessed the other party’s situation has clear advantages.

 

Favourable assessment Unfavourable assessment

 
Before signing the contract Once the contract has been signed

 

 Before signing the contract Once the contract has been signed

 
–        Provides peace of mind and confidence.

–        It allows you to focus on making your business successful.

 

 –        If a problem arises, knowing the creditworthiness and assets of the other party increases the chances of recovering the amount due or reaching a settlement.

–        As you have all the information available, you can promptly initiate legal action.

–        Sometimes a mere legal threat is an effective way of putting pressure on the other party and letting them see that you know how to ‘launch an attack’.

 

 –        You may wish to consider whether you are interested in pursuing the business further.

–        You may want to ask for additional assurances such as sureties or impose more restrictive clauses in the contract.

 

 –        If a problem arises, you can assess whether you are more interested in filing a court claim or attempting to solve the problem by other means (for example, if the other party is insolvent).

–        If you choose not to bring a court claim against the other party, knowing their solvency and assets gives you an advantage when negotiating a settlement.

 

Regardless of the scenario in which you finally find yourself, having analysed the equity of the other party and their economic and financial situation at the time of starting a legal relationship is always a recommended practice to use in order to protect your interests and prevent conflicts in the future. As us lawyers know, many stories about contractual relationships started off very well… but ended up like a soap opera!

Do you want to avoid problems like non-payments or contractual breaches?   Contact me for legal advice.