Sometimes, it is impossible to make a fully-fledged warranty in relation to (i) a fact or circumstance being absent, (ii) the non-occurrence of an event, which is by its very nature unknown or uncertain, or (iii) external events that can be influenced but not entirely.
Example 1: (no) technology infringment. It is often impossible to confirm that certain licenced technology does not infringe upon third party intellectual property rights. (In fact, it is often more realistic to acknowledge that a particular technology already existed at the moment that a particular application for it was developed.) This is impossible for two reasons: first, establishing whether an applied technology is already protected by a third party requires very extensive research into several registers of intellectual property rights (whilst it is not readily clear how such search should be conducted in order to be exhaustive and whilst the registries are abundant). Secondly, the third party that may be in a position to claim infringement will often wait to see whether the infringing party is successful before deciding whether making such claim is worth the effort. If it does, the licencee could have chosen a technology and made considerable related investments, whereas the use of such technology can then be stopped by the third party. For that reason, the licencee would seek protection against loss of its investments and all that relates to it. Hence the inclusion of the following:
To the Knowledge of Licensor, the Licenced Technology does not infringe or make unauthorised use of the Intellectual Property Rights of any third party.
Example 2: (no) defective product claims. Almost every supplier of products will continuously deal with customer complaints and need to handle defects in its products or damages caused by transportation or otherwise. A warranty in an M&A transaction that there is no litigation pending and that no litigation is threatened against the company, could (depending on the type of business) be incorrect. Hence the inclusion of the following, for example:
No written notification involving a claim against any of the Acquired Companies in excess of EUR 500,000 has been received by or, to the Seller’s Knowledge, threatened against the Acquired Companies or Seller in relation to any products sold or services provided by any of the Acquired Companies.
No court, arbitration, mediation or government proceedings involving a claim against any of the Acquired Companies in excess of EUR500,000 are pending against any of the Acquired Companies. To the Seller’s Knowledge, there are no facts or events that may give rise to any such litigation or proceedings.
Example 3: (no) violations of laws or regulations. In an M&A transaction, a purchaser of a business will likely require that the business is in full compliance with all applicable laws and regulations, but in any event that it does not violate regulatory prohibitions. This may well be impossible, even though it is understandable, because:
- the scope of competition law has changed and extended over time (e.g. historically acceptable business arrangements are currently unacceptable);
- over the past decade, competition laws are being enforced much more actively and have therefore become increasingly important (e.g. in-house lawyers have not been adequately educated);
- the acquired business has become a dominant market party (e.g. initially permitted exclusivity or minimum purchase arrangements are now troublesome as a consequence of the success of the business);
- remedying non-compliance is impossible because the number and types of contracts are too abundant and non-compliance is not recognised as a priority (i.e. the logistics required to correct any non-compliance are lacking).
What the purchaser of the business would probably want to ascertain is that there are no gross violations of laws and regulations: that there is a basic awareness of antitrust issues and that there are no price fixing arrangements between competitors. Despite its complexity and the understandability of a violation, no seller really wants to discuss this issue in detail. At the same time, a purchaser will not accept generic and broadly phrased carve-outs. In this case, it makes sense to be more specific about the scope of the warranty and distinguish its particular elements.
To the best of seller’s knowledge. In the above examples, instead of giving a straightforward warranty, a party can qualify a requested warranty by stating that as far as it knows, what is being warranted is correct. This is typically accomplished by the phrase To the best of Seller’s knowledge, or a more succinct version To the Seller’s knowledge (knowledge is a constant and not a variable: it is either ‘present’ or ‘absent’ but not ‘to a certain extent’ or ‘merely in a certain quality’ – hence, the word best is redundant).
If warranties are qualified to a party’s knowledge, it makes sense to specify the scope of such knowledge. For example:
A person’s knowledge, awareness or words of similar import means the knowledge of Messrs. Boukema and Wiggers who, after due and careful inquiry, have actual knowledge of the facts and events in relation to or on the basis of which the relevant statement is made.
A specification of what a party’s knowledge entails is important because the knowledge of any employee is already attributable to the employer, and therefore to the Seller. In particular, if the acquired company employs a large number of employees it would be appropriate to identify the relevant functions (e.g. the Acquired Companies’ president, chief executive, CFO, certain or all financial controllers, chief development officer, production site directors) or to name the members of senior management (including any staff members responsible for matters that are dealt with at group level: patent attorneys, members of group financial and tax departments etc.).
Furthermore, a qualified party’s knowledge still assumes that each and every case of infringement would be reported to senior management. If it were not, the seller would be released from its warranty. Therefore, the knowledge can be assumed to have been present if reasonable or due inquiry into the business organisation would have revealed that a fact or event was present (or absent). As section 8.3(c) on disclosures explains, such inquiry should in all cases be made as part of the process of negotiating warranties (and preparing disclosures). In any case, such inquiry implies an imputation of knowledge against a standard of reasonableness and permits an objective assessment and judgement of what should have been the case.