Existence and conduct of business: Overview, definition, and example
What is existence and conduct of business?
Existence and conduct of business refers to the assurance that a company is legally established, actively operating, and conducting its activities in compliance with applicable laws and regulations. This provision is often included in contracts to confirm that a party is a legitimate business entity and that its operations are being carried out responsibly, ethically, and in accordance with legal standards.
For example, a company might represent that it is duly incorporated under state law and is conducting business in compliance with all relevant environmental regulations.
Why is existence and conduct of business important?
Existence and conduct of business provisions are important because they establish trust and accountability in business relationships. For SMBs, these provisions ensure that the parties they engage with are legitimate entities operating within the bounds of the law.
Including this clause in contracts protects businesses from entering into agreements with entities that may not be properly established or are engaging in illegal or unethical activities, which could pose financial, reputational, or legal risks.
Understanding existence and conduct of business through an example
Imagine an SMB enters into a supply agreement with a manufacturer. The contract includes a clause requiring the manufacturer to confirm that it is a legally incorporated entity, holds all necessary licenses, and conducts its business in compliance with labor and environmental laws. This protects the SMB from potential risks associated with working with an unregulated or non-compliant supplier.
In another scenario, a tech startup seeking investment represents that it is duly organized under state law, actively operating, and conducting its business in compliance with intellectual property laws. This assures investors that the startup is legitimate and that its operations are free from legal challenges.
An example of an existence and conduct of business clause
Here’s how an existence and conduct of business clause might appear in a contract:
“The Party represents and warrants that it is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation. The Party further represents that it is conducting its business in compliance with all applicable laws, regulations, and industry standards and possesses all necessary licenses, permits, and approvals to operate its business as currently conducted.”
Conclusion
The existence and conduct of business provision ensures that a company is legally established and operating responsibly within the framework of applicable laws. For SMBs, including this clause in contracts provides assurance about the legitimacy and compliance of their business partners, reducing risks and fostering trust. A well-drafted clause protects against legal and reputational issues, supporting stable and reliable business relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.