Monday, March 7, 2011

Knowledge Qualifiers

Many times a Supplier will want to insert a “knowledge qualifier” as part of a commitment.  I consider knowledge qualifiers as a form of Ostrich Management where rather than see or look for the problem they bury their head in the sand. What knowledge qualifiers do is try to transfer certain risks to the Buyer. Instead of making the commitment that a certain fact exists or is true, they want include a commitment to the effect that they simply don’t know. For example: “to the best of their knowledge the Product does not have any claims or liens against it” is an example of a knowledge qualifier. 
The impact of the knowledge qualifier is that the Supplier would only be liable if they had actual knowledge of the fact. In the example above if the Supplier didn’t know and there was a lien or claim against the product, they wouldn’t be responsible to correct it. The Supplier met their obligation, since when they sold it to you they had no knowledge of the problem.

You should always avoid knowledge qualifiers as they transfer significant potential risk to the Buyer. 
If you must use the Supplier and the Supplier insists on a knowledge qualifier there are two things that need to be managed.  

You should include an obligation for the Supplier to either perform or state that they have performed reasonable diligence to verify the fact. Simply including a knowledge qualifier places no obligation on the Supplier to check the fact or become knowledgeable on it. Terms should drive the Supplier to behave the way you want especially if you are going to accept any risk.  With a knowledge qualifier alone there would be zero incentive for them to ask or perform any diligence as it could prevent them from making the sale and it would make them liable if they did know and still sold it to you.  Requiring reasonable diligence should reduce the risk and it opens the potential to claim that they failed to use reasonable diligence if a problem arises.

The second issue is at what point in time is the knowledge commitment being made. If it is as of the date of signing the agreement and they subsequently gain knowledge of the problem, they have met their commitment because at the time of the signing they didn't know.  If you will be entering into an agreement where products or services are being delivered over an extended period, a commitment that they have no knowledge as of the date of execution of the agreement increases the potential magnitude and cost of the problem for you. If you must agree to a knowledge qualifier you should make the commitment be at the time of delivery for each purchase to mitigate the risk. That creates the situation where if they do subsequently discover the problem, they would have the obligation to correct it before selling you any more. If they sold the item with the knowledge of the problem it would be a breach of the agreement and subject them to damages and potential termination of the agreement.

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