This Dechert memo reviews the position of courts in Delaware, New York & California on a buyer’s ability to hold a seller liable for a breach the buyer knew about before signing. Deal lawyers refer to this practice as “sandbagging,” and the three most important US commercial jurisdictions don’t see eye-to-eye on it. Here’s the takeaway:
Delaware law and New York law may be preferable to buyers as the governing law of an acquisition agreement because in these jurisdictions, a buyer is generally not required to show reliance to claim for a seller’s breach of a representation and warranty. On the other hand, sellers may prefer California law as buyers would be required to demonstrate reliance on the seller’s representation and warranty to make a breach of warranty claim against the seller.
Of course, parties can always bypass these default rules & negotiate for a pro-sandbagging or an anti-sandbagging clause in the acquisition agreement itself.
– John Jenkins