You Might Have “Knowledge” And Not Even Know It (And Other Crazy Things)

In a contract to buy a business, the buyer often requests from the seller a long list of promises, referred to as “representations and warranties,” about the business.  If any of them are found to be untrue before the deal closes, the buyer might threaten to cancel the deal and demand an expense reimbursement, or try to renegotiate the purchase price, or all of the above.  If the problem is discovered after the closing, the buyer might demand reimbursement of part or all of the purchase price to compensate for being misled by false representations and warranties.

The representations and warranties section of a contract can be the lengthiest part of the document, and the details of it can be mind-numbing.  Often the buyer demands information about the business that the seller doesn’t even know.  For example, a buyer might want to know if any of the seller’s customers or suppliers have breached their contracts with the seller.  Or the buyer might want to know if, at any time since the beginning of recorded history, any hazardous materials were ever stored on or below the ground where the business is located.

On many subjects, the most that a seller can say is, “To the seller’s knowledge,….”  So if the buyer discovers a problem that the seller had no “knowledge” of, is the seller in the clear?  Or is this where the trouble begins?

Well, in most cases the seller is not like you and me, because we are both humans.  Sellers are usually business entities, with employees, officers, directors, stockholders, etc., each of whom might know something about the business that the others don’t know.  So when the seller says it has no knowledge of something, who exactly has no knowledge?  And what if the seller’s management has no actual knowledge about a problem but could easily have learned of it with a simple email or phone call to someone else down the line?  Does “knowledge” then mean “should have had knowledge”?  If the answer is no, are we rewarding the seller for carelessness?  If the answer is yes, then “knowledge” has taken on a quite different meaning.

The basic answer is that in the world of business contracts, you should not rely on a dictionary for the meaning of knowledge.  Your contract should contain a carefully drafted, lawyerly (ugh!) definition of that word.

If you are the buyer, you might want the seller’s “knowledge” to include whatever the seller’s management could have discovered through a reasonably thorough investigation or consultation with lower-level employees.  But the seller probably wants knowledge to mean “actual, current knowledge, with no further inquiry” of just a few named individuals who run the company (and be sure to name them).  And neither the buyer nor the seller wants to roll the dice and leave it to a judge or jury later to decide later on what knowledge means after a dispute arises.

So if you really want to know what is knowledge, be prepared for some tough negotiations and careful contract drafting.  Otherwise, you might wind up with “knowledge” of what you don’t even know, and it could cost you.



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