Court of Chancery declares Delaware a ‘pro-sandbagging’ jurisdiction

In the context of acquisition, “sandbagging” refers to a buyer who knows upon signing that a representation and warranty is false, but instead of alerting the seller, consummates the transaction and seeks damages. after closing against the breach. The use of sandbags is so widespread that transactional planners can negotiate to include a clause in the agreement that specifically allows or prohibits the practice. Despite the possibility of private orders, the agreements are often silent on the issue. In the absence of explicit contractual language, jurisdictions are divided on the admissibility of sandbags. In “pro-sandbagging” states, a buyer’s knowledge of a breach prior to closing does not preclude a claim for breach of warranty. In “anti-sandbagging” states, a buyer who knew (or should have known) that the warranty was false has no right to recover a claim for breach. See Jacek Jastrzebski, “Sandbagging and the Distinction Between Warranty Clauses and Contractual Indemnities,” 19 UC Davis Bus. LJ 207, 209 (2019).

Although “characterising a state as pro-sandbagging or anti-sandbagging does not provide a complete description of the relevant case law”, California, Maryland and Texas are treated as anti-sandbagging jurisdictions, while New York is treated as a pro-sandbagging state. . See Charles K. Whitehead, “Sandbagging: Default Rules and Acquisition Agreements,” 36 DEL. J.CORP. L. 1081, 1091 (2011).

Thelma J. Longworth