Navigating Sandbagging (law) in Commercial Transactions

Navigating Sandbagging in Commercial Transactions can be a complex and delicate matter. Sandbagging refers to a tactic where one party delays or fails to fulfill their obligations in a commercial contract, often to gain an unfair advantage.

This can lead to disputes and even litigation, as seen in the case of [example 1]. A party may use sandbagging to slow down a deal, hoping to renegotiate terms or gain a better position.

To avoid falling victim to sandbagging, it's essential to be aware of the signs and tactics involved. One common tactic is to delay payment or delivery, as seen in [example 2].

Commercial parties should carefully review contracts and agreements to ensure they include clear obligations and deadlines. This can help prevent sandbagging and reduce the risk of disputes.

Take a look at this: Commercial Letter of Credit

Leaving out anti-sandbagging language in a definitive agreement can be risky, depending on the state law chosen to govern the agreement. This is because deciding whether a party is liable for damages could revolve around whether the state law requires reliance on the truth of the representation in order for the buyer to recover.

Over half of M&A agreements do not contain sandbagging language. This is likely because definitive agreements are often silent on this issue, leaving it to be negotiated later.

Deciding whether a party is liable for damages can be difficult to prove, especially if the state law requires reliance on the truth of the representation. This is why including anti-sandbagging provisions in a definitive agreement can be a good idea.

Oftentimes, parties rely on the law chosen to govern the definitive agreement rather than debating the issue within the confines of the agreement.

Delaware remains a "pro-sandbagging" jurisdiction, meaning that buyers are entitled to enforce representations they purchase, even if they're aware of the alleged breach prior to closing.

In English law, purchaser's knowledge precludes post-closing remedies for breach of warranty, but a contract may allow sandbagging based on pre-closing constructive knowledge or imputed knowledge.

Texas courts require buyers to prove reliance on the representation or warranty to bring a claim for breach of an express warranty, and precedent exists for buyers to argue for sandbagging provisions in these situations.

To avoid costly disputes in Delaware, parties should clearly set forth any understanding to the contrary in a purchase agreement, as the default "pro-sandbagging" rule will apply otherwise.

In Texas, buyers are unlikely to prevail in "he said, she said" sandbagging situations without solid evidence to back their claims.

Additional reading: Warranty

Delaware remains a "pro-sandbagging" jurisdiction, where buyers are entitled to enforce representations they purchase in the absence of contractual language to the contrary.

In the Arwood v. AW Site Services, LLC case, the Chancery Court held that buyers can bring suit for breaches of representations and warranties even if they're aware of the alleged breach prior to closing.

A "sandbagging" defense is available to sellers, but they must show that the buyer actually knew pre-closing that the seller's representations were false, not just that they should have known.

To avoid this default rule, sellers should include "anti-sandbagging" clauses in their contracts that specifically prohibit claims for breach if the buyer knew or should have known about the alleged falsity of the representations and warranties.

The Chancery Court made it clear that breach-of-contract actions don't require reliance, so buyers can pursue damages even with full knowledge of the seller's breach.

Broaden your view: Fundamental Breach

Texas has a reputation for being tough on buyers who try to claim breach of an express warranty. Buyers in Texas must prove they relied on the representation or warranty to bring a claim.

Related reading: Warranty Tolling

In Texas courts, precedent exists for buyers to argue for sandbagging provisions, but only with solid evidence to back their claims. Buyers who knew a statement was false may not be able to reasonably rely on it.

Indemnification provisions are often the most heavily negotiated in M&A transactions. Disputes concerning sandbagging issues can be costly and contentious to resolve.

Parties should perform detailed due diligence and negotiate sandbagging issues before closing to avoid costly disputes. It's better to get it right upfront than to deal with the fallout later.

A different take: Contractual Provisions Relating to Time

In a sandbagging provision, you'll often see language that protects a party's right to indemnification from being affected by any investigation or knowledge acquired about the accuracy or compliance of certain representations, warranties, covenants, or obligations.

This type of provision is designed to prevent a party from trying to use new information as a basis to challenge their right to indemnification. For example, the Sample Pro-Sandbagging Provision explicitly states that a party's right to indemnification won't be affected by any investigation or knowledge acquired at any time.

Expand your knowledge: Pre-emption Right

In fact, this provision goes so far as to say that no party shall be liable for any losses resulting from or relating to an inaccuracy in or breach of a representation or warranty if the party seeking indemnification had knowledge of the breach before closing.

Here are the key takeaways from this provision:

The choice between pro and anti-sandbagging clauses depends on what each party wants to achieve, their willingness to take risks, and how they view the balance of power in the negotiations.

Each party's goals, risk tolerance, and bargaining strength should be carefully considered before deciding on a clause. The inclusion of either clause is ultimately a strategic decision.

A pro-sandbagging clause is designed to protect the buyer, serving as a safeguard against the risks associated with the seller's disclosures. It allows buyers to seek indemnification for known breaches of representations and warranties.

By including a pro-sandbagging clause, the seller is held accountable for the accuracy and completeness of their disclosures, regardless of the buyer's awareness. This provides the buyer with the confidence to proceed with the transaction.

A pro-sandbagging clause explicitly states that the buyer's right to indemnification will not be affected by any knowledge acquired or that could have been acquired at any time. This clause underscores a transactional philosophy where the seller is accountable for their disclosures.

Ultimately, the choice between pro and anti-sandbagging clauses depends on the parties' negotiation dynamics and long-term goals.