Due diligence concept in law and risk management


Due diligence is the term used to describe an investigation an individual would carry out regarding a potential investment. This investigation will check all the facts concerning the investment, and evidence their truthfulness. The term is also used to describe the care which a reasonable person needs to take before entering into an agreement/an investment with another. This includes carrying out an investigation into the potential investment.

Due Diligence as a defence

Due diligence can be used as a defence, providing the person can prove they took steps which are considered reasonable and utilized ‘due diligence’ in attempting to steer clear of the offence. If these aspects can be proved, it is likely they will be acquitted. What amounts to due diligence will depend on the specifics of each individual case.

What Happens if I do Nothing?

In order to satisfy the requirements of due diligence, it is accepted by the courts that some form of positive action is required. It is therefore not sufficient to do nothing and yet attempt to use the defence of due diligence.

If an individual does take some form of positive action, yet the action is not enough to warrant being reasonable, then it is likely the defence will fail.

What Amounts to ‘Reasonable Steps’?

What action is classified as ‘reasonable steps’ depends on all the circumstances of each individual case. Factors that are taken into account include the amount of risk, the size of the businesses involved and the impact of the failure of the investment/agreement.

Factors that include being ignorant as to the law, not having common sense, or not being able to speak English properly, will not be taken into consideration when deciding what action amounts to a reasonable step.

It can be quite difficult to quantify what is reasonable, as there is not one simple definition of what being ‘reasonable’ entails; and of course, acting reasonably differs with each circumstance. However, if you spend time thinking about what could potentially go wrong in your business, assessing possible risks and devising mechanisms to deal with these risks, it is likely that you would satisfy the definition of having taken reasonable steps, and acting with due diligence. When you are assessing possible risks, it is imperative you break down each section of your business, and analyse risks associated with each section. Depending on the nature of the services you provide, including any goods you supply, you should also be aware how these goods and services are being used, and how other organisations are marketing them.

Devising a System of Risk Assessment and Checks

If you run a business, and want to act with due diligence, one of the ways you can do this is by devising a system of risk assessment and checks in your workplace. If one of these systems is in place however, it must be functioning properly. This requires continuous monitoring and reviewing.

Once a system has been established, your business should consider providing training and support to staff for all new systems implemented. This training and support should not just include training on the new system, but should also include training on the renewal of systems and the reviewing and updating of current systems. This training and support should be made available to all members of staff, irrespective of whether it applies directly to their department or not. In order for an organisation to act with due diligence, it should ensure that all its employees, as a team, are well informed about the way the business is run, and also know what to should a risk assessment flag up any business issues which need to be dealt with.