Canada: Purchaser's Knowledge Of Inaccurate Vendor Representations & Sandbagging Tactics

Last Updated: April 10 2016
Article by Randon Slaney


In virtually all transactions, parties make representations and warranties to build trust and induce contracting with each other, especially for facts not verifiable through due diligence.1 Representations are often subject to intense negotiations, and their accuracy is vital since untruths give rise to misrepresentation claims by the other party.

An issue can arise if a purchaser becomes aware, before closing, that a material representation of the vendor is inaccurate or untrue. Upon such a discovery, a purchaser has three options. It may (i) disclose this discovery to the vendor and terminate or (ii) disclose and seek to renegotiate the agreement based on the new facts, or (iii) it may remain silent on the discovery and commence an action after closing for the misrepresentation of the vendor.

The latter option is a tactic known as sandbagging. A sandbagging purchaser attempts to ambush the vendor, catching the vendor off guard. Parties may explicitly allow or prohibit the practice of sandbagging within the contract, or parties may remain silent on the issue altogether. How does the common law treat this practice and how should parties act to protect their interests?

The Effect of a Purchaser's Knowledge of an Untrue Representation

A party claiming misrepresentation must prove that the false representation was material and that it induced the claiming party through reliance to enter into the contract.2 This is a question of fact, often turning on what parties knew at the time. As a result, a party's knowledge is a critical factor in any claim for misrepresentation.

Purchasers who know that a representation of the vendor is false but proceed to close a deal in the face of it, may struggle to prove their reliance on that representation. For example, in one recent case, an experienced investor had knowledge of a company's financial viability and chose not to investigate further prior to buying shares. When the investor attempted to rely on false representations about share valuation made by the company's director, the Court ruled that it was not reasonable in the circumstances for the investor to rely solely on the director's representations.3

Similarly, purchasers cannot rely on wilful ignorance when a vendor discloses information that warrants reasonable enquiries, particularly where the conveyance of assets in a transaction is on an "as is" basis.4  This was the outcome where a sophisticated purchaser had knowledge of the possibility of landfill in the area being purchased, but did not bother to read the relevant materials.

Note however, that a purchaser's knowledge will not always excuse a vendor that fails to disclose all material facts. Where a vendor failed to disclose a reserve report showing a material and adverse change in the assets, it was unsuccessful in defending a misrepresentation claim by the purchaser, even though the purchaser had some awareness of the facts.5

Defining "Knowledge"

Given uncertainty, parties may prefer to solve any ambiguities on pre-existing knowledge within the contract. In drafting a definition of knowledge, a vendor will want to negotiate to qualify its knowledge and to construe a purchaser's knowledge broadly. Purchasers, for their part, will want to seek to broaden the vendor's knowledge to make its representations absolute, while narrowing its own knowledge pertaining to any false representations unearthed. An effective definition of knowledge is thus a powerful tool. Common elements to defining parties' knowledge include: 

  • Knowledge by whom: Are all employees, representatives or agents included, or only the executive or specific individuals?
  • Actual versus implied, imputed or constructive knowledge: Are the vendor, purchaser or both obligated to review all relevant records and make all reasonable diligent enquiries, and is the standard their actual knowledge at the time of execution or what they ought to have known as well?
  • Method of proof: Is knowledge provable only by documentation, or is knowledge, however acquired or inferred, enough?

Drafting a Sandbagging Provision

A purchaser may wish to add a clause to the contract that explicitly permits some measure of sandbagging tactics.6 A vendor must be extremely cautious with such provisions and may instead seek to prohibit the practice, or even impose disclosure obligations if the purchaser learns of any representational inaccuracies. There is little Canadian judicial guidance on the interpretation of these provisions, yet courts in the United Kingdom tend to take a dim view of sandbagging tactics, which may carry over into Canada.7

A recent study indicated that Canadian transactions use sandbagging clauses less frequently compared to their American and European counterparts, which tended to be more in favour of and against the practice, respectively.8 If a purchaser seeks to employ a sandbagging clause, it should be clear with the intention to make the vendor's representations unqualified and absolute, with express reliance by the purchaser, and it should clearly define knowledge. Consider the elements in this sample clause:

The Vendor's representations are not to be affected or waived by reason of any investigation by or on behalf of the Purchaser, or by reason of the fact that the Purchaser knew or ought to have known that any such representation is or might be inaccurate or untrue. The Vendor acknowledges that the Purchaser enters into this Agreement in express reliance upon the Vendor's representations, and that the Purchaser has paid good and sufficient consideration in exchange for all such representations.


When a purchaser, before the closing date, becomes aware that a material representation of the vendor is false or inaccurate, it may disclose this fact to the vendor and renegotiate based on this new understanding, or even walk away from the transaction. Another option for the purchaser is to remain silent and sandbag the vendor by bringing a claim after closing.

Reliance by the purchaser on the false representation is a requirement to prove misrepresentation. Resolving these disputes often turns on what parties knew at the relevant times. Thus, a purchaser's knowledge of the inaccuracy of a representation may prevent the purchaser from establishing reliance on the misrepresentation.  With this in mind, parties should consider defining knowledge in the contract to simplify such disputes.

Purchasers can also seek to allow sandbagging under the agreement, thereby permitting claims notwithstanding any knowledge on their part or duty to investigate. Counsel for the vendor should be wary of these provisions and negotiate to weaken them or seek significant concessions in exchange. Overall, effective negotiations around these issues are vital to safeguarding best interests.


1 Practically speaking, corporate transactions typically employ representations and warranties simultaneously, melding the distinction at law.

2 L.K. Oil & Gas Ltd. v. Canalands Energy Corp., 1989 ABCA 153, at paras 38, 46.

3 Strand v. Emerging Equities Inc., 2008 ABCA 23, at para 7; see also 35445 Alberta Ltd. v. Transamerica Life Insurance Co. of Canada, 1998 ABCA 110, at paras 10-11.

4 Motkoski Holdings Ltd. v. Yellowhead (County), 2010 ABCA 72, at paras 78-79.

5 Eagle Resources Ltd. v. MacDonald, 2001 ABCA 264, at paras 16-18.

6 See generally, Charles K. Whitehead, "Sandbagging: Default Rules and Acquisition Agreements" (2011), 36 Delaware Journal of Corporate Law 1081.

7 See for example, Infiniteland Ltd and another v. Artisan Contracting Limited and another, [2005] EWCA Civ 758.

8 John F Clifford, Freek Jonkhart, and Jessica Pearlman, "What's the Market for that Cross-Border Deal? The European, US and Canadian Private Target M&A Deal Points Studies" (May 2011), 12 Business Law International 2 at 147.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.