There are few issues as sensitive in private M&A as "sandbagging". The debate is particularly complex in Canada given competing appellate court precedent and two rulings of the Supreme Court of Canada that, although clearly relevant, are unclear in their ultimate impact. A recent sandbagging ruling in Delaware provides a useful contrast.
Our key practical takeaways include:
- Private M&A under Delaware law now benefits from legal certainty regarding sandbagging: where the M&A agreement is silent, Delaware courts will adopt a default "pro-sandbagging" stance. Canadian private M&A jurisprudence does not yet enjoy similar clarity.
- Given the large majority of Canadian private M&A agreements are silent on sandbagging, M&A parties should appreciate the resulting open questions and competing arguments. These will quickly take on practical, real-world significance should a buyer foresee a possibility of sandbagging or should the seller suspect the buyer may engage in sandbagging.
- Should the parties agree to either a "pro-sandbagging" or "anti-sandbagging" clause, clear drafting, including regarding the buyer's "knowledge", will be critical. Meaningful variations in approach, with material practical consequences, are also possible.
Our detailed insights follow. For more Fasken M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe. See also Fasken's Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024).
Sandbagging: The Controversy in Brief
"Sandbagging" refers to a scenario where an M&A buyer brings a post-closing indemnification claim based on a breached seller representation and warranty the buyer was arguably aware of prior to closing.
The origin of the term remains unclear,1 but the issue has long vexed M&A lawyers and remains controversial. Buyers argue they are entitled to claim on the representations and warranties the parties have bargained for and the deal within the contract's four corners. They argue the purchase price was partly dependent on the protections the buyer secured and the seller was not obligated to make any representation it was not confident giving. Sellers argue sandbagging is an abuse of the acquisition agreement's indemnities that effectively allows the buyer to reduce the otherwise agreed-upon purchase price post-closing. They argue sandbagging shifts the risk allocation between the parties, giving the buyer a potential option to exit the deal when the seller is particularly vulnerable after notifying employees, customers and suppliers about the transaction.2
Sandbagging Clauses and Market Practice in Canada
The possibility of sandbagging presents M&A parties with three options. They can include a "pro-sandbagging" clause that expressly permits the practice.3 They can include an "anti-sandbagging" clause that expressly prohibits it.4 Alternatively, they can forego any sandbagging clause and remain silent on the issue.
Which approach is most common? According to the most recent American Bar Association (ABA) Canadian Private Target M&A Deal Point Study,5 published in February 2025, 82% of deals in the study's sample stayed silent on sandbagging.6 By contrast, 10% of deals included a "pro-sandbagging" clause while 8% of deals included an "anti-sandbagging" clause.
The result is clear: the large majority of Canadian private M&A transactions are silent on sandbagging. The reason? Because of its controversial nature, many parties choose not to raise it for fear of derailing negotiations. If the topic is broached in negotiations, parties often settle on silence in the definitive agreement, perhaps due to pervading Canadian market practice (a self-fulfilling cycle), the lack of definitive legal clarity, or an implicit or explicit decision to defer the matter.
The question that follows is which approach to sandbagging a Canadian court would take when faced with contractual silence. The answer is now certain in Delaware. Much less clarity exists in Canada.
Sandbagging in Delaware: Finally, Crystal Clear Skies
In Dura Medic Holdings7 the buyer claimed damages for the seller's breach of a representation and warranty that the target had not received notice of non-compliance with healthcare laws in the preceding three years. The seller's disclosure schedules had identified one such notice, but post-closing the buyer discovered others and the additional governmental review resulted in significant expense. The seller defended the claim on the basis it had informed the buyer of the additional notices during a pre-closing due diligence call. The acquisition agreement was silent as to sandbagging.
This put sandbagging squarely before the Delaware Court of Chancery. Previous Delaware rulings had waffled somewhat. Historically, U.S. deal lawyers were confident Delaware was a "pro-sandbagging" jurisdiction even without precedent directly on point. However, an aside by the Delaware Supreme Court in 2018 caused confusion by stating "[v]enerable Delaware law casts doubt" on a buyer's ability to sandbag.8 Subsequent and more favourable obiter comments by Delaware courts on sandbagging calmed U.S. lawyers' concerns.9 But it was not until Dura Medic Holdings, decided in February 2025, that the issue of sandbagging needed to be confronted head-on.
The court rejected the seller's defence, explaining that the seller's disclosure during the due diligence call "has no bearing on the legal analysis." The reason was that a "breach of contract claim is not dependent on a showing of justifiable reliance." The result was that, having "contractually promised [the buyer] that it could rely on certain representations, [the seller] is in no position to contend that [the buyer] was unreasonable in relying on [the seller's] own binding words."
Sandbagging in Canada: Still Cloudy, Twenty Years and Counting
The law regarding sandbagging in Canada is much less clear. The principal reason is conflicting appellate precedent from over twenty years ago, the first appearing to endorse sandbagging and the second casting doubt on it. The waters have since been muddied further by related rulings by Canada's highest court regarding the duty of good faith.
Eagle Resources: Alberta Opens the Door
Eagle Resources10 arose from the sale of an oil company and a representation and warranty in the acquisition agreement that the seller had disclosed all material information regarding the company's oil reserves. The buyer claimed for breach on the basis the seller had not disclosed an updated reservoir report that was 36% lower. The seller countered that the buyer was nonetheless aware of the company's true value and thus had not relied on the seller's disclosure.
The trial court held that the disclosure warranty had been breached, but that, as the buyer had not relied on it, no damages were payable. The Alberta Court of Appeal (ABCA) allowed the buyer's appeal, and its reasoning echoed that of the Delaware court in Dura Medic Holdings. It explained:
The argument of [the seller] is that the purchaser knew the facts. But [the warranty] does not speak of that. It warrants that all facts, reports etc. are in the contract, not that the purchaser has been told about them. It is no bar to enforcing a contract that the buyer was skeptical as to whether the vendor would perform it, or could perform it, or that the buyer had reason to be skeptical.11
The ruling is therefore not an express validation of sandbagging, but the fact the court found both the warranty breached and damages payable notwithstanding the buyer's pre-closing knowledge of the underlying inaccuracy make it difficult to read any other way.
Transamerica Life: Ontario Says "Not So Fast"
Transamerica Life12 arose from the purchase of an insurance company. Following closing, the buyer claimed for breaches of the seller's representations and warranties relating to the target's accounting systems. The seller's defence was that, because of the buyer's extensive due diligence, the buyer had either become aware of the incorrect warranties or was wilfully blind to such inaccuracies. The seller also argued that such knowledge gave rise to a duty of the buyer to inform the seller of its own breach.
The trial court cited the ABCA in Eagle Resources in ruling the terms of the acquisition agreement controlled and that enforcing a warranty "does not depend on the purchaser's belief as to the truthfulness of the warranted facts."13 The majority of the Ontario Court of Appeal (ONCA) reversed, holding the lower court erred in granting the buyer's motion to strike. The ONCA explained that Canadian courts had not yet "developed a comprehensive and principled approach to the implication of duties of good faith in commercial contracts."14 The result was that, while it was "far from certain" the acquisition agreement could give rise to a duty to warn on the buyer's part, striking a pleading should only occur "when the applicable law is settled in the jurisprudence."15
Bhasin and Callow: The Plot Thickens, Courtesy of Canada's Highest Court
The state of sandbagging in Canada has only grown more complicated since these ABCA and ONCA rulings. The cause is the complimentary rulings of the Supreme Court of Canada (SCC) in 2014 in Bhasin16 and in 2020 in Callow.17
Bhasin established good faith as a "general organizing principle" of the common law, which includes a duty of honest performance in contract. It explained that this includes a duty that parties "not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract."18Callow elaborated that dishonest performance may include "lies, half-truths, omissions, and even silence, depending on the circumstances."19
Neither ruling addresses sandbagging. But it is arguable the SCC's treatment of good faith and honest performance could undermine an attempt at sandbagging, as Transamerica Life speculated. Alternatively, a court could instead focus on Bhasin's instruction that good faith does not require a counterparty "to put the interests of the other contracting party first" or to "forego advantages flowing from the contract".20 So, too, could the court focus on Callow's instructions that a contracting party need not "correct a misapprehension to which it has not contributed" or "subvert its own interests to those of [its counterparty] by acting as a fiduciary or in a selfless manner that would confer a benefit on [its counterparty]."21
Practical Takeaways for Canadian Private M&A
Sandbagging raises complicated issues.
Should the parties agree to either a "pro-sandbagging" or "anti-sandbagging" clause, clear drafting, including regarding the buyer's "knowledge", will be critical. Meaningful variations in approach, with material practical consequences, are also possible. In particular, the buyer's knowledge in connection with an "anti-sandbagging" clause can be limited to "actual" knowledge.
Alternatively, it can also include "constructive" knowledge. It can also be extended to include such actual or constructive knowledge that would be expected to result from a set level of inquiry (e.g., reasonable inquiry).
Given the large majority of Canadian private M&A agreements go silent on sandbagging, M&A parties should appreciate the resulting open questions and competing arguments. These will quickly take on practical, real-world significance should a buyer foresee a possibility of sandbagging or should the seller suspect the buyer may engage in sandbagging. In either case, legal counsel should be consulted immediately. M&A parties should also be aware of other practical considerations relevant to sandbagging. For example, where the agreement either includes an "anti-sandbagging" clause or is silent on sandbagging, the seller might be tempted to engage in a "document dump" whereby a large amount of disclosure is made in the run-up to execution and/or closing.
Related considerations include, first, cross-referencing and whether disclosure in one disclosure schedule may constitute disclosure in respect of related disclosure schedules and, second, whether the acquisition agreement addresses updates to the seller's disclosure schedules prior to closing.22 Specifically, regarding the latter, whether the agreement is silent on the point, expressly prohibits it, or expressly permits or requires it. Where the agreement either permits or requires such seller updates, it can also address the resulting impact on the buyer's termination and/or indemnification rights (e.g., should the buyer be entitled not to close based on a disclosure update but elects to close, it loses its indemnification right in respect of the update).
Footnotes
1 A common explanation is that the term invokes
“the tactics of nineteenth-century street gangs that
waylaid their victims with sand-filled socks”. However,
the term also exists in auto racing, horse racing and sailing,
among other sports. See C. Hutchison, “Sandbagging in
Canadian
Law and Practice” (2024) 68(3) C.B.L.J. 303
[Hutchison].
2 Sellers further argue that a failed sale could substantially impact the value of any future deal. Sellers also note they stand to be inadvertently hurt by the fulsomeness of their disclosure during the buyer’s due diligence process should the buyer discover potential issues the individual(s) whose knowledge is qualifying the seller’s representations and warranties are unaware of.
3 See, e.g., Canadian Private Target M&A Deal Point Study (including transactions from 2020, 2021& 2022), (American Bar Association, 2022) [ABA Study] at p. 105: The right to indemnification, payment, reimbursement, or other remedy based upon any such representation, warranty, covenant, or obligation will not be affected by ... any investigation conducted or any Knowledge acquired at any time...
4 See, e.g., ABA Study at p. 105: No
party shall be liable... for any Losses resulting from or relating
to any inaccuracy in or breach of any representation or warranty in
this Agreement if the party
seeking indemnification for such Losses had Knowledge of such
Breach before Closing.
5 See ABA Study.
6 This is the highest percentage of the four ABA Canadian private M&A studies to date, with 66% of deals going silent in the 2018 study, 54% of deals in the 2016 study, and 71% of deals in the 2014 study.
7 In re Dura Medic Holdings, Inc., 2025 Del. Ch. LEXIS 47 [Dura Medic Holdings]
8 See Eagle Force Holdings, LLC v. Campbell, 2018 Del. LEXIS 233 at **66.
9 See Arwood v. Arwood, 2022 Del. Ch. LEXIS 57 at *7: “In my view, Delaware is, or should be, a pro-sandbagging jurisdiction.”
10 Eagle Resources Ltd. v. MacDonald, 2001 ABCA 264 (CanLII) [Eagle Resources ABCA].
11 Eagle Resources ABCA at para. 17.
12 Transamerica Life Canada Inc. v. ING Canada Inc., 2003 CanLII 9923 (ON CA) [Transamerica Life ONCA].
13 Transamerica Life Canada v. ING Canada Inc., 2002 CanLII 22800 (ON SC) at para. 16.
14 Transamerica Life ONCA at para. 52.
15 Transamerica Life ONCA at paras. 54 and 56.
16 Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 SCR 494 [Bhasin].
17 C.M. Callow Inc. v. Zollinger, 2020 SCC 45 (CanLII), [2020] 3 SCR 908 [Callow].
18 Bhasin at para. 73.
19 Callow at para. 91.
20 Bhasin at paras. 65 and 73.
21 Callow at paras. 47 and 133. For a more detailed analysis of these issues, see Hutchison.
22 See ABA Study at pp. 66-71.
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